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Another bad day for Goldman Sachs

On Friday 16th April, Alex Ferguson wrote:

If volcanic ash didn't disrupt the steady increase of the Dow Jones Industrial Average (DJIA), the 'train' well and truly halted after the SEC accused arch-nemesis Goldman Sachs of fraud today.

At the time of writing, the DJIA was in nosebleed form, off over 100 points and descending rapidly (note- airline stocks weren't doing so well either!), and S&P was off nearly 1.5%. Not nice reading if you're an investor.

According to the SEC, Goldman created a subprime fund called Abacus, which was bet against by the bank itself as well as major hedge fund Paulson (no connection to former Treasury Secretary and former GS CEO Hank Paulson, we might add) to fail. The investment bank would make money if it fell in value.

And being sub-prime, that's exactly what happened.

Reading the SEC accusation, it's pretty hard not to get angry about this sort of thing.

If you're an insurer, it's pretty hard not to worry, either.

If Goldman takes this to court, the power of the SEC will probably win the case. Despite screaming from investors and the mainstream media Goldman won't want this to happen - they'll probably settle, and have to give back investors all of their original investment. And they may well have to hand back their winnings, too. If you think punitive damages were bad for the Greenberg family when Elliot Spitzer got to them, this is going to be worse.

What are the ramifications for the insurance industry?

According to one US underwriter, this might cause a wave of worry in the insurance industry. Think House of Cards, except worse. You can forseeably see every company with a subprime book to get asked questions by the SEC- and investors. When one group of investors manages to successfully sue, then suddenly you've got a D&O and E&O tidal wave.

We'll have more discussions on the legal ramifications next week for you. Keep reading...

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