Goldman Sachs is facing more heat today over the sale of a mortgage-backed security U.S. regulators say was designed to fail. According to The Washington Post, regulators in the United Kingdom and Germany are looking at the investment, known Abacus 2007-AC1.
Abacus, which was launched by Goldman Sachs in 2007 just before the housing market began to collapse, was a collateralized debt obligation linked to the performance of subprime mortgages. According to a civil lawsuit filed by the U.S. Securities and Exchange Commission (SEC) last Friday, Goldman Sachs failed to disclose the role that hedge fund manager John A. Paulson played in selecting the Abacus portfolio, and did not reveal the fact that his hedge fund had taken a short position against it. Instead, marketing documents for Abacus indicated that the mortgage bond portfolio would be selected by a firm called ACA Management.
According to the SEC, Paulson selected mortgage bonds for Abacus that he believed were most likely to lose value. According to a report in The Wall Street Journal, Abacus one of the worst-performing mortgage deals of the housing crisis, with 100 percent of its bond downgraded by rating firms less than a year after it was completed. When Abacus tanked, Goldman Sachs clients who invested in it lost more than $1 billion.
Two of the Goldman Sachs clients that were on the losing end of Abacus were The Royal Bank of Scotland and the Duesseldorf-based IKB Deutsche Industriebank. Both of those banks were bailed out by their governments after they lost millions on investments that were marketed by Goldman Sachs. Royal Bank of Scotland is now 84 percent owned by British taxpayers after being partly nationalized by the government.
According to The Washington Post, that has prompted both London’s Financial Services Authority and Germany’s BaFin regulatory agency to open probes into Goldman Sach’s practices. Both agencies are coordinating their investigations with the SEC.
For its part, Goldman Sachs continues to insist it did nothing wrong.
