Goldman Sachs case triggers lawsuits

A wave of lawsuits led by banks, insurance companies and investors could follow the Securities and Exchange Commission's fraud charges against Goldman Sachs, the Financial Times reports.

They are thought to have lost hundreds of billions of dollars on risky debts backed by subprime mortgages.

The report states that numerous cases have already been filed related to losses on collateralised debt obligations - the debt instruments at the centre of the SEC's case against Goldman Sachs - as well as other investments related to subprime US mortgages.

On Friday the SEC accused Goldman Sachs and one of its vice-presidents of failing to disclose that in 2007 the hedge fund Paulson & Co helped to create a security backed by subprime mortgages called Abacus so that the fund could bet against it. Goldman denied the charges and vowed to "vigorously contest them and defend the firm and its reputation".

The report adds that the charges knocked 13% off Goldman Sachs shares on Friday and many other bank shares were also hit, partly on worries that the case could unleash a surge in litigation related to the derivatives market.

However shares rose in insurance companies that have come close to collapse because they insured losses on such CDOs.

Ambac and MBIA, bond insurers, and AIG were the biggest providers of such insurance, offered in the form of credit default swaps - derivatives that pay out on default - on the CDOs. AIG's exposure to such losses required the US government to bail out the insurer in 2008, and both Ambac and MBIA have filed lawsuits relating to losses on mortgage-backed securities.