Megabank Goldman Sachs Charged With Fraud

Federal regulators charged the Wall Street megabank Goldman Sachs with civil fraud Friday. The Securities and Exchange Commission announced the charges in connection with subprime mortgage securities. Within minutes of the charges being announced, Goldman Sachs' shares fell more than 10 percent.

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RENEE MONTAGNE, host:

NPR's business news starts with big charges against a big bank.

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Federal regulators today charged the Wall Street megabank Goldman Sachs with civil fraud. The Securities and Exchange Commission announced the charges in connection with subprime mortgage securities.

Goldman Sachs shares are down more than 10 percent on the news. NPR's Yuki Noguchi joins us now to talk about that story. Good morning.

YUKI NOGUCHI: Good morning, Renee.

MONTAGNE: Now, what precisely has Goldman Sachs been charged with?

NOGUCHI: Well, basically the SEC is saying that they misrepresented an exotic investment called a collateral debt obligation, or CDO. They marketed this investment (unintelligible) in this case some mortgage related securities. And the SEC's charge says at the same time Goldman was also allowing a hedge fund manager to play an unusual role. He was sort of picking the investments that backed the CEO, and Goldman didn't disclose this.

So you know, meanwhile that hedge fund manager was selling those securities short. So basically you have one of Goldman's clients undercutting these investors without them knowing it, and Goldman, according to the charge, was collecting on both ends of that deal.

MONTAGNE: Yeah, among the consequences for Goldman and we can talk more about that but its shares immediately began falling as soon as this came out. How is that going to affect the bank in the very near term?

NOGUCHI: Well, you know, certainly the amount that Goldman made from doing this was a tiny fraction of its overall profits. I mean the SEC said something like $15 million in fees were made from this. But you know, the SEC investors, of sorry, the investors in this case lost a billion dollars. But how much and what this means for Goldman will really depend on how widespread this kind of practice was.

The SEC has established a new division to look into some of these exotic investments, and so, you know, this case centers on this one product and this 31-year-old guy who ran that product, but you know, it depends on how aggressive the SEC gets in pursuing other cases like this, not just with Goldman but maybe even other banks.

MONTAGNE: Well, then what are the consequences though? I mean this is a civil fraud case. You know, sort of in the larger picture, what are the consequences?

NOGUCHI: Well, for Goldman, I mean politically this is not good. The firm has been spending lots of time defending its success and its bonus and its bonuses given out in spite of all the financial crisis and the fallout from that.

And as you pointed out, the stock has plummeted on the news of this charge this morning. But you know, if the news if the SEC is successful, it will try and collect its ill-gotten fees and impose some penalties, although they didn't quantify how much they would pursue on this case.

At a minimum you can count on the fact that Goldman Sachs can afford the best legal counsel out there, and you know, these kinds of cases are not typically easy for regulators to win.

So you know, a lot of it will depend on how how widespread the practice was.

MONTAGNE: Well, then how does this fit into the landscape of subprime mortgages, bank failures and government bailouts - all together?

NOGUCHI: Well, you know, mortgage backed securities, because of these exotic instruments, were distributed in a lot of places. It's really hard for me to quantify, Renee, at this point, you know, how - what how many of these kinds of cases we brought. But rest assured, there are a lot of exotic instruments and the SEC is bringing to bear a new team of people who are looking into this, and they are very eager to make sure that that banks, you know, weren't double-dealing and they weren't misrepresenting their investments to consumers.

MONTAGNE: That's NPR's Yuki Noguchi on news that federal regulators have today charged Goldman Sachs will civil fraud. Thanks very much.

NOGUCHI: Thank you.

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