The Abacus Controversy: The Goldman Sachs Group, Inc.
The Abacus Controversy
The Goldman Sachs Group, Inc. was hit hard by the 2008 financial crisis as a result of its involvement in subprime mortgages, and was later rescued in a huge U.S. government bailout.
On 16th April, 2010, the Securities and Exchange Commission charged Goldman Sachs and its vice president Fabrice Tourre for “defrauding 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.” It was announced in July 2010 that Goldman Sachs & Co. will pay $550 million to settle the charges.
Paulson & Co approached Goldman to assemble a synthetic Collateralized Debt Obligation for a $15 million dollar fee. Abacus 2007-AC1 was structured and marketed under Fabrice Tourre. Paulson …show more content…
Investors IKB and ACA Management were not informed of Paulson's short position on the CDO and his involvement in selecting the portfolio. The SEC states that this was material information that would have alerted them to the high risks.
3. ACA was told by Goldman that Paulson was long equity in the CDO. The equity tranche is at the bottom of the capital structure in a CDO and if the underlying RMBSs were to fail, it is the first to experience losses. This led ACA to assume that since Paulson was long equity on the CDO, it had an incentive to ensure the success of the CDO, which implied that ACA's and Paulson's interests were aligned. This was one reason ACA felt comfortable and agreed to being the Portfolio Selection Agent for the CDO.
From these facts, it is apparent that Goldman favoured Paulson in the Abacus case. There is a conflict of interest as Goldman did not honour its ethical obligation to act in the best interests of its clients, namely ACA Management and IKB.
Although Goldman paid the fine, it was made clear in a public statement that, “Goldman will not admit wrongdoing, though it will admit that its marketing materials for the investment contained incomplete
The Goldman Sachs Group, Inc. was hit hard by the 2008 financial crisis as a result of its involvement in subprime mortgages, and was later rescued in a huge U.S. government bailout.
On 16th April, 2010, the Securities and Exchange Commission charged Goldman Sachs and its vice president Fabrice Tourre for “defrauding 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.” It was announced in July 2010 that Goldman Sachs & Co. will pay $550 million to settle the charges.
Paulson & Co approached Goldman to assemble a synthetic Collateralized Debt Obligation for a $15 million dollar fee. Abacus 2007-AC1 was structured and marketed under Fabrice Tourre. Paulson …show more content…
Investors IKB and ACA Management were not informed of Paulson's short position on the CDO and his involvement in selecting the portfolio. The SEC states that this was material information that would have alerted them to the high risks.
3. ACA was told by Goldman that Paulson was long equity in the CDO. The equity tranche is at the bottom of the capital structure in a CDO and if the underlying RMBSs were to fail, it is the first to experience losses. This led ACA to assume that since Paulson was long equity on the CDO, it had an incentive to ensure the success of the CDO, which implied that ACA's and Paulson's interests were aligned. This was one reason ACA felt comfortable and agreed to being the Portfolio Selection Agent for the CDO.
From these facts, it is apparent that Goldman favoured Paulson in the Abacus case. There is a conflict of interest as Goldman did not honour its ethical obligation to act in the best interests of its clients, namely ACA Management and IKB.
Although Goldman paid the fine, it was made clear in a public statement that, “Goldman will not admit wrongdoing, though it will admit that its marketing materials for the investment contained incomplete