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December 24, 2009

Goldman Sachs Faces Probe over Betting on Housing Market Crash
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The New York Times reports investigators in Congress, at the Securities
and Exchange Commission and at the Financial Industry Regulatory
Authority have launched probes into Goldman Sachs and other Wall Street
firms for deliberately selling risky structured securities to clients
and then betting on the securities failing. The probes are looking at
how Goldman Sachs, Morgan Stanley, Deutsche Bank and other Wall Street
firms profited off complex mortgage-based securities, known as synthetic
collateralized debt obligations, or CDOs. Pension funds and insurance
companies lost billions of dollars on such securities that they believed
were solid investments. One focus of the inquiry is whether the firms
creating the securities purposely helped to select especially risky
mortgage-linked assets that would be most likely to crater, setting
their clients up to lose billions of dollars if the housing market
imploded. Finance expert Sylvain Raynes said, “The simultaneous selling
of securities to customers and shorting them because they believed they
were going to default is the most cynical use of credit information that
I have ever seen.” Raynes compared it to buying fire insurance on
someone else’s house and then committing arson.



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