Goldman Sachs Sued for Lying to Ratings Agencies

October 16, 2011 by · Leave a Comment
Filed under: General, The Rating Agencies 

The Federal Housing Finance Agency (FHFA) has filed 10 causes of action against Goldman Sachs; of these, the more serious are for fraud. The agency is hoping to collect $11.1 billion plus interest for the lost securities and legal fees.

Courtney Comstock of Business Insider quotes a key passage from the lawsuit: “Because the information that Goldman provided or caused to be provided [to ratings agencies] was false, the rating were inflated…[and] also that Goldman Sachs knew, or was reckless in not knowing, that it was falsely representing the underlying process and riskiness of the mortgage loans…because Goldman’s longstanding relationships with the problematic originators, and its numerous roles in the securitization chain, made it uniquely positioned to know the originators had abandoned their underwriting guidelines…[and because] as a result, the GSEs paid Defendants inflated prices for purported AAA (or its equivalent) Certificates, unaware that those Certificates actually carried a severe risk of loss and inadequate credit enhancement.”

Because Goldman Sachs was not the originator of the mortgage loans, where the actual fraud took place, Ms. Comstock believes that Goldman Sachs has a strong defense. However the suit claims that Goldman Sachs was updated daily on the number of defaults but chose to securitize these failed loans anyway. Ms. Comstock also believes that Fannie and Freddie Mac were “sophisticated investors” who should have done their due diligence. To this the FHFA claims that the substandard loans were hidden; there is no way they could have known.

Good plan. Use the laws and rules that exist. If there is fraud, prosecute!

Speak Your Mind

Tell us what you're thinking...