Goldman Sachs Charged With Fraud

An interesting development related to the mortgage default crisis occurred today when Goldman Sachs was sued by the SEC for fraud. An Article from Reuters reports that the lawsuit arises out of a collateralized debt obligation ("CDO") transaction structured by Goldman Sachs. The CDO marketed by Goldman Sachs provided a way to sell securities to investors in connection with subprime residential mortgages. If payments were timely made on the mortgages, the investors would profit. In the SEC's Complaint, it is alleged that the same principals involved with selecting subprime mortgages for the transaction were also "shorting" or betting against the performance of the mortgages. Less than a year after the CDO transaction was finalized by Goldman Sachs, 99% of the consumer mortgages associated with the transaction were downgraded, costing investors more than $1 Billion. However, Goldman Sachs made a profit of $15 Million on the deal.