“Morally Bankrupt” Goldman Sachs Investigated by SEC and FSA


Last Friday the U.S. Securities and Exchange Commission charged the investment bank Goldman Sachs and their London based Vice President Fabrice Tourre with fraud:

The SEC alleges that Goldman Sachs structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities (RMBS). Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.

The SEC alleges that one of the world's largest hedge funds, Paulson & Co., paid Goldman Sachs to structure a transaction in which Paulson & Co. could take short positions against mortgage securities chosen by Paulson & Co. based on a belief that the securities would experience credit events.

Over the weekend British Prime Minister Gordon Brown, who no doubt coincidentally is currently campaigning to keep that position in the forthcoming general election, demanded that the U.K. Financial Services Authority launch a formal inquiry into allegations of fraud by Goldman Sachs. According to The Times:

The Prime Minister accused Goldman Sachs of “moral bankruptcy” over plans to pay substantial bonuses and demanded that the FSA work with Britain’s US counterpart, the Securities and Exchange Commission, to ascertain whether the bank tricked investors into buying bogus mortgage securities.

Earlier today the FSA released a brief statement stating that it too would be investigating Goldman Sachs:

Following preliminary investigations the FSA has decided to commence a formal enforcement investigation into Goldman Sachs International in relation to recent SEC allegations. The FSA will be liaising closely with the SEC in this review.

In the same article The Times pointed out that:

In December, it was leaked that Royal Bank of Scotland, which is state-owned, was planning to pay its staff £1.5 billion in bonuses. The Prime Minister stayed silent, but both Lord Mandelson and Lord Myners publicly urged restraint

This afternoon UK time the BBC reported that Goldman Sachs had announced "spectacular" earnings figures of $3.46 billion for the quarter to March, well ahead of analysts expectations, and that:

Goldman also revealed that it paid its employees about $5.5bn in compensation, equivalent to 43% of its revenue.

It seems that we long suffering U.K. taxpayers are also involved in this no doubt long running saga. According to the Daily Telegraph:

Royal Bank of Scotland was the biggest victim of the alleged sub-prime mortgage fraud orchestrated by Goldman Sachs and involving hedge fund Paulson & Co.

RBoS shares have risen this week on the news that:

Their lawyers were examining whether there would be any action to take against Goldman to recover losses.

Somehow I doubt that as a consequence of the legal eagles efforts we long suffering  taxpayers will eventually receive a bonus to match those of Goldman Sachs or Royal Bank of Scotland employees. However if Mr. Brown's electioneering goes well it is not entirely beyond the bounds of possibility that we will wake up on May 7th to receive the bonus of another few years of his prudent hand on our collective tiller.

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May 1, 2010

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