Finacial terms and players in the SEC’s fraud charges against Goldman Sachs

Terms, players in the Goldman Sachs fraud charges

The Securities and Exchange Commission’s civil fraud charges against Goldman Sachs concern complex investments backed by mortgages that many blame for worsening the financial crisis as the U.S. housing market went into a nosedive. Goldman denies the charges. Here are definitions of some of the terms involved in the charges, and descriptions of some of the key players.

THE TERMS:

— Synthetic CDO, or Collateralized Debt Obligation. A complex investment vehicle whose performance is tied to a set of assets, in this case securities backed by subprime residential mortgages. The SEC says Goldman didn’t disclose to investors that a major hedge fund, Paulson & Co., helped select the mortgages and subsequently bet that some of them would lose value.

— CDS, or Credit Default Swap. A transaction between two parties in which one side buys protection from the other that a loan or other obligation will stay in good standing. If it doesn’t, the party that bought the protection must be paid. The SEC says Paulson made a $1 billion profit by using credit default swaps to bet against Goldman’s CDO.

— Subprime mortgages. Loans made to borrowers with weak credit histories. They usually carry higher interest rates than conventional loans to compensate lenders for the additional risk.

— RMBS, or Residential Mortgage-Backed Securities. A type of security that is backed by a home mortgage or a group of home mortgages. They pay money out to investors based on the interest and principal payments received from homeowners. There are also CMBS, or Commercial Mortgage-Backed Securities.

— ABACUS 2007-AC1. The name of the collateralized debt obligation at the center of the SEC’s allegations. The SEC says Goldman created and sold the CDO in early 2007, just as the U.S. housing market was starting to falter.

THE PLAYERS:

— Fabrice Tourre. A 31-year-old Goldman Sachs employee that the SEC accuses of committing fraud by marketing Goldman’s CDO without disclosing Paulson & Co.’s role in helping create the CDO or the fact that Paulson had an incentive in choosing investments that would lose value. According to the SEC’s complaint, Tourre rushed the CDO to market since investor appetite for mortgage-backed securities was waning, telling a friend in an email: “The whole building is about to collapse anytime now.”

— Paulson & Co. A major hedge fund. Made a fortune betting that the U.S. housing market would collapse.

— ACA Management LLC. Financial consulting company that had experience building and managing collateralized debt obligations. The SEC says Goldman asked ACA to serve as the “Portfolio Selection Agent” for the CDO as a way to reassure investors about the CDO. The SEC says ACA wasn’t aware that Paulson was planning to bet against the CDO. ACA’s parent company, ACA Capital Holdings Inc., sold credit protection on part of the CDO.

— ABN Amro Bank NV, based in the Netherlands, ended up on the hook for ACA Capital’s position through a series of credit default swaps. Parts of ABN Amro were later taken over by the Royal Bank of Scotland, which paid $841 million to Goldman Sachs to unwind that transaction. Most of that money was then paid to Paulson.

— IKB Deutsche Industriebank AG. A German commercial bank and one of the investors in Goldman’s CDO. IKB lost its entire $150 million investment. The bank ran into trouble with its investments in U.S. subprime mortgages and eventually had to be bailed out by German banks. It was later acquired by Lone Star Funds, a U.S.-based private equity firm.