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SEC accuses Goldman Sachs of fraud as Obama presses for tough new regulations

The civil charges relate to Goldman Sachs' creation of collateralized debt obligations -- mortgage-backed securities -- before the financial crisis. Goldman denies any wrongdoing.

April 16, 2010|By Nathaniel Popper

Reporting from New York — Spurred by the government's lawsuit against Wall Street investment banking giant Goldman Sachs & Co., President Obama said Friday that he would veto any overhaul to financial regulations that doesn't include new rules on the derivatives market.

The president's comments came after the Securities and Exchange Commission earlier in the day filed a civil lawsuit accusing Goldman Sachs and one of its vice presidents of fraud in marketing complex mortgage-backed securities that were partly to blame for the financial crisis that gripped the nation.

Goldman, Wall Street's preeminent investment banking house, was one of a number of major financial firms that received billions of taxpayer dollars to prop them up and help them recover from the debacle. Lehman Bros. Holdings Inc. and Bear Stearns Cos. were among firms that collapsed or were folded into healthier companies.

Obama, facing stiffening Republican and industry opposition to his regulatory proposal, said the government must act to prevent a similar financial crisis, and new rules should include regulating the $605-trillion over-the-counter derivatives market.

"We can't allow history to repeat itself," Obama said at the start of a meeting at the White House with his panel of outside economic advisors. "I will veto legislation that does not bring the derivatives market under control in some sort of regulatory framework that assures that we don't have the same kind of crisis that we've seen in the past."

The session with a panel of business and labor leaders and economists, headed by former Federal Reserve Chairman Paul Volcker, was held at the White House as the Senate is gearing up to debate a financial regulation overhaul bill. All 41 Senate Republicans told Majority Leader Harry Reid in a letter Friday that they will oppose the legislation when it comes to the floor of the chamber next week.

The SEC charges against Goldman, filed in federal court in Manhattan, relate to so-called collateralized debt obligations -- complex securities tied to the performance of subprime mortgages -- that Goldman created in 2007 near the end of the housing boom.

The value of the securities plunged in the mortgage meltdown that began later that year, helping to set off the global financial crisis.

The SEC's lawsuit alleges that Goldman did not tell investors in the securities that they were based on a portfolio of mortgage bonds selected by a hedge fund. The investment bank subsequently helped the hedge fund, Paulson & Co., place bets against the same bond portfolio, the suit says.

Paulson, which made a number of such bets, made billions of dollars as the subprime home-loan market collapsed in a wave of borrower defaults.

"The product was new and complex but the deception and conflicts are old and simple," Robert Khuzami, the SEC's director of enforcement, said in a statement.

Goldman denied any wrongdoing.

"The SEC's charges are completely unfounded in law and fact, and we will vigorously contest them and defend the firm and its reputation," the firm said in a statement

Wall Street's most storied investment bank, Goldman emerged from the crisis stronger than ever. But it has been widely criticized for its role in financial transactions leading up to the crisis. Until now, though, no charges have been brought against the bank.

The charges shocked stock investors. Goldman's shares tumbled as much 16% before rebounding somewhat. More than halfway through the trading day, the stock was at $164.45, down $19.82, or 11%.

The overall market also slid on the news, with the Dow Jones industrial average down 128 points, or 1.2%.

nathaniel.popper@latimes.com

Bloomberg News was used in compiling this report.

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