"The product was new and complex but the deception and conflicts are old and simple," said Robert Khuzami, Director of the Division of Enforcement. "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."
This seems to demonstrate the inherent information asymmetries involved with securitization as it was practiced during the bubble years. If it was rating agencies sleeping on the job, it was investment banks and hedge funds colluding to dupe and deceive outmatched institutional investors. The client in question here was ultimately hedge fund manager John Paulson, widely heralded in the business press for making a killing off the housing crash. Paulson got a company called ACA to put securities of his choosing into a CDO it was managing (Abacus) that Goldman helped put together and sell off to other clients. He then shorted the same CDO with default swaps. The results: The Dealbook rundown explains that "as the Abacus deals plunged in value, Goldman and certain hedge funds made money on their negative bets, while the Goldman clients who bought the $10.9 billion in investments lost billions of dollars."
James Kwak and Felix Salmon have analyses that explain why Goldman and not Paulson is the entity being held legally accountable. Salmon:
Paulson and ACA are both culpable, but it’s Goldman which was clearly central to the plan of deceiving investors into believing that the CDO was being managed by people who wanted it to make money, when in fact it was being structured by the biggest short-seller in the entire subprime market. And although ACA should never have been so passive in terms of accepting the names given to it by Paulson, it did reasonably believe, because it was essentially lied to by Goldman Sachs, that Paulson was in the deal to make money on the long side.... The scandal here is not that Goldman was short the subprime market at the same time as marketing the Abacus deal. The scandal is that Goldman sold the contents of Abacus as being handpicked by managers at ACA when in fact it was handpicked by Paulson; and that it told ACA that Paulson had a long position in the deal when in fact he was entirely short.In other words, Goldman enabled Paulson to make fools out of ACA and all the investors who bought a piece of Abacus, all while collecting the fees for the deal.
Kwak isolates the juiciest quote from the documents, from an email by Goldman trader Fabrice Tourre, who appears to have been the point man on the deal: "More and more leverage in the system, The whole building is about to collapse anytime now…Only potential survivor, the fabulous Fab…standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!" Just another financial mastermind at work.