Before Friday Goldman Sachs was one of the most highly regarded financial services firm in the world, the only Investment bank that dis not crumbled during the sub prime crisis and not to have shown losses in any of the quarters since years.
But the things changed after Friday, when SEC filed the lawsuit against the firm for creating one of the most innovative financial transactions called Abacus, that allowed Goldman to off-load the risk of mostly subprime home loans and commercial mortgages to investors, either as hedges for similar positions or to bet against securities itself.
In, a simple lay man term what Goldman did was to sell mortgage bonds to investors which it was sure will default and hence also purchased default swaps that offered payouts to Goldman Sachs if certain mortgage bonds didn't pay as promised, in return for regular premiums.
So, what happened that during the crisis time when the bonds sold to investors started under performing and investors lost billions of dollars, Goldman Sachs minted those dollars as a pay off for the bond's default.
This, as per SEC is a clear case of breach of investors trust and hence a law suit and the company's stock tumbled over 15% on Friday and the negative sentiments spread across the globe and the markets melted.
Hence, I would advice all to remain cautious in the markets since this news could have far wide repercussion and moreover it is certain that the RBI would hike the interest rates tomorrow. Its the time to start going for the defensives and move away from high momentum.
Happy Investing...!!!
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