The US Securities and Exchange Commission (SEC) dropped a bombshell on 16 April when the watchdog announced that it has decided to sue investment bank Goldman Sachs for a possible “fraud” in its role in the Collateral Debt Obligation (CDO) that caused investors to lose more than US$1billion.

The announcement – made after the US stock market closed on 16 April – caused a stir in the US stock market, which caused the major averages to plunge on 19 April. When Asian stock markets opened for trading on 19 April, all the major indices plunged.

However, the worst-performing stocks were the Chinese developers as opposed to widespread belief that the financial stocks would be the hardest-hit.

At the same time when the US SEC made the announcement, the Chinese government, too, dropped another bombshell by attempting to cool the property sector. The Chinese government said that buyers of a first property could now only borrow up to 70% of the property value instead of the previous 90% while buyers of second property could loan only 50% from the banks. As for buyers of a third property, no loans would be approved.

Why did the SEC decided to sue Goldman Sachs? Is it firing the first salvo towards warning the other investment banks? Will there be others dragged into the saga?

We do not know what the implications are, but US$1billion is small change compared to the US$5billion bonus that Goldman Sachs paid to its top management.

It is possible that Goldman Sachs was picked on because it ignored President Obama’s advice to freeze bonus payments amid angry sentiment among Americans at the aftermath of the financial crisis. The American public are pissed off with the government utilizing huge amounts of public funds to rescue the “too big to fail” corporations such as AIG when these companies faced extinction during the 2008 financial crisis.

Upon receipt of these rescue funds, the corporations that received the handouts not only failed to revamp their risk management system but had used the funds to speculate in the financial markets. These people who run the big corporations believe that even if they were to fail in their speculative ventures, the US government would once again hand out more money.

At the end of the day, Goldman Sachs won the bet and paid huge bonuses.

That angered President Obama, who decided to make those responsible for the financial crisis pay in the form of taxation as well as a bonus freeze. Both parties ended up with black faces and, finally, President Obama decided to teach Goldman Sachs a lesson by suing them for possible “fraud”.

The Chinese government had, over the past few years, warned developers against pushing up property prices. These advices fell on deaf ear and that resulted in sky-high prices that caused the government much embarrassment. In order to stop the property sector from overheating, the central government had no choice but to adopt measures that will mitigate the rise of home prices.

The US stock market has rebounded after the selloff while the Goldman Sachs case has subsided. While most stock markets have risen, China’s stock markets have yet to recover from the 150-point fall. I advise all investors to stay by the sidelines and wait for clearer picture.