On Friday, Goldman Sachs lost $10 billion in market value as investors responded to news of a civil lawsuit brought on by the Security and Exchange Commission (SEC), and other banks were dragged, too. With all this volatility in financials, now may be a good time to do some homework on financial exchange traded funds (ETFs).
The SEC’s lawsuit focuses on a particular investment vehicle called Abacus 2007-AC1, which Goldman Sachs (NYSE: GS) created so the bank and some of its clients could bet against the housing market, report Louise Story and Gretchen Morgenson of The New York Times. One of those clients was John A. Paulson, who made $3.7 billion betting that the housing bubble would burst.
Abacus 2007-AC1 was basically an investment vehicle structured around credit default swaps. Goldman Sachs allowed Paulson to hand pick the mortgage bonds he believed carried higher ratings than justified and placed insurance on the bonds in the form of credit default swaps, allowing Paulson to bet against those bonds. [6 ETFs for a Financial Recovery.]
Paulson & Company was not included in the lawsuit because they were not responsible for informing investors of their involvement, reports Michael J. de la Merced of The New York Times.
Now the question remains whether the SEC will crack down on other Wall Street banks as well. Robert Khuzami, the director of the SEC’s enforcement division, said they would continue to investigate similarly structured investment vehicles, clearly indicating that other banks could also be charged.
If other banks do get charged, their stocks may get hit. ETFs with exposure to Wall Street banks include Vanguard Financials ETF (NYSEArca: VFH), Financial Select Sector SPDR (NYSEArca: XLF) and SPDR KBW Bank (NYSEArca: KBE).