Secretly setting up investors to lose might be a crime after all. Federal prosecutors have opened a preliminary probe into trading at Goldman Sachs, a review that follows closely the civil fraud charges brought against the investment giant by the Securities and Exchange Commission. The Tampa Bay area has a direct interest in seeing justice. A number of the foreclosed mortgages in Goldman's toxic investment product, Abacus, were issued on houses here, fueling Tampa Bay's foreclosure crisis. Now there may be real consequences for the people who got rich building this house of cards.
Abacus is the Goldman-created, mortgage-related product that is at the center of the SEC civil suit. The suit alleges that John Paulson, a New York hedge fund manager who was betting that housing prices would go south, was permitted by Goldman to help select the mortgage-backed bonds that went into Abacus. But Paulson's involvement and financial interest were never disclosed to investors, according to the SEC.
Goldman pocketed $15 million from Paulson for creating Abacus and sold the security as a highly rated and secure investment. When the mortgages underlying the bonds in the portfolio started defaulting en masse — just as Paulson had intended — investors lost $1 billion and Paulson walked away with about $1 billion.
Tampa Bay enters the picture because, as St. Petersburg Times staff writer Susan Taylor Martin reported, a number of the loans in the bonds packaged to make up Abacus were issued to area residents by First Franklin of California, a bank that lent money to thousands of risky borrowers. In one case, a St. Petersburg woman was given 100 percent financing for a $138,000 home purchase in 2006, even though she had a $95,000 judgment against her that she couldn't pay. In another, a Clearwater couple bought a $243,000 house for nothing down with a First Franklin loan despite having declared bankruptcy in 2003 and losing their home to foreclosure. And there were more.
The results of all this money flowing to people who could never repay it was an unsustainable run-up in housing prices and inevitable defaults which led to a housing slump and massive foreclosures. Some of Tampa Bay's suburban neighborhoods have been devastated, with foreclosed homes driving down housing prices and bringing blight. And it was Goldman's alleged complicity in hiding the shakiness of the mortgages in the bonds it was packaging that gave banks like First Franklin the incentive to keep making bad loans.
If the facts regarding Goldman prove true, the firm should not just be facing massive civil liability but criminal charges as well. Goldman's Abacus investors aren't the only victims. Tampa Bay homeowners also deserve justice.