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Goldman Sachs e-Mails Show Bank Sought to Profit from Housing Downturn
A Senate investigation into the financial crisis has found that Goldman Sachs, the storied Wall Street investment bank, sought to profit from the historic decline in housing prices by betting against the U.S. mortgage market.
Goldman Sachs "made more than we lost because of shorts," Chief Executive Lloyd Blankfein said in a November 2007 e-mail. (Image: Goldman Sachs CEO Blankfein ) The documents show that Goldman, at times, made big, profitable bets
against the housing market -- sometimes betting against mortgage
investments that it had sold to investors.
Sen. Carl Levin (D-Mich.), chairman of the Permanent Subcommittee on Investigations, said four internal e-mails released Saturday contradict Goldman's assertion that it didn't seek to profit from the housing downturn. "Goldman made a lot of money by betting against the mortgage market," Levin said.
In a November 2007 e-mail, Goldman chief executive Lloyd Blankfein wrote that the firm "lost money" on the housing market, "then made more than we lost because of shorts."
The release of the documents comes as Goldman Sachs is preparing its most detailed defense yet to allegations that it misled clients in its mortgage securities business, arguing that the firm was unsure whether housing prices would rise or fall and did not take any action at odds with the interests of its clients.
An internal Goldman document, prepared for senior executives and obtained by The Washington Post, describes debates among top executives in 2006 and 2007 over whether the firm should make investment decisions based on the belief that the mortgage market would continue to prosper.
The document details meetings and e-mails that ultimately resulted in a decision to reduce the company's exposure to the mortgage market, especially subprime loans, by making new investments that would pay off if housing prices fell.
Goldman has been widely criticized for investing its own money to bet against the housing market while simultaneously urging clients to invest in securities that would increase in value only if the housing market did.
Those concerns over possible double-dealing spiked a week ago as the Securities and Exchange Commission filed a fraud suit against Goldman, alleging that it misled clients by selling them mortgage-related securities secretly designed to fail.
The Senate panel will hold a hearing on investment banks and the financial crisis Tuesday. Blankfein and other executives are scheduled to testify.
In one of the e-mails obtained by the committee, Goldman chief financial officer David Viniar responded to a report that the firm earned $50 million in one day with bets that the housing market would decline.
"Tells you what might be happening to people who don't have the big short," Viniar wrote to his colleagues.
In another e-mail, Goldman executives discussed how one subprime mortgage lender the company worked with was facing "wipeout" and another's collapse was "imminent." Goldman helped these lenders bundle and sell their loans to investors.
But one executive, Deeb Salem, wrote, the "good news" was that Goldman would profit $5 million from a bet against the very same bundles of loans it had helped create.
In an October 2007 e-mail, Goldman Sachs mortgage trader Michael Swenson was gleeful at news that credit-rating companies downgraded mortgage-related investments, which caused losses for investors.
"Sounds like we will make some serious money," the executive wrote.
"Investment banks such as Goldman Sachs were not simply market-makers, they were self-interested promoters of risky and complicated financial schemes that helped trigger the crisis," Levin said. "They bundled toxic mortgages into complex financial instruments, got the credit rating agencies to label them as AAA securities, and sold them to investors, magnifying and spreading risk throughout the financial system, and all too often betting against the instruments they sold and profiting at the expense of their clients."
The e-mails released Saturday portray a different narrative than the one Goldman has given about its role in the mortgage market.
According to Goldman's 11-page defense, while the firm moved to significantly reduce its losses when the housing market cratered, the bank was confused, like many other financial firms, over how bad the collapse would be and suffered losses as a result.
The document also reprises Goldman's frequent explanation that it was not investing its own money in financial transactions to make a trading profit but to help investors who wanted to do a deal and could not easily find someone to trade with. That role, commonly played by investment banks, is known as being a market maker.
In the paper, Goldman argues that it was a relatively small player in the mortgage market, bringing in only $500 million from its residential mortgage business in 2007, less than 1 percent of the firm's overall revenue.
Still, the bank's mortgage investments were large enough that executives began to worry in 2006 that it was betting too heavily on the health of the housing market.
According to the document, the concerns arose in late 2006, when Dan Sparks, the head of the mortgage unit, wrote to top executives that the "subprime market [was] getting hit hard," with the firm losing $20 million in one day.
On Dec. 14, 2006, chief financial officer Viniar called Goldman's mortgage traders and risk managers into a meeting to discuss investing strategy. They concluded that they would reduce the firm's overall exposure to the subprime mortgage market.
But the prevailing view of executives, as described in the paper, was not that the housing market was headed into a prolonged decline. They were not looking to short the market overall. That would have entailed making such large bets against mortgage securities that the firm would turn a profit if the market as a whole collapsed, which in fact it did.
The document acknowledges that Goldman at times shorted the overall market but describes those periods as temporary while the firm was rebalancing its portfolio to limit losses if mortgage securities were to lose more value.
At some moments, executives were actually considering making new bets, buying potentially undervalued securities that could pay off when the mortgage market turned around. A day after Viniar met with traders and risk managers, he wrote to Tom Montan, co-head of the securities division, saying, "There will be very good opportunities as the markets goes into what is likely to be even greater distress and we want to be in position to take advantage of them."
The back-and-forth over which way the market would go, and how to invest in it, continued into 2007.
