The fraud charges leveled against Goldman Sachs on Friday are—or more accurately, could be—a pivotal moment as the United States continues its long, slow extrication from the financial crisis. The 22-page complaint filed by the Securities and Exchange Commission is almost too painful to read, filled with damning e-mail excerpts and fact patterns sure to make any legal department retch. The SEC has stabbed at the very heart of Wall Street, with an accusation that resonates from Main Street to Washington and all points in between. Compliance officers would do well to consider it carefully, because the mistakes Goldman stands accused of making carry lessons for you all.
The allegations are somewhat convoluted, but can be boiled down as follows. In early 2007, hedge fund manager John Paulson believed the U.S. housing market was in a bubble, and wanted to short the entire sector. Lacking any easy way to do this, he worked with Goldman Sachs trader Fabrice Tourre to draw up a list of mortgage-backed securities that looked like clunkers doomed to default. Tourre then shared that list of securities with a mortgage analysis outfit named ACA Management, and coaxed ACA into using that list to draw up collateralized debt obligations Goldman Sachs could sell to investors—CDOs whose value would depend on homeowners continuing to make their mortgage payments.
