On April 16th, The Securities and Exchange Commission (SEC) filed charged against Goldman, Sachs & Co. and one of the its vice presidents with defrauding investors. The SEC is alleging that Goldman Sachs both omitted and misstated misstated crucial facts pertaining to a financial product that were tied to subprime mortgages, just as the U.S. housing market began to falter.
More Information
Litigation Release No. 21489SEC Complaint
The SEC lawsuit is alleging that Goldman Sachs put together and promoted a collateralized debt obligation (CDO) that was based soley on the performance of subprime residential mortgage-backed securities (RMBS). The fraud occurred when Goldman Sachs failed to disclose to investors crucial information about the CDO, most notably the role that a major hedge fund played in the selection of the portfolio, with said hedge fund having taken a short position against the CDO.
"Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party." said Robert Khuzami, Director of the Division of Enforcement.
The lawsuit alleges that Paulson & Co., one of the world's largest hedge funds, gave money to Goldman Sachs to manufacture a transaction so that Paulson & Co. could take a short position against the mortgage securities chosen by Paulson & Co. in the belief that the securities would have credit disruptions.
After playing a major in the selection of the portfolio, it is alleged that Paulson & Co. was able to short the RMBS portfolio that it had helped design by entering into credit default swaps (CDS) with Goldman, Sachs & Co. to purchase investment protection within specific layers of the ABACUS capital structure. Goldman Sachs did not inform investors about Paulson & Co.'s short position or its part in the selection process of the offering memorandum and marketing materials that were provided to them.
The SEC also names Goldman Sachs Vice President Fabrice Tourre in the lawsuit as being principally responsible for ABACUS 2007-AC1. It is alleged that Tourre put together the transaction, prepared and conceived the marketing materials, and spoke directly with investors. The SEC further alleges that Tourre knew of Paulson & Co.'s short interest and the part it played within the collateral selection process. Tourre is charged with leading the ACA into believing that Paulson & Co. had invested close to $200 million into the equity of ABACUS, creating the belief that Paulson & Co.'s interests in the collateral selection process were parallel with the ACA's interests. In truth, their interests were vastly different.
The SEC's complaint states that the deal was closed on April 26, 2007, with Paulson & Co. paying Goldman Sachs around $15 million for building and selling ABACUS. 83 percent of the RMBS that was in the ABACUS portfolio had been severely downgraded and the additional 17 percent were on negative watch by Oct. 24, 2007, . By Jan. 29, 2008, over 99 percent of the portfolio had been downgraded.
It is alleged that investors in ABACUS have lost over $1 billion. The SEC's filing charges Goldman Sachs and Tourre with violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5. The Commission seeks an injunction, disgorgement of profits, prejudgment interest, and financial penalties.
Should we consider a Corporate Windfall Profits Tax in order to balance the U.S. federal budget? Please share your opinion at www.dyslexinomicon.blogspot.com
ReplyDeleteIn 1965, even after Kennedy's historic tax cuts, corporate taxes made up 21.8%(1) of federal revenues, the marginal corporate income tax rate was 70%(2) and unemployment was at 4.5%(3). But as of 2007 corporations slashed their share down to 14.4% of federal revenues while shoving an additional 4% of the burden on individual tax payers. Currently the marginal corporate income tax rate is 35%, and unemployment hovers around 10%.
Check it out yourself:
(1) Federal burden sharing by sector:
www.whitehouse.gov/omb/Budget/historicals , Office of Management and Budget Table 2.2
(2) Marginal federal income tax rates: www.wikipedia.org/wiki/Income_tax_in_the_United_States for marginal tax rates,
(3) Unemployment history: www.gpoaccess.gov/eop/tables10.html , Table B-42 Civilian Unemployment Rates 1962-2009