Friday, April 16, 2010

The latest news on the investment banks

If you're tuned into the news these days, you probably have heard today that the SEC has charged Goldman Sachs with fraud regarding the subprime mortgage fiasco that is blamed for the "great recession." Some observers are speculating that this fraud case could be as significant as Enron was. If so, I would expect Goldman's stock to tank over the next few days as a complete picture of the fraud comes to light.

As for now, here is what we know. Both the WSJ and the LA Times reports that Goldman was essentially passing profits to a hedge fund known as Paulson & Co. The LA Times article explains Goldman's fraud as follows:
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.
Meanwhile, earlier in the week, The NY Times reported that Lehman's accounting methods are looking shadier by the minute. In particular, the Times article explains:
In the years before its collapse, Lehman used a small company — its “alter ego,” in the words of a former Lehman trader — to shift investments off its books.

The firm, called Hudson Castle, played a crucial, behind-the-scenes role at Lehman, according to an internal Lehman document and interviews with former employees. The relationship raises new questions about the extent to which Lehman obscured its financial condition before it plunged into bankruptcy.

While Hudson Castle appeared to be an independent business, it was deeply entwined with Lehman. For years, its board was controlled by Lehman, which owned a quarter of the firm. It was also stocked with former Lehman employees.

None of this was disclosed by Lehman, however.

I wonder which investment bank will be in the news for fraud tomorrow?

No comments:

Post a Comment