The SEC stepped up to the plate today and filed fraud charges against Goldman Sachs, a company with investments in, well, everything and a pulse on the top leaders in government.

The move marks the first time that regulators have taken action against a Wall Street deal that helped investors capitalize on the collapse of the housing market. Goldman itself profited by betting against the very mortgage investments that it sold to its customers. [emphasis mine]

The suit also named Fabrice Tourre, a vice president at Goldman who helped create and sell the investment.

An excellent book explaining the concept of betting against a financial product and specifically the bundled CDO (collateralized debt obligations) is ‘The Big Short: Inside the Doomsday Machine‘ by Michael Lewis. It details in a very entertaining way how other, less unscrupulous, traders recognized the mortgage bubble would burst and bet against it and even tried to warn people. But this suit alleges…

According to the complaint, Goldman created Abacus 2007-AC1 in February 2007, at the request of John A. Paulson, a prominent hedge fund manager who earned an estimated $3.7 billion in 2007 by correctly wagering that the housing bubble would burst.

Goldman let Mr. Paulson select mortgage bonds that he wanted to bet against — the ones he believed were most likely to lose value — and packaged those bonds into Abacus 2007-AC1, according to the S.E.C. complaint. Goldman then sold the Abacus deal to investors like foreign banks, pension funds, insurance companies and other hedge funds.

But the deck was stacked against the Abacus investors, the complaint contends, because the investment was filled with bonds chosen by Mr. Paulson as likely to default. Goldman told investors in Abacus marketing materials reviewed by The Times that the bonds would be chosen by an independent manager.

The gist of the suit is that Goldman lured its own investors/customers to be on the opposite side of the bet to enable the firm to make billions.

…in the S.E.C. complaint, Mr. Paulson pinpointed those mortgage bonds that he believed carried higher ratings than the underlying loans deserved. Goldman placed insurance on those bonds — called credit-default swaps — inside Abacus, allowing Mr. Paulson to short them while clients on the other side of the trade wagered that they would not fail.

But when Goldman sold shares in Abacus to investors, the bank and Mr. Tourre only disclosed the ratings of those bonds and did not disclose that Mr. Paulson was on other side, betting those ratings were wrong.

This is a fascinating story for those of us who favor decentralization of pretty much everything and of course favor strong regulatory protections for consumers. It should also be noted how many former Goldmanites now sit in positions of power next to President Obama setting financial policy in Washington.

UPDATE – Turns out the cleverly orchestrated bet against its own GS trader John Paulson earned $3.7B while costing his investors $1B. Meanwhile GS stock fell 10% after news of the civil suit but the ever plucky traders, according to an as yet unconfirmed tweet, apparently having inside information, bet against their own stock in advance of the news! Another big short!

“Scheherazade Rehman discusses the likelihood of Greece receiving a bailout from the European Union” Arguments are strong that Goldman Sachs contributed to the fall of Greece just to make a buck…

Goldman Sachs helped the Greek government to mask the true extent of its deficit with the help of a derivatives deal that legally circumvented the EU Maastricht deficit rules. At some point the so-called cross currency swaps will mature, and swell the country’s already bloated deficit….

Creative accounting took priority when it came to totting up government debt.Since 1999, the Maastricht rules threaten to slap hefty fines on euro member countries that exceed the budget deficit limit of three percent of gross domestic product. Total government debt mustn’t exceed 60 percent…

Greece’s debt managers agreed a huge deal with the savvy bankers of US investment bank Goldman Sachs at the start of 2002. The deal involved so-called cross-currency swaps in which government debt issued in dollars and yen was swapped for euro debt for a certain period — to be exchanged back into the original currencies at a later date.

Bush went begging again in the Middle East and came back red faced and empty handed. Neither the Saudi King or the Iranian Oil Minister Gholamhossein Nozari were moved by the plight of the American president when he asked OPEC to step up production.

