Sec Versus Goldman Sachs (a)

26 Pages Posted: 30 May 2017

See all articles by Wei Li

Wei Li

University of Virginia - Darden School of Business; Centre for Economic Policy Research (CEPR)

Rick Green

University of Virginia - Darden School of Business

Abstract

In April 2010, the SEC brought fraud charges against Goldman Sachs for its structuring and marketing of Abacus 2007-AC1, a complex mortgage-related security. Less than two years after the onset of the great financial crisis, and in the midst of political posturing to shape agendas for the financial reform, the case discusses the market reaction to the lawsuit and the dilemma facing Lloyd Blankfein, Goldman's CEO. The deal structure is analyzed in detail within the context of the market for mortgage-backed securities. The case can be used in a course on financial market regulation or in a course on financial markets and institutions. Instructors may also assign a technical note "The Financial Regulatory Environment" (UVA-GEM-0103) to give students more background on the U.S. regulatory environment.

Excerpt

UVA-GEM-0101

Oct. 27, 2010

SEC VERSUS GOLDMAN SACHS (A)

The product was new and complex, but the deception and conflicts are old and simple. 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 that the securities were selected by an independent, objective third party.

—Robert Khuzami, SEC Director of the Division of Enforcement

In other words, the SEC is a dreadful failure in fulfilling its core mission of protecting individual investors, as the Stanford and Madoff cases show. But the SEC is very good at nailing politically correct targets like Goldman years after the fact on charges that have little or nothing to do with the investing public....In the cases of Stanford and Madoff, thousands of small investors lost their life savings. In the case of Goldman, some masters of the financial universe lost money on what they knew was a calculated gamble. Which did more societal harm?

. . .

Keywords: mortgage-backed security, credit default swap

Suggested Citation

Li, Wei and Green, Rick, Sec Versus Goldman Sachs (a). Darden Case No. UVA-GEM-0101. Available at SSRN: https://ssrn.com/abstract=2974615

Wei Li (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
804-243-7691 (Phone)
804-243-7681 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/li.htm

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Rick Green

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

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