Goldman Sachs has determined that it must settle charges that it defrauded investors in a collateralized debt obligation it structured for hedge fund Paulson & Co.
A deal with the Securities and Exchange Commission, which sued Goldman for allegedly failing to disclose Paulson’s role in the construction of the CDO or the hedge fund’s short interest in it, could cost Goldman between $1 billion and $5 billion, according to Fox Business. The latter figure is five times the total losses in the CDO, ABACUS-AC1-2007.
Goldman has denied any wrongdoing. The firm plans to approach the SEC about settlement talks soon after it releases its response to the charges.
“We can’t be going to war with the SEC,” a senior executive at Goldman told Fox’s Charles Gasparino.
The question is whether the SEC is as eager for a settlement as Goldman. According to Fox, the regulator is uninterested in a slap on the wrist, and could demand the scalp of a top Goldman executive, including CEO Lloyd Blankfein.
Goldman is also facing a half-dozen shareholder lawsuits stemming from the case.
According to the SEC, Paulson paid Goldman $15 million to structure and market the Abacus synthetic CDO and played a “significant role” in choosing the residential mortgage-backed securities that went into it. The New York-based hedge fund then shorted the CDO, buying credit default swaps from Goldman itself.