Image: From WRLDs Project, showing how the chart of Goldman Sachs escalated as the housing crisis crashed the stock market in September 2007.
Around 10:30 AM ET, on April 16, 2010, Goldman Sachs shares plummeted as the SEC announced that they were charging Goldman Sachs with fraud. The story is still unfolding, but apparently the SEC is claiming Goldman created and sold to its own investors, CMOs, (collateral mortgage obligations)–packages of mortgages, cut into smaller slices or traunches and sold to investors–based on mortgages that it clearly knew would fail. Apparently the Hedge Fund Paulson & Company, (John Paulson), had helped Goldman structure these investment vehicles, and had also taken a short interest in them, (his fund would profit if the price dropped). It was also reported that Goldman told their investors that Paulson had taken a long position, (he believed their value would rise), not a short position, clearly misrepresenting facts. One of the most colorful examples the SEC provided, was an email from a Goldman Sachs vice president, 31 year old Fabrice Tourre, a French graduate of Stanford, who was involved in creating the CMOs:
“More and more leverage in the system. The whole building is about to collapse anytime now… Only potential survivor, the fabulous Fab [referring to himself].”
During the week of September 17th, 2007, at the beginning of the financial crisis, it was clear something was going on with Goldman Sachs. The Federal Open Market Committee lowered the discount rate by a half-point or 50 basis points, on September 18th. This marked the first in a rapid series of large rate cuts which continued throughout March, 2008, signaling a possible recession, or worse in the US, and impacting the global markets.
During the same week, Goldman Sachs shares sharply increased, as their reported earnings came in much higher than expected, shocking those on Wall Street. This was in sharp contrast with other banking and lending institutions, which showed steep declines. We now know why their stock jumped that day, but it took nearly three years for the story to begin to reach main street.