This is on the scale of the Enron case. Except that it could affect every firm involved in subprime securitization.
I haven’t read anything in years as racy as the SEC’s complaint against Goldman Sachs for collusion with the Paulson hedge fund to cheat subprime investors out of $1 billion. A billion-dollar fraud is not a small matter. I’m no lawyer, but the granularity of detail and documentation that the SEC has assembled appears extremely impressive. They have nailed a 32-year-old Goldman vice president who cobbled together the tainted structure, and he appears to be singing. Investment banks aren’t like the mafia. No one takes twenty-year sentences and keeps their mouth shut. This case very well might open up others.
The issue, as the press has reported, is the selection of collateral in a Goldman Sachs (NYSE:GS) synthetic CDO deal. As the SEC reports:
In late 2006 and early 2007, Paulson performed an analysis of recent-vintage Triple B RMBS and identified over 100 bonds it expected to experience credit events in the near future. Paulson’s selection criteria favored RMBS that included a high percentage of adjustable rate mortgages, relatively low borrower FICO scores, and a high concentration of mortgages in states like Arizona, California, Florida and Nevada that had recently experienced high rates of home price appreciation. Paulson informed GS&Co that it wanted the reference portfolio for the contemplated transaction to include the RMBS it identified or bonds with similar characteristics.