On Friday, almost two years after the financial meltdown that began on Wall Street and reverberated throughout the U.S. economy, a civil lawsuit has been filed by the Securities and Exchange Commission (SEC) against Goldman Sachs, alleging that the behemoth financial institution engaged in financial fraud.
The SEC accuses Goldman and a vice-president, Fabrice Tourre, of "defrauding investors by misstating and omitting key facts" about securities tied to subprime mortgages.
According to the AP, the charges against Goldman relate to a complex investment tied to the performance of pools of risky mortgages known as collateralized debt obligations (CDOs).
In the complaint, the SEC alleges that Goldman marketed the package to investors without disclosing a major conflict of interest: The pools were picked by Paulson & Co., a prominent hedge fund that was betting the housing bubble would burst.
The SEC said in a statement that Goldman failed to tell investors that one of the world's largest hedge funds, Paulson & Co., paid Goldman Sachs to structure a transaction in which it could take speculative positions against mortgage securities chosen by the fund.
Goldman then sold the package to investors like foreign banks, pension funds and insurance companies, which would profit only if the bonds gained value.
The focus of the SEC case, an investment vehicle called Abacus 2007-AC1, was one of 25 such vehicles that Goldman created so the bank and some of its clients could bet against the housing market. The deal, which took place during a massive mortgage meltdown in 2007 and as the country was about to fall into a brutal recession, was said to have cost investors around $1 billion. Paulson in turn bought insurance against the deal and when the securities later tanked, losing almost all of their value, Paulson has acknowledged reaping a $3.7 billion profit by betting against the housing market as it nose dived in 2006 and 2007.
News of the lawsuit against Goldman Sachs sent the firm's stock plummeting on Friday, falling 13 percent and wiping out more than $10 billion of the company’s market value. The Dow Jones Industrial Average tumbled 125.91 points or 1.13 percent to end the week at 11,018.66 points, snapping a six-session winning streak that had driven the blue-chip index to a fresh 18-month high. Oil prices also fell sharply, with New York's main contract, light sweet crude for delivery in May, slipping 2.27 dollars to 83.24 dollars a barrel.
The charges may unleash a torrent of lawsuits, and signal that the government is prepared to file more lawsuits related to the overheated market that preceded the financial crisis, the AP reported.
"This is just the tip of the iceberg," said James Hackney, a professor at Northeastern University School of Law. "There are a lot of folks out there in different deals who played similar roles, and once it starts building steam, plaintiffs' lawyers will figure out this is where the money is and there should be a lot of action."
It is uncertain what the final cost of the TARP bailout of failing Wall Street banks will be to U.S. taxpayers. In Sept. 2008 it was estimated at $700 billion, as the ripple effect trickles down through smaller financial institutions, the housing market and the economy. The Congressional Budget Office puts the current cost at $109 billion, while other sources claim the figure could reach as high as $7.5 trillion.
The public outcry against the bank bailouts was driven in part by suspicions that a heads-we-win, tails-you-lose ethos pervades the financial industry. Goldman, the most profitable company in Wall Street history, and others are once again minting money and paying big bonuses to their employees, which to many is evidence that Wall Street got a sweet deal at taxpayers’ expense. The accusations against Goldman may only further those suspicions.
Part of the action in the coming months may come in the form of a financial reform bill that President Obama is preparing to push through the House and Senate in what looks to become a heated battle on the scale of health care insurance reform.
"Every day we don't act, the same system that led to bailouts remains in place, with the exact same loopholes and the exact same liabilities," Obama said in his weekly radio and Internet address. "And if we don't change what led to the crisis, we'll doom ourselves to repeat it. Opposing reform will leave taxpayers on the hook if a crisis like this ever happens again," the President said.
Republicans in congress, thus far united in their opposition to the any such reform, contend that a provision creating a $50 billion fund for dismantling banks considered "too big to fail" would continue government bailouts of Wall Street. Obama administration officials say such a fund is unnecessary and they want Senate Democrats to remove it. The President criticized financial industry lobbyists for opposing the proposed regulations and for waging a "relentless campaign to thwart even basic, commonsense rules."
Regardless of what the judgment on the Goldman case about guilt or innocence will be, a steady stream of fraud and Wall Street corruption cases in the news is likely to inflame the nation and may direct anger at the institutions that are truly responsible for the mess that the U.S. economy has become. Even the Federal Reserve bank may not be under the radar this time.
One thing may be clear after the crash of 2008 - the financial industry needs a complete ethics overhaul, but we will not see it until people are thrown into prison and financial corporations have to choose which business they want to be in, banking or finance. The current state of affairs where anything goes for a profit on Wall Street is unacceptable.
Perhaps Americans can begin with demanding more tax cuts for the middle class, and a 50 percent tax of Wall Street bonuses for executives in companies that caused the crisis for the unjust profits made during the five years that took the American economy down.
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