As small business owners continue to struggle in this economy with the unavailability of credit to sustain and grow their business, here’s some dirty details on how Wall Street bankers gamed the system.

SEC investigating how Goldman Sachs and friends gamed the system

Goldman Sachs and others were trading in Collateralized Debt Obligations (CDOs), the credit default swaps that made Goldman, Morgan Stanley, Deutsche Bank and other smaller firms billions—much of it coming from the pockets of their own clients.

Immoral? Yes. Illegal? We may soon find out.

The New York Times reports this particular scam is now under investigation by the Securities Exchange Commission, which is questioning whether there was anything illegal in this version of how Goldman and others screwed over their clients.

Here’s how the money game worked

Goldman sets up a fund of collateralized mortgage debt, which it sells to clients with promises of a nice payout if the housing market continues to rise. It then takes out insurance to cover losses should the housing market tank. It then bets against the fund by shorting the bonds, a little maneuver that helped bring down the housing market.

When the housing market collapses, Goldman’s clients lose big. Goldman’s paper losses are covered by insurance, and it cleans up on the short sale. Talk about a fixed game. And what a game it was. Between 2005-2007, more than $100 billion of these securities were sold.

Goldman and others involved in this scheme insist they’ve done nothing wrong. The SEC is not so sure. One focus of its inquiry is whether the securities Goldman and others picked were particularly risky mortgage-linked assets.

These were the investment that cost investors dearly and pushed the government to use billions of our tax dollars to stabilize the banking system. Several of the securities packaged by Goldman and another firm, Tricadia, were so bad they tanked just months after they were sold.

“The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen,” Sylvain R. Raynes, an expert in structured finance at R & R Consulting in New York, told the New York Times. “When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else’s house and then committing arson.”

Others might call it stealing.

Source: http://www.nytimes.com/2009/12/24/business/24trading.html?_r=1&hp

Technorati Tags: small biz, small business, SEC, goldman sachs, collateralized mortgage debt

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