I’m trying to get a feel for the Goldman investigation. Felix Salmon takes a detailed look at the charges here and sums up:
The scandal here is not that Goldman was short the subprime market at the same time as marketing the Abacus deal. The scandal is that Goldman sold the contents of Abacus as being handpicked by managers at ACA when in fact it was handpicked by Paulson; and that it told ACA that Paulson had a long position in the deal when in fact he was entirely short.
(note: the Paulson here is not Hank, it is the hedge fund Paulson and Co.)
Essentially, Goldman was selling investors CDOs that Goldman thought were worthless and was lying about who assembled the CDOs along with what the actual assembler really thought of the CDOs’ contents. The former is legal, the latter may or may not be.
(Note: I’ve edited this post a lot for clarity, so I hope it makes sense now.)