The `poster boy' of investment banking is in the line of fire, as regulators, politicians, and shareholders accuse it of serious breach of fiduciary duty and unjust enrichment. It has surely inflicted a severe blow on the reputation of the once mighty Goldman Sachs. Can it survive what is being seen as the biggest crisis in its history?

On April 16^th morning, Wall Street woke up to a rude shock, as the Securities and Exchange Commission (SEC) charged its most fabled firm, the venerable Goldman Sachs, of serious breach of fiduciary duty involving a 2007 sale of a structured product. The financial market regulator said in its civil fraud lawsuit, which it filed with the US District Court for the Southern District of New York, that Goldman concealed material information from investors into sale of a structured product by failing to disclose that Paul Johnson & Co., a UK-based hedge fund, had bet against it and had also had a role in portfolio selection. The erstwhile investment bank, which transformed itself into a full-fledged commercial bank post the financial crisis, not only hid this vital information from investors, but also allegedly bet against its own client in a synthetic Collateralized Deal Obligation (CDO) named Abacus, whose performance was tied to Residential Mortgage-Based Securities (RMBS), which caused a billion dollar loss to the said client, while it, along with the hedge fund, pocketed the profits. According to Wikipedia, a synthetic CDO is a form of collateralized debt obligation in which the underlying credit exposures are taken on using a credit default swap, rather than by having a vehicle buy assets such as bonds. Consequent to the SEC's move, the Senate subcommittee, on the 27^th of the same month, summoned Goldman's CEO, its Vice-President Fabrice Tourre, who was termed as `a whipping boy' by Senator Tom Coburn, and whom SEC has alleged to be principally responsible for ABACUS 2007-AC1. Goldman has released several personal e-mail correspondences from 2007 between Tourre and his girlfriend, which described many of the contracts the firm sold as crap. The subcommittee, which grilled the executives in an 11-hour long grueling session, which was reminiscent of the Pecora Commission hearings into the causes of the 1929 stock market crash, has not found much success so far. While Goldman, on its part, has vehemently countered the charge that the firm misled investors and sold products which its own staff referred to as worthless in their e-mail communications, on the other hand, the swiftness with which the SEC has acted in making its allegations public against the Wall Street's most powerful firm—which though has won popular support from average Americans—is being viewed by many as a desperate attempt by the Obama Administration to gain wider (read: political) support for its effort to introduce a range of reforms to rein in the Wall Street firms.

The Analyst Magazine, Investment Banking, Collateralized Deal Obligation, CDO, Residential Mortgage-Based Securities, RMBS, Global Financial Crisis, Mortgage Market, European Markets, Risky Assets, Credit Default Swaps, Wall Street Firms, Financial Market Regulators.