The Justice Department, only two days after Goldman Sachs’ executives were grilled and humiliated by lawmakers, has launched a full-on, criminal investigation of Goldman Sachs’ mortgage securities deals. This action follows on the heels of civil fraud charges against GS, which were filed by the government roughly two weeks ago.
It is interesting to note, the U.S. attorney’s office’s investigation, in Manhattan, stems from a “criminal referral” by the Securities and Exchange Commission. The Justice Department’s criminal investigation was announced a day after a group of 62 House lawmakers had asked Justice to open a criminal probe of Goldman Sachs.
An unflinching Goldman spokesman, Lucas van Praag said, “Given the recent focus on the firm, we’re not surprised by the report of an inquiry. We would cooperate fully with any request for information.”
Recently, a Senate investigative panel which investigated and followed Goldman Sachs’ activities for nearly a year and a half, alleged the infamous Wall Street firm bet against its clients as well as the housing market, through its short positions on mortgage securities. Additionally, GS never admitted to investors the securities they were selling were at high risk of default.
Goldman Sachs’ CEO, Lloyd Blankfein, said the company “didn’t bet against its clients and can’t survive without their trust.” He then reasserted GS lost $1.2 billion in the residential mortgage meltdown of 2007 and 2008. He proceeded to argue Goldman Sachs was not making an aggressive, negative bet, nor short, on the mortgage market’s slide.
There is a whopping $2 billion “collateralized debt obligation” (or “CDO”: a pool of securities all tied to mortgages and/or other types of debt, which Wall Street firms had packaged and sold off to investors during the peak of the housing boom. Buyers of CDOs such as big banks, pension funds and other large investors made a killing off the investments—if the underlying debt was paid off. Eventually, as homeowners fell behind on and couldn’t pay their mortgages, leading to a mass-default in 2007, CDO buyers lost billions) which is the crux of the SEC’s charges against Goldman, as well as the subcommittee’s find of five other such transactions—all in all adding up to approximately $4.5 billion.
The government must now prove GS executives were intentionally committing fraud as opposed to doing their best to manage amidst the country’s most horrific financial crisis in years.