Goldman Serves One Master Better Than The Others

Authored by Jonathan Weil of Bloomberg (originally appearing on, well, Bloomberg obviously)

April 16 (Bloomberg) -- As Wall Street bombshells go, the lawsuit that the Securities and Exchange Commission filed against Goldman Sachs Group Inc. is about as big as it gets.

Who knew the folks at the SEC still had it in them to accuse a major Wall Street bank of fraud? And who could have guessed that Goldman’s canned explanation for its behavior during the subprime mortgage bubble -- that it simply was serving clients’ needs -- could come so unglued so quickly?

To recap, the SEC’s complaint accuses Goldman and one of its vice presidents of selling subprime mortgage-backed securities to institutional investors, without disclosing that one of its clients, the giant hedge fund Paulson & Co., had paid Goldman to structure these securities so that they would be the world’s perfect short -- at least from Paulson’s point of view.

The securities, called Abacus 2007-AC1, became worthless within months, showing that Paulson had done its homework. The SEC said Paulson paid Goldman a $15 million fee.

The SEC said Goldman’s main infraction was telling investors who bought the securities that an independent company called ACA Management had chosen the assets that were backing them, when it was Paulson that played a major role in the process. The SEC said Goldman duped ACA into believing that Paulson was looking to take a bullish position, though the SEC’s complaint doesn’t try to explain why this somehow would excuse ACA’s decision to bow to Paulson’s influence.

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