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SEC charges Goldman Sachs over packaging of subprime mortgage deal

The SEC has charged Goldman Sachs with fraud over its packaging of a subprime mortgage investment.

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The SEC charges that Fabrice Tourre, a Goldman vice president, failed to disclose Paulson & Co.'s role to other investors. The product was a collateralized debt obligation (CDO), a multilevel complex of debts tied to underlying loans including subprime mortgages.

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Such CDOs played an important role in the housing boom and bust. During the boom, investor appetite for these seemingly attractive products helped feed the supply of credit to borrowers with poor prospects of repaying their loans. Then, as the risks of subprime loans began to emerge, the implosion in CDO values became a source of financial-industry instability. What had been a key source of credit in the economy quickly dried up.

News reports have documented how both Goldman Sachs and John Paulson made a great deal of money betting on a housing collapse at the right time, after the market peaked in 2006. Neither party faces charges of wrongdoing in those wider profits. And the SEC filed no charges against Paulson or his fund Friday.

The outcome of the SEC lawsuit remains to be seen, but the charge puts at least a dent in Goldman's reputation while the case is hashed out. The firm has also been tarnished recently by criticism that it helped Greece to hide the extent of its national debts.

Political fallout

Friday's charges also come at an important moment politically for the financial industry. President Obama is pushing for new regulation of Wall Street to prevent another financial crisis.

"We can't allow history to repeat itself," Obama said Friday. He didn't mention the SEC action against Goldman, but called for reforms so that taxpayers wouldn't be on the hook for "risky speculators on Wall Street."

In a 2007 e-mail cited by the SEC, Mr. Tourre appeared to talk openly about the risks that were rife at the time. "The whole building is about to collapse anytime now," he saids, citing "more and more leverage in the system."

Meanwhile, the SEC is also fighting to defend its own reputation as a vigilant regulator.

The agency released a report by its own inspector general Friday concluding that the SEC knew since 1997 that R. Allen Stanford probably was operating a Ponzi scheme. The report attributed the failure (until recently) to prosecute Stanford to a managerial culture that was wary of taking on complex cases.