Goldman may owe British taxpayers $841m
Because the bulk of the loss on the transaction at the heart of the charge against Goldman ended up with Royal Bank of Scotland, the bank where British taxpayers have an 84% stake.
How the loss ended up with Royal Bank is quite a long story, which I'll summarise below.
But the material fact to dwell on for now is that on 7 August 2008, just before Royal Bank was semi-nationalised, it paid out $841m to Goldman Sachs to settle a claim on credit insurance provided by ABN, the Dutch bank which Royal Bank had acquired (or to be more precise, it had bought a big bad chunk of ABN in the autumn of 2007).
Goldman then passed this $841m to the ultimate beneficiary of the insurance contract, the giant US hedge fund, Paulson & Co.
Now the SEC claims that the insurance contract would never have been written, and therefore the loss would never have fallen on RBS, if Goldman had told the truth about certain financially important elements of the investment product that was being insured.
So although most interest in the SEC's case will focus on the big point that the world's most successful investment bank, Goldman Sachs, has been charged with fraud - and doubtless there will be lots of new jokes leveraged on the resonant statement last year by Lloyd Blankfein, Goldman's chair and chief executive, that the bank does "God's work" - there is a fascinating sub-plot about whether Royal Bank (and by implication British taxpayers) will be able to recover a short billion dollars from Goldman.
The narrative of what transpired, as set out by the SEC, is quite the financial thriller. It's all about the circumstances in which a collateralised debt obligation called Abacus 2007-ACI was created and sold to investors, notably a German commercial bank called IKB.
Collateralised Debt Obligations, or CDOs, are bonds that are created out of lots of other mortgage-backed bonds.
And this one was created by Goldman Sachs, according to the SEC, to service a demand from the hedge fund, Paulson & Co.
Freefall housing market
But here's the thing: Paulson didn't want to invest in the CDO in a conventional sense, it didn't want to go long of it (to use the jargon); the hedge fund wanted to bet on the price of the CDO falling, it wanted to go short of the CDO.
The background is that Paulson had rightly identified that the US housing market was in freefall and that this would lead to massive price falls of CDOs, bonds and investments created out of homeloans, especially subprime homeloans.
Paulson was looking for ways to profit from falls in these CDOs and bonds. So it gave a list of bonds to Goldman that it wanted to be included in the Abacus CDO.
It selected these bonds on the basis of its belief that these bonds would be downgraded by rating agencies and their price would collapse.
Now although lots of people are uneasy about investors that take short positions, there is nothing illegal or unethical about anything I've just described.
But what the SEC alleges is that Goldman failed to disclose to the main adviser on the constituents of the CDO, a firm called ACA that has since collapsed, that Paulson wanted to bet on Abacus falling.
In fact, says the SEC, ACA was led to believe that Paulson would be taking a long position in the equity of the CDO, or doing precisely the opposite of what Paulson actually did.
The SEC says that Goldman also failed to disclose to those who invested in the CDO that it had been created with advice from Paulson and that Paulson wanted to bet on the bond falling in value.
The $1bn bet
It believes that investors in the CDO, like IKB, and those that insured the CDO against default - which ultimately turned out to be Royal Bank - wouldn't have done so, if they had known that it had been constructed to enable Paulson to take a giant bet at their potential expense.
Paulson certainly won that bet (and this firm, founded by John Paulson, has won many such big bets over the past three years, making its founder a billionaire several times over).
The Abacus deal closed on 29 April 2007. By 29 Jan 2008, a staggering 99% of its constituent bonds had been downgraded.
Which meant that investors lost $1bn. And Paulson had made a handsome $1bn profit.
As for Goldman, it expected to make a fee of between $15m and $20m on the deal.
For the record, I should point out that the SEC has not accused Paulson of wrongdoing.
Along with the SEC's fraud charge against Goldman, SEC is also charging a Goldman middle-ranking executive, Fabrice Tourre - who currently works in London, but was based in New York when working on the Abacus deal.
I should also point out that Goldman has tonight rejected the charges. The bank said: "The SEC's charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation."