Goldman Sachs has had a $550 million fine imposed on it to settle civil fraud charges after it was accused of misleading investors on major mortgage deals.

The huge investment bank raised concerns over the way it marketed the mortgage deals to investors at a time when the US housing market was about to enter stormy waters.

Levying the fine, said to be the biggest smack on the wrist for a bank in history, was the Securities and Exchange Commission which acts as the US finance watchdog.  The case centred on allegations that Goldman Sachs did not reveal key information when one of its clients, a firm named Paulson & Co and a major hedge fund, was party to choosing which securities were placed within a mortgage portfolio called Abacus, which was then marketed and sold to investors throughout 2007. The key information was that Paulson & Co had at the same time ‘bet’ that the value of the mortgage securities would fall.

And the securities did fall, losing the Abacus mortgage fund some $1 billion in the US housing market collapse. The $1 billion was paid to Paulson & Co, which had effectively stood on both sides of the deal as a ‘short’ investor; a fact not relayed to the investors in Abacus.

Some of the big losers in the deal will get some compensation. The Royal Bank of Scotland, which took a $840 million hit, will receive $100 million, still a huge loss, and the German bank IKB Deutsche Industriebank will get back $150 million, recouping nearly all their losses.

The US Treasury gets around $300 million of the fine proceeds when the deal is finally approved by a federal judge.

But although Goldman Sachs received the record fine, industry experts say that the investment bank got off lightly. Such is the level of the bank’s profits, that the fine would be effectively recouped in a matter of weeks. Also the Goldman Sachs share price rose nearly 5% on the news, meaning that they got a nearly one billion dollar boost to their market capitalisation.

This is unlikely to be the last chapter in the Goldman Sachs mortgage deals saga.

Guest Article by Neil Camp