Goldman fraud charges trigger prospect of wider crackdown

WASHINGTON (AFP) - Top Wall Street bank Goldman Sachs has been charged with financial fraud in a move that raises the prospect of a wider crackdown on firms that bet on the collapse of the housing market.

The securities were a key contributor to the financial crisis that peaked in 2008 because many contained risky mortgages.

The charges are believed to be the first brought against a Wall Street firm for speculating on the collapse of the housing market, which is still struggling to emerge from the worst financial crisis in decades.

Underlining persistent concerns about the unfettered trade, US President Barack Obama said Friday he would veto a Wall Street reform bill that lacked tough rules for complex financial instruments.

"I will veto legislation that does not bring the derivatives market under control and some sort of regulatory framework assures that we don't have the same sort of crisis we have seen in the past," Obama said.

The SEC said Goldman failed to tell investors that a major hedge fund had helped put together the controversial financial product known as collateralized debt obligation (CDO) and was at the same time betting against it.

Paulson & Co, one of the world's largest hedge funds, paid Goldman Sachs to structure a transaction in which it could take speculative positions against mortgage securities chosen by the fund, the commission said in a statement.

The deal, which took place during a massive mortgage meltdown in 2007 and as the country was about to fall into a brutal recession, was said to have cost investors around one billion dollars.

Goldman rejected the charges as "completely unfounded in law and fact."

The firm said it would "vigorously contest them and defend the firm and its reputation."

The lawsuit also named Fabrice Tourre, then a vice-president at Goldman. He was said to be the creator and salesman of the product, which caused investors to lose about one billion dollars.

"The product was new and complex but the deception and conflicts are old and simple," said Robert Khuzami, SEC's director of the enforcement division in a statement.

Analysts said a long courtroom battle could now be expected.

The authorities have not ruled out the possibility of others involved in the alleged fraud or other similar types of fraud.

"The SEC continues to investigate the practices of investment banks and others involved in the securitization of complex financial products tied to the US housing market as it was beginning to show signs of distress," said Kenneth Lench, head of the SEC's structured and new products unit.

It not known whether the SEC might refer the case to the Department of Justice for criminal prosecution.

"The fact that the only individual charged here, after what was presumably a very thorough investigation, was a vice president rather than a managing director or higher, is relatively reassuring news for Goldman," said Bank of America-Merrill Lynch research analyst Guy Moszkowski.

He said it seemed most likely that the potential for more serious charges rose dramatically the higher up the management chain the charges went.

Among investors of Goldman's controversial product were German commercial bank IKB.

Paulson was not charged because it was not obligated to disclose any conflict of interest to investors, Khuzami said.

"Goldman made representations to investors, and Paulson did not."

The firm reportedly made billions of dollars by betting against the housing market in the years before its collapse.

"Paulson did not sponsor or initiate" Goldman's product, the Paulson firm said in a statement.

Goldman shares dived 12.79 percent Friday to 160.70 dollars, after falling as much as 15 percent when news of the fraud charges first hit the market.

The Dow Jones Industrial Average tumbled 125.91 points or 1.13 percent to end the week at 11,018.66 points, snapping a six-session winning streak that had driven the blue-chip index to a fresh 18-month high.

Oil prices also fell sharply, with New York's main contract, light sweet crude for delivery in May, slipping 2.27 dollars to 83.24 dollars a barrel.