SEC Rule Would Ban Banks and Hedge Funds From Betting on Investor Losses
By DJ Pangburn Monday, September 19, 2011
In 2007, as the sub-prime mortage crisis was looming, Goldman Sachs and hedge funder manager John Paulson teamed up to bundle 3,000,000 sub-prime mortgage loans together into a collateralized debt obligation called ABACUS 2007-AC1, and then shorted mortgages to unwitting investors. John Paulson made $1 billion (Goldman took a $15 million cut) and investors lost $1 billion.
According to The New York Times, 25 such investment vehicles were created by Goldman Sachs in order to shield the firm from massive losses in mortgages. However, they turned out to be rather great investments instead of losses. (Deutsche Bank and Morgan Stanley also created these CDOs).
At issue in the SEC complaint was whether the firms who selected the mortgages intentionally chose those most likely to fail and shine the shit for their investors.