Let the prosecutions begin -- Justice Department open criminal probe of Goldman Sachs

Word comes from New York that federal prosecutors have finally started the practically unconscionably delayed investigation into whether Goldman Sachs and other Wall Street traders should be held criminally liable for crashing the nation's housing market in 2006 and kicking off the global recession. Unnamed sources told the New York Times that the U.S. Securities and Exchange Commission, which last month filed a civil lawsuit accusing Goldman Sachs of fraud, referred its findings to the U.S. Justice Department. Goldman Sachs has denied the allegation in the fraud suit, which accuses the firm of defrauding investors in its Abacus 2007 AC1 collateralized debt obligations. According to the SEC, investors in the Abacus deals were not told that Goldman Sachs was simultaneously allowing other people to bet that the mortgage market would fall. When the market collapsed, Abacus investors lost millions but other investors enjoyed a windfall. One trader, hedge fund manager John Paulson earned more than $1 billion when value of bonds he helped select for Abacus investors crashed, the SEC alleged. Paulson has not been charged with any wrongdoing, the Times said. Of course, getting investigated is not the same as being charged, just as being charged is not the same as being guilty. In fact, two hedge fund managers at Bear Stearns were acquitted of criminal charges last year.

Goldman Sachs charges could be first of many

News that the U.S. Securities and Exchange Commission had filed civil charges against Wall Street trading giant Goldman Sachs and one of its officers is a signal that the Obama administration is continuing to pursue its investigation of the financial collapse that thrust the country, and the world, into the worst economic crisis since the 1930s. The lawsuit, which accuses the bank of devising and selling an investment product that was secretly designed to fail, could be the first of a series of government actions to punish companies and executives who behaved boorishly and prevent them from doing so again. It should, of course, be clear to everyone by now that this crisis was not caused by some uncontrollable and unexplainable economic forces but by human greed and regulatory inattention, and that the former is likely impossible to remedy but the latter is not. So it is at least reassuring that the White House is still pressing the case for tighter regulation of Wall Street. Of course, Goldman Sachs denies that it did anything wrong in designing and promoting a line of investment products to bet against the housing market, including one called "Abacus" that lost more than $1 billion, according to the New York Times. In a written statement, Goldman Sachs called the accusations “completely unfounded" and pledged to “vigorously contest them and defend the firm and its reputation.” But Robert Khuzami, director of the SEC enforcement division, said in his own statement that Goldman Sachs designed the investment products to fail and even allowed a hedge fund manager who stood to earn billions of dollars if they failed to help choose what to invest in. "Goldman (Sachs) wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio,” Khuzami said. That client, a prominent hedge fund manager identified in the lawsuit as John Paulson, made nearly $4 billion in 2007, the Times said. The SEC suit also named Fabrice Tourre, a Goldman Sachs vice president who helped create and sell the investment products, the Times said. Then again, the lawsuit filed by the SEC is a civil complaint, meaning that if it is successful, and there really is no way at this point of knowing whether the government is correct, the defendants can only be forced to pay back their ill-gotten gains and possible monetary penalties. What everybody in the country is waiting for -- Wall Street excepted, no doubt -- is when the criminal complaints that carry the likelihood of prison time will be filed.