The SEC caught us all off-guard this morning by announcing they were filing civil charges on Goldman Sachs for material misrepresentation.

This is textbook misrepresentation. Goldman Sachs ALLEDGEDLY built a mortgage-backed security that was designed  to implode in a manner that Paulson & Co. could profit from by shorting the portfolio. 

NOTE: the counterparty to this trade is not Hank Paulson, the ex-Treasury Secretary. It is John Paulson, the most famous housing investor of the era. READ MORE

My first reaction is this seems like an isolated event but I do know that there was a lot of self-interest in these CDO deals so it wouldn't surprise me if there were other forms of market manipulation or misrepresentation. This is terrible timing! Right when President Obama is pushing financial reform!

HERE are the details and more color on what Goldman did and how it affected investors. Goldman has already responded with a denial statement.

I embedded a hint up there as to how the market is reacting to this tapebomb: IT WAS CAUGHT OFF-GUARD

Check out how stocks are doing. Financials are leading the way lower with GS shares getting punished. HA...Moody's is #2 (pun intended). Stocks are lower but not terribly. The S&P is -1.50%, the Dow is -1.26%, the NASDAQ is -1.57%. Bid wanted...

A knee jerk "flight to safety" followed in the bond market. The 3.625% coupon bearing 10 year TSY note is beginning to warm the face of market watchers, currently +0-17 at 98-25 yielding 3.774%. The panicked run to risk averse assets has pushed 10s firmly into the 3.57 to 3.85 range. Our target is a test of 3.71%...the midpoint of the 3.57 to 3.85 range. After that, if scared fast money stays in TSYs, a test of 3.68%. If money is reallocated back into risk, expect 10s to tick back up toward 3.80%.

Rate sheet influential mortgage-backs are slowly trailing the directional movements of their benchmark big brothers. By "slowly trailing" I mean the secondary market current coupon yield is not falling as fast as the 10 year TSY note yield.

Plain and Simple: mortgage rates are lagging the flight to safety TSY rall

The FN 4.5 is +0-09 at 100-13 yielding 4.458%. The secondary market current coupon is 4.449%. The current coupon yield is 68.4 basis points over the rallying 10 yr TSY note and 70.8 basis points over the 10 year interest rate swap. CC yield spreads are at their widest levels of the day as "rate shee influential" MBS coupons fail to keep up with the Treasury rally.

Look for buyers to step in as MBS get wider to TSYs. This will help the FN 4.5 catch up to the Treasury rally. Reprices for the better are due.