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Written by: Ryan Vanzo
On April 16, the Securities Exchange Committee (SEC) charged Goldman Sachs with fraud in the structuring and marketing of Mortgage-Backed Securities. The SEC claims that Goldman acted against their clients’ best interests by recommending mortgage securities to them even though the firm was betting on them falling in value.
The SEC claims Goldman defrauded investors by “misstating and omitting key facts about a financial product tied to subprime mortgages as the U.S. housing market was beginning to falter.”
Robert Khuzami, SEC Enforcement Director, said, “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party.”
Immediately after the announcement, Goldman Sachs shares dropped by almost 15 percent, ending the day off with lows down 13 percent. The drop was the biggest decline in Goldman’s share price in over a year. Banking index’s fell by around three percent on the day as the Goldman news weighed heavily on other banking firms. Morgan Stanley ended the day down by almost six percent, with Citigroup and JP Morgan down by five percent.
Investors, relying on Goldman to give them dependable, independent research, lost more than $1 billion in this latest breach of fiduciary duty. Although its overall effect on the financial system is minimal, it could present an opportunity for sweeping regulatory changes to the investment banking industry.
Perhaps even more newsworthy than this was Moody Corp’s share price decline of eight percent. Being the largest securities rating agency, Moody received a fair amount of negative publicity during the market crash as many securities that received its highest rating defaulted. The latest suit against Goldman could mean increased scrutiny on Moody’s research practices and independence.
Although it appears to deal with Goldman Sachs alone, the suit could cause major ramifications across the banking industry. Only time will tell if the issues will be properly addressed, but for now Goldman Sachs is rejecting all claims of wrongdoing, calling the SEC’s charges “completely unfounded in law and fact.”
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