April 19th, 2010
04:35 PM ET

Goldman 101: What's going on?

[cnn-photo-caption image=http://i.cdn.turner.com/money/.element/img/1.0/sections/mag/fortune/mostadmired/2010/snapshots/goldman_sachs_ny_building.jc.jpg caption="Goldman Sachs could be forced to pay out $706.5 million over the next few years."]

Annalyn Censky

In a 22-page complaint filed Friday, the Securities and Exchange Commission charged Goldman Sachs with defrauding investors on real estate securities likely to go bust.

The legal document reads less like a court filing, and more like a twisted story of how actions by Wall Street's most notorious investment bank allegedly caused losses of $1 billion for investors.

Here's what it said:

The opportunity: real estate bubble

In late 2006 and early 2007, when the United States housing market is beginning to show signs of distress, hedge fund Paulson & Co. takes a "bearish view on subprime mortgage loans," according to the SEC complaint.

The fund - run by John Paulson - identifies more than 100 bonds with the lowest credit ratings, which are likely to experience defaults. Paulson cherry-picks these bonds by favoring adjustable rate mortgages, borrowers with low credit scores, and mortgages in states like Arizona, California, Florida and Nevada, where the real estate bubble hit the hardest.

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Filed under: Economy • Finance • Keeping Them Honest
soundoff (One Response)
  1. Su from Fort Lee, NJ

    Why isn't anyone suing the SEC?

    They failed to prevent ponzi schemes like Madoff and Stanford...
    They failed to expose these new financial market instruments and to oversee their compliance.
    They failed to protect the investors by doing their own due diiigence!

    April 19, 2010 at 5:00 pm |