Goldman Sachs Allegedly Violated Securities Laws

Goldman Sachs investors are filing class action suits against the Wall Street Firm alleging that Goldman Sachs and other Wall Street Firms made false and misleading representations of the bonds they sold that were back by subprime mortgage loans.

Goldman Sachs sold off more than forty billion in mortgage backed securities between 2006 and 2007 that involved nearly two hundred thousand mortgages. The firm never shared with investors that it was furtively betting that a quick drop in housing market would send the worth of those bonds into a decline.

Goldman Sachs secret wagers on the housing market in the United States enabled the firm to pass the vast majority of the firm’s potential losses onto others prior to the vast mortgage loan foreclosures that set the economy into a tail spin.

Investors into what Goldman Sachs promoted as Triple A investments were mere junk bonds as later discovered by investors around the world. The investors such as pension funds, insurance companies, labor unions and foreign financial institutions are facing numerous losses. An investigation by McClatchy Newspapers found that Goldman Sachs lack of disclosure involving the out of the ordinary bets on the housing market failure may have been a violation of securities laws.

Laurence Kotikoff, professor of economics at Boston University stated that The Securities and Exchange Commission should be looking into any financial institution that clandestinely decides that a securities product is not worth buying but sells and markets the security as a prime product without disclosing the true nature of product is a firm that needs to be examined. The practice is fraudulent and should be prosecuted as such.

Columbia University Law Professor and Former Advisory Committee Member to The New York Stock Exchange, John Coffee, stated that investment firms and banks are allowed wide latitude when managing their assets. The maneuvers of Goldman Sachs as far as litigation are concerned falls on what the executives knew at the time. It would be more damning for Goldman Sachs if the firm appeared to be dropping the investments because it saw them as worthless and toxic.

Spokesperson for Goldman Sachs, Michael DuValley revealed that the firm made the decision in December 2006 to lower its mortgage back securities risks by selling off subprime mortgage securities and to make increase its insurance risks. The practice of doing this is called credit default swaps or to hedge against a housing market downturn. DuValley confirmed the firm secretly bet on the downturn but had no obligation to disclosure that information related to how it manages the risks. He further stated that investors would not have expected for Goldman Sachs to do so as market participants and other firms had the same information that Goldman Sachs did.

The investigation by McClatchy shows that the firm purchased and converted into high-yield bonds subprime mortgages from subprime lenders. The very subprime mortgage loans that became subject to the Federal Bureau of Investigations investigation into if the firm misled borrowers or falsified borrowers’ incomes to justify the subprime loan involved.

The investigation also reveals the firm used tax havens overseas to move the mortgage back securities into European and Asian Banks through secretive deals going through the Cayman Islands. The Cayman Islands are frequently used by United States companies to bypass disclosure requirements.

The investigation shows that the firm sent lawyers across the country to repossess properties from financially burdened individuals and individuals whom claimed bankruptcy. Wall Street made it simply for these individuals who were lacking in credit and income to received subprime loans and qualify.

July of this year Goldman Sachs announced its revenues were on course to surpass fifty billion and would allow them to pay their employees over twenty billion in yearend bonuses.

Goldman Sachs sold over one hundred thirty five billion in bonds related to subprime mortgage loans between 2001 and 2007. Their financial status on Wall Street made the sales pitch irresistible to policymakers and investors and explains why few questioned the firm’s risky security ventures when it sold off those securities for over fourteen months.

The Mississippi Public Employees Retirement System and other pension funds have filed a class action law suit against Goldman Sachs for what they contend was Goldman Sachs and other Wall Street firms negligence in representing the true nature of the bonds being sold.