U.S. financial regulators are charging one of the world's leading financial firms, Goldman Sachs, with fraud in a case that allegedly cost investors more than $1 billion. Goldman says it has done nothing wrong and vows to defend itself in court. The charges grow out of the collapse of the housing market that helped spark the worst recession in decades for the U.S. and global economies.
The U.S. Securities and Exchange Commission (SEC) alleges that Goldman lied to investors about securities tied to subprime mortgages just as the housing market was beginning to falter.
It has long been a common practice to gather mortgages into groups and sell the packages as securities to investors seeking good returns and low risk.
But the SEC says Goldman did not tell investors that a hedge fund paid them millions of dollars for the right to select which mortgages would go into the securities. The fund allegedly picked flawed mortgages and then set up complex transactions that would pay them well if the securities defaulted.
Goldman called the charges "unfounded" and promised to "vigorously contest" them in court. The firm admits it made bets against the success of some mortgage-backed securities, but Goldman says those were designed to balance the risk of some other investments.
The SEC lawsuit is seeking to fine Goldman and force it to return profits it received from the alleged fraud.
The Chief Market Analyst at Jeffries and Company, Art Hogan, says the case is hurting Goldman's stock price and the value of other financial firms, at least in the short term. "Goldman Sachs has been long one of the top investment banks. If you look back over the last couple of years of this financial crisis we went through, they certainly were able to come out of it in a better fashion than Bear Sterns or Lehman did. They have got a reputation for having very, very aggressive trading and very, very smart people working there, that's long been the case. They have had decades of the reputation of being one of the top investment banks and they certainly seem to have come out of the financial crisis in better shape than some of their competitors did," he said.
But University of Missouri law professor William Black says Goldman is in a "disastrous" situation, and its plight could hurt other major financial firms. "The charges are enormous in terms of their potential legal liability they have the potential to change the way people look at this crisis," he said.
Professor Black says Goldman is just the latest example of an elite financial firm accused of lying to investors. He says widespread fraud should help Obama Administration efforts to pass major financial reforms intended to prevent future financial meltdowns.