If true of course:

The Wall Street bank, which has previously denied working against its own clients, was yesterday rocked by allegations that it hood-winked investors by selling them a toxic package of mortgages in the interests of another client, the hedge fund Paulson & Co.

From the brief story so far it doesn\’t look like the basic thing they were doing was fraud. They set up a synthetic CDO and sold it on to people.

The allegation seems to be that they way they sold it to people, what they told them when they sold it, was fraudulent.

Be interesting to see what happens next….

2 thoughts on “Interesting”

  1. Funny,I seem to remember the “we live in the best of all possible free markets” crowd chanting in unison that shorting the market was always a perfectly legitimate tactic and may indeed help to clear the market.
    However it is gonna be difficult to prove that people knowingly sold people stuff they knew was doomed-although the Lloyds names scandal might prove a useful comparison.

    Tim adds: Shorting’s just fine. That’s why the basic idea, creating something with a long and a short side, is just fine. The allegations are that they lied about what they were doing, not that what they were doing was wrong.

  2. “Investors in Goldman’s deal reasonably thought that they were buying a portfolio that had been carefully selected by a reputable manager whose sole interest lay in optimizing the performance of the CDO. They no more thought they were trading “against” short investors than investors in IBM or Treasury bonds do. In violation of these reasonable expectations, Goldman arranged that a party whose interests were diametrically opposed to those of investors would have significant influence over the selection of the portfolio. Goldman misrepresented that party’s role to the manager and failed to disclose the conflict of interest to investors. That’s inexcusable.”

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