America's financial regulator, the SEC, accused the Wall Street icon Goldman Sachs, of fraud on Friday over a subprime mortgage security that caused $1bn-plus in losses to investors. The regulator alleges that Goldman let a big hedge fund fill a financial product in 2007 with risky subprime mortgages and then failed to disclose that to the product's buyers. Goldman did not disclose that Paulson & Co, one of the world's largest hedge funds, had bet that the value of the securities would fall. According to the SEC, Goldman failed to disclose that Paulson played a significant role in selecting the CDO's portfolio, but the firm then bet against it by entering into a credit-default-swap transaction with Goldman to buy protection on certain layers. As a result of that bet, Paulson made about $1 billion, the SEC said. "Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party," a spoksperson for the regulator said. Goldman rejected the SEC's allegations, saying that it would "vigorously" defend its reputation. You can read the SEC claims here. Goldman Sachs has disputed the SEC claims here. This case will provide another fascinating inside look of the workings of the derivatives industry in the lead up to the global financial crisis.
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