Wall Street is adjusting to increased scrutiny following the global financial crisis [GALLO/GETTY]
The US government is launching legal action against Wall Street giant Goldman Sachs over claims that the investment bank defrauded investors in the run-up to the international financial meltdown.
The alleged fraud relates to the sale of subprime mortgage investments as the US housing market began to falter in 2007.
Goldman is accused of failing to disclose that one of its clients had created, and then bet against, complicated mortgage securities which lost investors more than $1 billion and helped trigger the financial crisis that plunged the US into recession.
Goldman's share price crashed after the charges were made public, losing 13 per cent of its value and affecting other companies, with more than 125 points - or 1.13 per cent - wiped from the Dow Jones industrial average after the announcement was made.
The fall in Goldman's stock price was its worst one day drop since January 2009.
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The US government charges Goldman Sachs with fraud relating to mortgage securities
Speaking from New York, Al Jazeera's Cath Turner said that the charges had badly shaken financial markets, even hitting the price of gold, oil and the currency markets.
"It's a fear of the unknown, of what will happen next," she said.
"We'll have to wait until Monday morning when the markets reopen to see how long this might last"
Tom Lydon, president of Global Investment Trends in Newport Beach, California, told Reuters it will take time for the full impact of Friday's revelations is felt.
"It's going to take a while for the markets to digest this as investors weed out what it could mean for Goldman and if other banks could be hit with something similar," he said.
Conflict of interest
The charges involve a hedge fund called Paulson & Co., which paid Goldman around $15 million to broker a deal with investors to buy complex mortgage securities.
"The product was new and complex but the deception and conflicts are old and simple"
Robert Khuzami, SEC enforcement chief
But the US government says that Goldman did not tell buyers that Paulson & Co. were involved in the process, concealing the fact that the hedge fund stood to make huge profits if the investments lost money.
Goldman received around $10bn in tax payer-funded bailout money at the hieght of the financial crisis.
The Securities and Exchange Commission (SEC) also filed civil fraud charges against the Goldman vice president who masterminded the deal.
Fabrice Tourre devised the sales and was in charge of marketing the securities to buyers. The SEC is seeking unspecified fines and restitution from both the bank and Tourre.
"The product was new and complex but the deception and conflicts are old and simple," Robert Khuzami, the SEC Enforcement Director said in a statement.
"Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party."
Goldman Sachs has denied the SEC's charges saying they are unfounded [GALLO/GETTY]
The lawsuit was filed in Manhattan federal court and marks an expansion in efforts by the US government to hold companies and individuals to account for contributing to the financial crisis.
The announcement sent shockwaves through Wall St, where banks are adjusting to increased scrutiny following the meltdown.
"This is big," Walter Todd, a portfolio manager at Greenwood Capital Associates LLC, told Reuters.
"Reputationally, obviously, it is damaging. I'm still kind of in shock."
In a rapid rebuttal to the SEC's allegations on Friday, a statement from Goldman firmly denied the charges against it saying they were unfounded and not based on fact and that it would contest them in order to defend its reputation.
Ten days ago, Goldman told shareholders that it had not sold its clients investments that it expected to lose value.
"Our short positions were not a 'bet against our clients,'" Goldman said in a letter to shareholders.
"Rather, they served to offset our long positions. Our goal was, and is, to be in a position to make markets for our clients while managing our risk within prescribed limits."
http://english.aljazeera.net/business/2010/04/2010416163932747367.html
