On Friday, the SEC sued Goldman Sachs for not fully disclosing that it was short selling the same derivatives it was asking clients to buy.
Goldman's hedge fund, John Paulson Co, made $20 billion using shorts to bet against the same mortgage-backed securities that the former investment bank was promoting.
Goldman insists that everything it did was legal. Technically, this is true because there were no laws in place to prevent it. Lack of regulations on hedge funds and the derivatives they used was one of the cause of The Great Recession.
In fact, it is a common practice for companies to hedge risky transactions by using derivatives. This means the SEC Chair, Mary Schapiro, may go after other financial firms, such as Morgan Stanley. This will rally support for the sorely needed financial regulations bill now languishing in Congress.
UK's Prime Minister Gordon Brown and Germany's Chancellor Angela Merkel said their countries may also file suit against Goldman, and possibly other financial firms. The move will be highly popular among most voters who are angry at Wall Street for causing the recession and then receiving bailouts.
Related Articles
- The Role of Derivatives in the Mortgage Crisis
- SEC Making Money Market Funds Safer
- Goldman Repays TARP Funds
Photo:(L-R) Goldman Sachs CEO Lloyd Blankfein, JPMorgan Chase CEO Jamie Dimon, Bank of New York Mellon CEO Robert Kelly, Bank of America CEO Ken Lewis and State Street CEO Ronald Logue (Credit: Chip Somodevilla/Getty Images)
Comments
How can the SEC sue him? Paulson said from 2007 that he’s betting short on credit market? Who had the ears to hear that … was a smart guy! Take a look at Paulson words in 2007!
http://www.pionline.com/apps/pbcs.dll/article?AID=/20070709/FACETOFACE/70705017/1021/TOC
Wow! Very interesting article. Thanks for bringing it to our attention.
The suit is because Goldman didn’t disclose to investors they were betting against the MBS with Paulson’s Co. Even if Goldman wins the suit, the point has been made – derivatives like MBS and CDS need to be regulated. This will help the regulations bill get passed.