Banks Probed for Betting Against Own Securities

Firms bundled bad debt then sold it short
By Rob Quinn,  Newser Staff
Posted Dec 24, 2009 5:04 AM CST
Banks Probed for Betting Against Own Securities
A trader works in the S&P 500 futures pit in Chicago.   (AP Photo/Kiichiro Sato)

(Newser) – Congress and financial regulators are probing several Wall Street firms for bundling bad debt, selling it to clients, and then profiting from betting that those same securities would fail, insiders say. Clients at Goldman Sachs and other firms lost billions of dollars on the mortgage-related securities as the housing market collapsed. The firms and some hedge funds made billions from the negative bets.

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The practice "is the most cynical use of credit information that I have ever seen,” a finance expert tells 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.” Investigators are trying to determine whether the firms deliberately created and sold securities they knew were likely to collapse.
(Read more financial sector stories.)

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