The current financial recession was triggered by a collapse in the value of securities called Collateralized Debt Obligations (CDOs) into which high risk U.S. subprime mortgages were bundled and ticked off by the credit rating agencies as being of high quality and low risk.

All U.S. investment banks were involved in this practice. However, Goldman Sachs, the hard-nosed leader of the pack, seemed to do it better than any one else, as indeed in the view of Wall Street, it did most everything better and more profitably than the competition.
Now comes the surprising news that the U.S. Securities Exchange Commission (SEC) is prosecuting Goldman for fraud, claiming it deliberately structured a CDO to fail so that a leading hedge fund client could benefit by “shorting” the security, effectively betting that its value would fall. And fall the CDO did. The hedge fund allegedly made a cool $1 billion.
Goldman has denied the charges vigorously, which represent the first major legal action that the SEC has taken against any of the top investment banks. Because the regulators have chosen to go for the biggest beast on Wall Street, the outcome will be watched with particular nervousness by the investment banking world’s lesser brethren. Any one of them could be next.
There are also, however, some bitter smiles. Goldman has always been a tough competitor and its wealth and success bred arrogance toward other investment bankers. The firm may, however, have lost its way when it became the last of the major U.S. investment houses to change itself from a partnership to a public company. At the time, in 1999, the model in which partners were impacted directly by any losses or profits, seemed outdated. Goldman sold itself off to the markets, though initially, the former partners kept a controlling bloc of shares.
Short of being fired with massive payoffs, the people running Goldman no longer ran any personal risk from the investment bank’s activities. Shareholders were far more remote than the partnership boardroom and certainly less fearsome. Some Goldman insiders said that the personal touch disappeared from the business, to be replaced by manic drive to accumulate profits, however it was done, whether it was “stuffing” investor clients with overpriced securities or cutting corners on major deals, such as the now controversial revaluation of Greek sovereign debt — a transaction which is also currently under investigation.
The irony is that by facilitating the movement of capital, investment banks around the world, not just on Wall Street, have in fact contributed substantially to the general growth in global wealth. Yet now the banking profession is generally reviled for its greed and ultimately its incompetence. The SEC action against Goldman is, however, exploring the darker possibility that there was widespread wrongdoing. If this proves true then one of the biggest mistakes Goldman may have made was to be found out. And since Goldman was at the pinnacle of the CDO process, was the entire investment banking system actually rotten and therefore are the nightmares on Wall Street continuing?