Goldman Sachs CDO ( Collateralized Debt Obligation) Case

The US Securities & Exchange Commission, has filed a complaint against Goldman Sachs on April 16 alleging that the investors of Collateralized Debt Obligation issued by Goldman Sachs have been cheated by not disclosing the involvement of Paulson & Co, a Hedge Fund in creating the underlying securities.

The Securities and Exchange Commission wants to prove that the Goldman Sachs has cheated its investors by not disclosing the fact that a hedge-fund firm betting against them has a role in creating the underlying securities on which the CDO is based.

As per Goldman Sachs the assets selected were signed off by an independent Asset Manager who had initially rejected more than 50 percent of the assets suggested by the Hedge Fund.

The case against Goldman Sachs is a strong indication that SEC may start investigating other banks that have issued CDOs. The list may include Merrill Lynch, UBS & Citigroup.

The CDO deals has helped the Hedge Funds to profit from Housing Loans defaults by the borrowers.
Goldman Sachs Chief Executive Officer Lloyd Blankfein, said that the SEC allegations are baseless and that it would strongly challenge them and defend the firm and its reputation.

As per Goldman Sachs the offer document prepared for potential investors said that CDO would be associated with securities “selected” by asset manager.

As per SEC Paulson & Co, the hedge-fund firm became the world’s third-largest Hedge Fund after betting sub prime mortgages and has earned around $1 billion on the Abacus deal.

In a marketing document for the CDO, Goldman Sachs said it might have access to “non-publicly available information” about the collateral and, as a result of this, “this presentation may not contain all information that would be material to the evaluation of the decision to purchase the CDO.

As per SEC the Goldman Sachs hired a third party independent Asset manager when it realized that the investors would not invest unless the assets are selected by an independent asset manager. As the complaint allege, Goldman Sachs presented the information about the Hedge fund to the Asset manager in such a way to suggest that the involvement of Hedge fund is trivial but in fact it turned out to be for a major portion.

The allegation against Goldman Sachs says that the CDO deal was closed knowing that it would fail & if the investors had been informed about the involvement of the Hedge Fund they should have abstained from investing in it. This is so because Paulson & Co. is well known as "Bearish" & this would affect the outcome of the investments.

According to experts in synthetic instruments there is always a high risk involved in instruments like CDOs & the buyer of the instrument knows that there is someone with the exactly opposite perception & this is the underlying principle of any synthetic instrument.

It is very interesting to know that many of the world’s biggest banks have issued CDOs involving hedge-fund firms betting against mortgage bonds. This includes, JP Morgan Chase, UBS, Citigroup, Bank of America, Wachovia, Deutsche Bank etc. As per sources many CDO managers have acted partially in favor of hedge funds while designing the CDOs. The outcome of Goldman Sachs investigations may trigger a chain of investigations by the regulators in CDOs already issued.

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