Last month, the US Securities and Exchange Commission (SEC) announced that it has charged Goldman Sachs, the world’s most prestigious investment bank, with intentionally deceiving investors in a complex mortgage-backed synthetic collateralised debt obligation (CDO) sold just before the collapse of the US sub-prime housing market. As a result of the announcement, Goldman Sachs’ stock lost 13% of its value, its largest one-day drop since January 2009.
While the nature of the product at the centre of the allegations, the Abacus 2007-AC1 CDO, is unquestionably highly complex, the SEC’s allegations can be summarised quite simply: the marketing materials for Abacus 2007-AC1, it is alleged, were false and misleading because they represented that ACA – the structuring company and collateral manager – selected the reference portfolio while omitting any mention that Paulson & Co, a party with economic interests adverse to the CDO investors, played a significant role in the selection of the underlying obligations.
