SEC Charges Goldman Fraud — Warning: Skip Subprime Carbon

Wall Street banking firm Goldman Sachs intentionally sold “toxic” mortgage-backed assets to clients to generate fees and bonuses, according to fraud charges filed by the Securities and Exchange Commission Friday. (Washington Post, 4/17.) SEC’s suit alleges that Goldman vice president Fabrice Tourre wrote: “The whole building is about to collapse anytime now,” in an e-mail months before creating and marketing the mortgage-backed investment. (Goldman denies that they “bet against… clients.”)

And, earlier this week, police in Spain arrested nine people for alleged fraud involving trading of carbon credits.

Carbon “offsets,” like mortgages underlying the investments Goldman marketed, vary tremendously in quality and value. GAO has reported that verification of offsets in the EU’s carbon trading system has been spotty; many have little or no value. The incentives that apparently led Goldman to oversell repackaged subprime mortgages would also prevail in a cap-and-trade carbon market, setting the stage for another bubble and collapse. The SEC’s case is a loud, clear warning to Congress: Skip the markets, traders, volatility, offsets and fraud; set a predictable, rising carbon price directly.

Comments

James Handley says

April 22, 2010 at 5:08 pm

Update — With S.E.C. Suit, Goldman Faces Major Test (NYT 4/19):

The Securities and Exchange Commission filed a civil fraud suit on Friday that essentially says that Goldman built the financial equivalent of a time bomb and then sold it to unwitting investors… a way for a prominent hedge fund manager, John A. Paulson, to bet against risky mortgages.

With Mr. Paulson’s help, Goldman created an Abacus investment that, the S.E.C. now says, was devised to fall apart. By betting against that Abacus investment, Mr. Paulson reaped $1 billion in profit, according to the S.E.C.