Are SEC Charges Against Goldman More Serious Than Market Understands?
Avery Goodman submits: The SEC’s recent charges against Goldman Sachs (GS) involve something known as a collateralized debt obligation (heretofore referred to as “CDO”), which is a derivative instrument whose value is determined (or "derived") from the value of something else. Most CDOs are essentially investment funds, and their investments are generally chosen by their promotors and creators. In this particular case, the CDO was structured with residential mortgage bonds as the underlying "something else." The case was disclosed last Friday, and it involved a “synthetic” CDO called "Abacus 2007-ACA." Synthetic means it did not hold underlying mortgages or collateralized bonds. Instead, it contained a type of derivative, known as “credit default swaps” (heretofore referred to as “CDS”) for which premiums are paid on a regular basis. So, this particular CDO was a derivative of derivatives. Complete Story »