A glimpse into the mortgage crisis
At long last it seems that the regulatory bodies in the US and UK are taking to task the financial institutions through whose reckless speculation and disregard for other people’s money we all ended up with the credit crunch and consequent recession.
The story started at the weekend on the far side of the Atlantic when Goldman Sachs, the Wall Street powerhouse, was accused of defrauding investors by America’s financial regulator.
The Securities and Exchange Commission (SEC) alleges that Goldman failed to disclose conflicts of interest regarding the marketing of sub-prime mortgage investments just as the US housing market faltered.
Specifically, the SEC says Goldman failed to disclose vital information that one of its clients, Paulson & Co, helped choose which securities were packaged into the now infamous mortgage portfolio of securities which were sold to investors in 2007.
Goldman neglected to inform investors that Paulson, one of the world’s largest hedge funds, had bet that the value of the securities would fall.
Apparently, investors in the mortgage securities lost more than $1bn (£650m) in the US housing collapse.
Goldman has, unsurprisingly, rejected the SEC’s allegations and said that it will defend its reputation ‘vigorously’. However, the howls of protest and squeals of innocence looked less than convincing when, a few days later, the UK Financial Services Authority (FSA) announced that it too is beginning an investigation into the activities of the troubled behemoth.
There is some degree of defence for Goldman in that the two investors that lost the most money, German bank IKB and ACA Capital Management, are top flight financial institutions themselves that should have been aware of the risks having researched what they were investing in.
Anyway, the whole affair is of interest not only because crimes may have been committed on UK soil. In fact, another of the big losers from the transaction at the centre of the controversy was our very own Royal Bank of Scotland.
This means that the UK taxpayer could, with very much emphasis on that could, be in line to receive a payout of close to one billion dollars.
The whole affair is gripping the financial world in a way, I accept, it is unlikely to do for everyone else. This is because Goldman, possibly the world’s most prestigious investment bank, escaped relatively unscathed from the global financial meltdown.
For many who have been wondering how Goldman managed to beat the recession this case has provided the answer, they did it by cheating.
