By Michael Ventura
DNAinfo Senior Editor
MANHATTAN — Goldman Sachs fueled the recent economic crisis when the banking firm defrauded investors by making "misleading statements" about a financial product tied to subprime mortgages, the Securities and Exchange Commission charged in a lawsuit filed Friday in Manhattan.
The product, a synthetic collateralized debt obligation, was pegged to the performance of subprime mortgages. When mortgages failed, Goldman would still reap profits through the product,, the suit said.
As a result, the Abacus 2007-AC1 product magnified "losses associated with the downtown in the United States housing market," the suit said.
The Wall Street titan in 2007 let a major hedge fund manager, John Paulson of Paulson & Co., arrange a transaction "in which Paulson heavily influenced the selection of the portfolio to suit his economic interests, but failed to disclose to investors, as part of the description of the portfolio selection process contained in the marketing materials used to promote the transaction," Paulson's role in the process or its "adverse economic interests," the complaint said.
Paulson made $3.7 billion in the deal, the New York Times reported.
The suit also names Goldman Vice President Fabrice Tourre, who devised the product, prepared its marketing materials and sold it.
The suit seeks undisclosed financial penalties.
Goldman defended its real estate investments in a letter published last week in the company's annual report, the Times reported.
“We certainly did not know the future of the residential housing market in the first half of 2007 anymore than we can predict the future of markets today,” Goldman wrote, according to the Times. “We also did not know whether the value of the instruments we sold would increase or decrease.”
