Goldman Sachs (GS) is facing another SEC inquiry into its handling of a collateralized debt obligation, this time involving a security called Hudson Mezzanine, according to a Bloomberg Businessweek report. The probe is reportedly examining the Hudson CDOs, which were created in late 2006 and based on $2 billion worth of low-quality subprime mortgages. Goldman created and sold the CDOs, which one Goldman Sachs employee described in an email as "junk," then purchased credit protection against the entire deal, making a bet that the CDOs would fall in value. It remains unclear whether the SEC will take action.
For Goldman, this inquiry comes on the heels of the fraud lawsuit the SEC filed in April over the investment bank's handling of the Abacus CDOs back in 2007. Federal securities regulators allege that Goldman misled investors in the Abacus sale by failing to disclose it stood to benefit not only from the sale of the junk bonds but also through its purchase of insurance to hedge its position and creating an index that would allow other investors to bet against the bonds.
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