Goldman Sachs Mortgage Bets
The synthetic CDOs being reviewed typically don’t contain actual mortgages, the Times said. Instead, the CDOs bundled credit-default swaps, a type of insurance that can require an investor on one side of the contract to pay the other side when debts go into default.
The Financial Industry Regulatory Authority, which polices broker-dealers, is looking into whether firms such as Goldman Sachs Group Inc.
In late October 2007, as the financial markets were starting to come unglued, a Goldman Sachs trader, Jonathan M. Egol, received very good news. At 37, he was named a managing director at the firm.
Goldman’s synthetic CDOs involved it paying millions of dollars in insurance premiums every year to the investors who bought them. Because of the balance of power between buyers and sellers of credit during the boom, the people buying bonds had very little bargaining power, and the people issuing debt had a lot.
Morgan Stanley spokesman Mark Lake, SEC spokesman Kevin Callahan and Finra’s Brendan Intindola declined to comment.
The creation and sale of synthetic C.D.O.’s helped make the financial crisis worse than it might otherwise have been, effectively multiplying losses by providing more securities to bet against. Some $8 billion in these securities remain on the books at American International Group, the giant insurer rescued by the government in September 2008.
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