Goldman Sachs was today accused of fraud by a US financial watchdog over the make-up and marketing of a debt product tied to sub-prime mortgages.
In a civil suit, the Securities and Exchange Commission (SEC) alleges the investment bank structured and marketed a synthetic 'collateralized debt obligation' (CDO) called ABACUS that hinged on the performance of subprime residential mortgage-backed securities and which cost investors more than $1bn.
It says Goldman did not tell investors "vital" information about the structure of ABACUS, including that a major hedge fund, Paulson & Co, was involved in choosing which securities would be part of the portfolio and had taken a short position against the product in a bet its value would fall.
Shares in Goldman Sachs slumped 10% on the news.
"[ABACUS] was new and complex but the deception and conflicts are old and simple," SEC enforcement director Robert Khuzami says.
"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 the securities were selected by an independent, objective third party."
During the credit crisis, John Paulson, founder of Paulson & Co, made what is one of the hedge fund industry's most successful ever trades - betting against the US sub prime residential housing market using residential mortgage backed securities (RMBS).
Largely as a result of his bets on the crunch - including on banks whose shares plunged as the extend of the crisi became clear - John Paulson became the industry's richest manager.
In 2007 he personally earned a record $3.7bn, according to Absolute Return and Alpha magazines. In 2009, he earned another $2.3bn.
To promote 'long-term investment'
Switching 'hard and expensive'
Smaller funds still packing a punch
To drive progress