In the year 2007, Goldman Sachs approached an insurance firm named ACA to invest and place on any one side of a financial wager. This instrument was named Abacus 2007-AC1 was only made for an institutional client (familiar with the organization) named John A. Paulson, the manager of Paulson & Company. When the traders of Goldman met ACA, they produced many mortgage investments. It affected the financial condition of the company. In the year 2010, the Securities and Exchange Commission charged the Vice President and the company with cheating on the investors through financial products that are linked with subprime mortgages (Avgouleas & Cullen, 2014).
Goldman Sachs was one such company that survived during the financial crisis period. However, the company was charged with cheating on the clients by selling them securities on mortgage that were designed secretly by John Paulson. The US government found that he made a betting of killing on the collapse of the housing market. The company denied the charges of the Securities and Exchange Commission and that created a big clash between the regulators and Wall Street. The shares of the company fell by 13% and this strengthened the position of the American President Barrack Obama. The product was complex and new. However, the conflicts and deception are simple and old. The Vice President of the company, Tourre, prepared the materials for marketing and structured the process of transaction. He had a direct communication with the investors of the business (O'Hare, 2014). Tourre was aware of the undisclosed interest of Paulson and his role in the process of collateral selection. He convinced and informed ACA to believe that Paulson & Company had invested $200 million in the project ABACUS 2007-AC1. He also made them believe that they shred common interests. However, the reality was somewhat different. Their interests were quite conflicting. The SEC complains that Paulson & Company had cut short the portfolio of RMBS and he was helped by taking entry into credit default swaps. The company had an economic opportunity to select RMBS for the selected task (Bidwell et al. 2015).
When the government found that Paulson & Company had cheated on their investors, it took several measures to decrease the fraudulent activities and accused Goldman Sachs on ground of fraud. It forced them to sell off their securities that catered to the collapse of the housing market. The housing market began to sink in the period between 2007 and 2008 and because of this, the new project suffered huge loss during this period. The Government found that when the market sank, it provided Paulson with an opportunity to make a profit of nearly $1 billion. The Government found him guilty of paying $15 million to Goldman Sachs for modeling and structuring the bonds of the said project (Lloyd, 2014). The company is a very big trader of bonds and stocks. It suffered a loss of nearly $90 million on the process of transaction. The investors were provided about sufficient information regarding the act of fraudulence. It was also found by the US government that the traders involved in the headquarters of the company stopped working after this fraud. Paulson and Goldman have been working together since 1994 (from the establishment of firm of hedge fund). Paulson and his associates bought protection of toxic mortgages for millions of dollar. He wanted to expand his business. Deutsche Bank and Goldman were the firms that agreed to put deals for Paulson & Company. The hedge fund selected a security list to form the foundation of CDOs. The target customers of the bonds (mortgage) were informed about the credit ratings of the firms (Hurley, Gong & Waqar, 2014).
When the laws of economies were defied by the housing market, the American economy had already made its way towards a new phase of sustainable growth. An exchange took place that included the financial product that was arranged by the company, Goldman Sachs. The firm also formulated high finance that led the company to adapt fraudulent activities. The firm set a gambling between the long side and wager. One side speculated that there would be an increase in the housing prices while the other side speculated that there would be a decrease in the housing prices (Keenan, 2015).
Numerous factors led to the fraudulent activities adopted by Paulson & Company that ultimately caused the project to decline in the potential or the target market. The factors led to involvement of the company in fraudulent activities and it has been charged with cases of cheating on the investors. However, the company has improved since then and they continue to deliver quality services that led to the profitability factor of the company. They regained their position in the potential market and earning high returns on investment due to improved techniques and methodologies.
Avgouleas, E., & Cullen, J. (2014). Market Discipline And Eu Corporate Governance reform in the banking sector: Merits, fallacies, and cognitive boundaries. Journal of Law and Society, 41(1), 28-50.
Bidwell, M., Won, S., Barbulescu, R., & Mollick, E. (2015). I used to work at Goldman Sachs! How firms benefit from organizational status in the market for human capital. Strategic Management Journal, 36(8), 1164-1173.
Hurley, R. F., Gong, X., & Waqar, A. (2014). A framework for understanding and restoring trust in universal banks. The Routledge Companion to Financial Services Marketing, 456.
Keenan, J. M. (2015). From sustainability to adaptation: Goldman Sachs’ corporate real estate strategy. Building Research & Information, 1-17.
Lloyd, M. B. (2014). Goldman Sachs: Hello. CORPORATE GOVERNANCE CASE STUDIES, 180.
O'Hare, J. (2014). Synthetic CDOs, Conflicts of Interest, and Securities Fraud. University of Richmond Law Review, 48(2).