The story of a CDO named Hudson-Mezzanine-2006-1 (“Hudson”) shows how Goldman Sachs, the only major Wall Street firm to escape relatively unscathed from the nation’s economic meltdown, created and sold CDO deals in which it secretly took a short position to hedge its long bets on the housing market, according to an article by Greg Gordon in the McClatchey Newspapers entitled “While Goldman raked in profits, clients squirmed,” citing the Senate Permanent Subcommittee on Investigations report (“Senate Report”).
Goldman allegedly lured investors (including Morgan Stanley) into buying Hudson by investing $6 million in the riskiest equity slice (which Goldman stressed to investors), then secretly betting “more than 300 times more” that the securities around which the $2 billion deal was structured would default, according to the article, citing Senator Carl Levin, co-chair of the Senate Permanent Subcommittee on Investigations (“Senate Subcommittee”).
Internal Goldman documents reportedly show that Goldman’s mortgage department created Hudson in September 2006 to offset $1.2 billion in long bets on mortgage-backed securities on a London-based exchange, known as the ABX Index.
Hudson collapsed in November 2008, a little over two years after its creation. Goldman reaped $1.35 billion. Morgan Stanley lost $930 million. Morgan Stanley accused Goldman of breaching its contractual duty to sell off downgraded securities, according to the article.
The Senate Report reveals that Goldman created at least four offshore deals with total value of $4.5 billion that were rife with conflicts of interest. Goldman paid the SEC $550 million to settle a civil fraud suit on one of them.
Levin charged that Goldman deceived Hudson investors by failing to disclose that it was short the underlying securities. Levin further charged that Goldman CEO Lloyd Blankfein and other officials misled the Senate Subcommittee by denying that Goldman bet massively on a housing downturn in 2006 and 2007.
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 45 occasions. Page Perry’s attorneys have extensive experience in representing investors in CDO matters. For further information, please contact us.