The US Securities and Exchange Commission has stepped up its inquiries into a complex mortgage-backed deal by Goldman Sachs that was not part of the civil fraud charges filed against the bank in April, according to people close to the matter.
SEC interest in Hudson Mezzanine Funding, a $2bn collaterised debt obligation, comes amid settlement talks with Goldman over accusations that the bank defrauded investors in Abacus, a similar CDO.
People familiar with the matter said that in recent weeks the SEC had been gathering information on Hudson Mezzanine, which featured prominently in an 11-hour grilling of Goldman’s executives in the US Senate in April. The SEC and Goldman declined to comment.
The inquiry into Hudson Mezzanine is part of a wider investigation into the CDO activities of Wall Street banks. People close to the situation said the probe was preliminary and there was no certainty that it would lead to additional actions against Goldman.
The bank created and sold Hudson Mezzanine, which contained residential mortgage-backed securities from its own balance sheet, in late 2006.
In an internal e-mail unearthed by the Senate investigation, a Goldman employee said a potential investor in the CDO was “too smart to buy this kind of junk”.
Goldman went “short” on Hudson Mezzanine, buying protection on the entire value of the CDO, according to internal documents. Less than 18 months later, as the US housing bubble burst, Hudson Mezzanine’s credit rating had plunged to junk status, causing losses for investors and enabling Goldman to collect on the insurance.
Legal experts said that inquiries into Hudson Mezzanine were likely to focus on whether Goldman provided investors with adequate disclosure. In a marketing document, Goldman stated its interests were “aligned” with investors because it would buy equity in the CDO.
In legal disclaimers, Goldman also said it would buy protection on the security, but it did not specify how much.
Carl Levin, the senator who chairs the sub-committee investigating Wall Street’s actions during the crisis, seized on the “junk” reference repeatedly during the hearing when questioning Lloyd Blankfein and other Goldman executives.