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Americas

Goldman fraud case rattles stocks - but regulator's not finished

media A man is reflected on a stock market board at a business district in Tokyo Reuters

The French Goldman Sachs banker accused of defrauding investors is likely to be just the first in a string of people charged with manipulating the markets in the lead up to the US housing collapse. News of the charges has hit stock prices and risky assets across the board.

Interview: Acountancy specialist Tim Bassett in London 19/04/2010 - by Molly Guinness Listen

As the global investment bank moved to contain the damage caused by the $US1 billion fraud charge launched by US regulators, its shares plummeted 12 per cent.

Meanwhile news of the unprecedented charges sent jitters through the markets. Asian stocks sold off 2 per cent on Monday, while the yen hit a one-month high against the dollar.

The US Securities and Exchange Commission (SEC), which brought the charges against Goldman Sachs, says it's also investigating several other firms in connection with similar deals.

Meanwhile, the British Financial Services Authority has begun its own investigation, saying it will work closely with US regulators.

So what's all the fuss about?

The SEC says that Goldman Sachs allowed New York hedge fund firm Paulson and Co to influence the selection process of the bundle of investments in a collateralised debt obligation, or CDO.

The hedge fund bet against the CDO and made a lot of money when the prices crashed soon afterwards. The deal generated about $1 billion dollars for the bank and Paulson.

French trader Fabrice Pierre Tourre, a former vice president of Goldman Sachs, was the only person named, with the SEC arguing he was in charge of creating and selling the misleading funds.

The SEC says Tourre knew Paulson misled the investor into believing that the hedge fund was betting on the success of the portfolio, as well as hedging against losses by buying short positions.

Paulson allegedly paid Goldman Sachs about $15 million for organising the deal. Eight months later, 99 per cent of the portfolio had been downgraded.

It may sound complicated to the layperson, but Goldman Sachs’s defence is that the buyers were sophisticated investors who should have known what they were getting into.

Not so, says Tim Bassett, an accountancy specialist in London, speaking to RFI.

“They were not sophisticated investors ... European financial institutions were known as bag holders you dumped stuff into. They were buying bonds they thought were triple-A rated, so carrying no risk of default,” Bassett said.

Word from the inside

Another London-based banker, who declined to be named, said that within financial circles, there was a feeling Goldman was going to get hit pretty hard.

“They could even lose their licence to participate in the markets,” he said.

The banker added that TD Securities was fined 7 million pounds last December because one trader had mismarked his books.

“That was for one rogue trader. They’re going to throw the book at Goldman. And apart from a fine, they’re likely to face class actions from the investors.”

The fallout

An SEC enforcement officer told RFI the fine would not necessarily be restricted to the amount of money the bank made on the trade.

But he said it was extremely unlikely Goldman Sachs’s licence would be revoked. For that, the SEC would have to prove the bank was systemically corrupt.

Other market participants say it's unlikely that Tourre, who was relatively junior, was a key player in the trade.

“Usually they go after one person first,” said one. “This was probably the best way they could make something stick and now they will build back from that.”

Financial firms are obliged to retain all their communications, which can be requested by regulators under a subpoena.

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