The OPEC members are currently utilizing their full capacity and are supplying the market … With oil at US$126, it is not wise for those with oil not to supply it.” Nozari then added, “I believe it is not that oil is becoming more expensive, but the dollar is becoming cheaper.”

It would have been unthinkable five or six years ago that a visiting US president would receive such an open rebuff in the Middle East. Last weekend’s exchanges revealed the extent of decline in the US’s dominance of the Middle East through the present Bush administration. No doubt, oil lies at the very center of the decline of the American dominion. The cascading rise in oil prices has led to a massive transfer of resources to the energy exporting countries. Iran is one principal beneficiary.

Goldman Sachs is predicting that oil will reach $140 per barrel by July and Iran is using its bountiful wealth to exert influence on regional oil policies. Iran doesn’t need nuclear weapons to do the US in if that is really its aim, it just needs to keep the spigot on idle to bring down our oil dependent nation.

You know what they say, ‘one man’s loss is another man’s gain’, well that certainly is true with regard to the subprime mortgage meltdown. Canny trader’s working for Goldman Sachs bet against lenders and won to the tune of $4 billion.

House prices are crumbling on both sides of the Atlantic, growing numbers of homeowners face repossession, financial markets are yo-yoing and the UK saw its first run on a bank in living memory. But for three audacious New York traders it all added up to a $4bn (£2bn) profit opportunity and the biggest jackpot in the history of Wall Street.

The young guns at the investment bank Goldman Sachs – none of them over 40 years old – were unmasked yesterday, prompting a wave of adulation and envy among their colleagues, and another bout of handwringing about Wall Street’s ability to make multibillion-dollar profits even as millions of ordinary people face losing their homes.

Dan Sparks and two underlings, Josh Birnbaum and Michael “Swenny” Swenson, placed what were in effect giant bets against the US mortgage market at the start of the year and watched their winnings tick higher and higher as the rising numbers of mortgage defaults spiralled into a worldwide financial crisis. Throughout the year, they battled with more cautious bosses who feared the bets were too big and too dangerous, but in part because of their success Goldman Sachs will post record profits next week. In doing so, the firm will stand alone on Wall Street, where rivals have suffered huge losses from the credit market meltdown.

The trio themselves are in line for bonuses of about $10m apiece from a record bonus pool at Goldman of about $19bn. “They are very embarrassed that their names have come out,” said a company source. “Until now, nobody had heard of them, including most of the people on the floor where they work.”

Hailed as canny heroes these three will reap enormous profits off the very backs of individual homeowners lured into low interest loans on over appraised properties. Their loss is Goldman Sachs gain. Also from the Wall Street Journal

Goldman’s success at wringing profits out of the subprime fiasco, however, raises questions about how the firm balances its responsibilities to its shareholders and to its clients. Goldman’s mortgage department underwrote collateralized debt obligations, or CDOs, complex securities created from pools of subprime mortgages and other debt. When those securities plunged in value this year, Goldman’s customers suffered major losses, as did units within Goldman itself, thanks to their CDO holdings. The question now being raised: Why did Goldman continue to peddle CDOs to customers early this year while its own traders were betting that CDO values would fall? A spokesman for Goldman Sachs declined to comment on the issue.

The structured-products trading group that executed the winning trades isn’t involved in selling CDOs minted by Goldman, a task handled by others. Its principal job is to “make a market” for Goldman clients trading various financial instruments tied to mortgage-backed securities. That is, the group handles clients’ buy and sell orders, often stepping in on the other side of trades if no other buyer or seller is available.

The group also has another mission: If it spots opportunity, it can trade Goldman’s own capital to make a profit. And when it does, it doesn’t necessarily have to share such information with clients, who may be making opposite bets. This year, Goldman’s traders did a brisk business handling trades for clients who were bullish on the subprime-mortgage-securities market. At the same time, they used Goldman’s money to bet that that market would fall.

I don’t pretend to understand the nuanced world of high finance but I can say that all this feels intuitively wrong and gives full argument towards achieving local sustainability.