While the news seemed horrible today with the SEC announcing fraud charges against Goldman Sachs (GS), the news is already turning very questionable for the SEC. Its difficult to fathom how the SEC will be able to isolate one transaction from GS and get that to stick. All of the parties in this deal were very sophisticated and knowledgable. No indication exists that they were intentionally misled. Just about everybody thought the housing market would never decline and hence irrational investments were made. If anything, the rating agencies and regulators remain as the main culprits for the blowup of the markets not GS.
After the bell, news has come out that not only did GS lose $90M on the questioned deal, but Deutsche Bank (DB) lost $500M. Both banks were instrumental in working with John Paulson to structure these deals that he shorted. The SEC believes the intent was to defruad the buyers in this case. According to GS they lost $90M in this transaction because they accepted residual risk as part of the transaction. Now its possible they lost $90M here, but then turned around and shorted the market elsewhere to profit. DB supposedly lost $500M because they were unable to unload or maybe didn't want to unload the securities because they thought Paulson was wrong. Regardless it seems highly unlikely that either firm intentionally set up the deal for one party to lose. Its very apparent that back in late 2006 that just about every party wanted to be long mortgage securities. They facilitated a transaction between a willing buyer and a seller.
Nobody knew Paulson back then and I seriously doubt anybody thought for a 2nd that they should follow his trade. Very few firms profited to a great extent from the downturn in housing so I find it very questionable that these charges will stick. GS wasn't selling an island that didn't exist. Even Paulson seemed to question whether he made the right bet. Would housing really decline?
Great comments from Cramer before the news from GS became public. The SEC must find other information where GS actually profited on this deal to prove fraud. Regardless the news flow will be interesting prior to the open on Monday, but its difficult to see how a 3 year old transaction leads to a market correction.