On March 14, Goldman co-president Jon Winkelried e-mailed Sparks and others asking what the bank was doing to protect itself from a decline in prices of not just subprime loans, but also other loans traditionally considered less risky. Sparks replied that the firm was trying to have "smaller" exposure to those loans also.
But managing director Richard Ruzika took issue with that answer a few days later, saying that Goldman might be overestimating the decline in housing. "It does feel to me like the market in general underestimated how bad it could get. And now could be overestimating where we are heading," he wrote in an e-mail. "While undoubtedly there will be some continued spillover, I'm not so convinced this is a total death spiral. In fact, we may have terrific opportunities."
Sparks later endorsed that optimistic view, suggesting as late as August 2007 that Goldman begin buying more mortgage securities.
The bank did not immediately follow that path, and by Nov. 30, 2007, Goldman had largely canceled out its exposure to subprime mortgages by increasing its bets that the market would continue to slide, according to the document.
But by that account, Goldman also continued to have $13.5 billion in exposure to safer, prime mortgages. That cost the bank. In 2008, the firm lost $1.7 billion on investments in residential mortgages.
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31 Comments so far
Show AllAgain, this very thing was reported on by multiple sources WELL OVER a year ago prior to the time the Government announced the need to bail them out.
The Government is trying to pretend these revelations are new and ones they could never have been aware of so as to cover their backsides when the people learn that the US GOvernment shoveled trillions of dollars to fraud artists.
The mainstream media refused to carry these reports at the time. Had they did so the massive trillion dollar bailouts might never have occurred.
Scam the taxpayer out of trillions. Give the scam artists well over a year to shift those trillions to safer havens and then suddenly huff and puff about how outraged you are that such an event allowed to happen, slap a few on the wrists and fine them a few million and all is well again.
Just remember, "They" are all Members of The Council on Foreign Relations..."They" are protected by the U.S. Government (Everyone in Treasury is from The Council on Foreign Relations).....Thank you, Henry Kissinger and Zbigniew Brzezinski for such a wonderful group of policy makers!
Obama is just there to protect all those a..holes from being prosecuted and sent to jail.........So much for integrity! "They" murder..."They" invade two sovereign nations without just cause and by fabricating information..."They" Kidnap..."They" torture..."They" brainwash..."They" lie... And those are our government and military leaders!
Quite right: Wall Street committed serious crimes, 'legalized' through bribery, which effectively 'legitimized' piracy along with war crimes. In this, the DOJ under Holder is, by design, a witless and feckless corporate legal arm, and Obama's insistent quashing of accountaiblity, in the end, makes his own administration co-conspirator and accomplice in past crimes as well as future crimes committed on his precedent.
I suspect that the SEC case may really be Kabuki theater for the unwashed, wherein Blankfein issues the requisite wailing protests sufficiently shrill for the back rows to hear; after which one rogue Frenchie trader is thrown in Club Fed (with early parole and nice retirement) and GS reaches an undisclosed, non-admission settlement before returning to killings-as-usual.
Call these conspiracies what they are and you will be accused of being a conspiracy theorist.
There are no conspiracy THEORIES. There are many conspiracies.
Economic Treason! Is it in the law books anywhere?
Since 1978 the elite have systematically decriminalized nearly all economic and financial crimes. This process has been euphemistically called deregulation.
Authors Simon Johnson and of "13 Banks" and the daily blog "The Baseline Scenario" are absent, persumably on book tour and perhaps as expert witnesses - and missed.
The Baseline Scenario takes it from the top with "The Financial crisis for Beginners"
Videos, radio shows blogs with extremely interesting conversations more often than not with people who have a pretty solid grasp and appreciation for plain talk.
http://baselinescenario.com/financial-crisis-for-beginners/
oops - thats Simon Johnson and James Kwak on Baseline Scenario
The US Government is giving these hucksters time to shift their money out of the USA before the collapse.
What do you think the last years stock market rally has all been about?
Not to mention that the US Treasury continues to be raided by the banksters as we speak.
Here's another Twilight Zone scenario. It's so true, those who'd rob a convenience store, get real jail time. Those who rob the tax payer- no time and and raise and a bonus...
Like I said on another piece, I wouldn't want to be one of the rich in another couple of years. The scales of justice are already tipping...
As long as the banksters own the Democrats and Republicans the scales of justice will keep tipping in their favor and against you and I.
Obama's bankster bill will enhance the banksters' fortunes at our expense.
As soon as Obama finishes the bankster bill he will push cap and trade into law, thereby giving the banksters more commodities to manipulate and more bubbles to create and more taxpayer-funded bailouts.
An “octopus wrapped around the face of humanity” as one journalist put it; the New World Banking Order has arrived. In 2009 speculative, uncontrolled derivatives were the Worlds largest market at an estimated 600 Trillion. The Worlds total economic output was an estimated 58.07 Trillion and the total World bond market was an estimated 82.2 Trillion. Yet, there is no “crime” that the bankers can be charged with as they bankrupt citizens and Nations into the New World Order?
The appropriate criminal charge should be Treason to the American People and our Democratic Republic and Constitution. The members of the Trilateral Commission and the Bilderberg Group in government and banking who conspired to overthrow our soverenity as an independent nation, who conspired to bankrupt our Treasury with three unjust Wars and multinational corporate bailouts, conspired to control mass media “free Press” propaganda, conspired and manipulated “financial crisis” for their own gain, conspired to “relocate” American industry and technology, conspired to offshore “American Income Tax”, and who have conspired to enslave American citizens with National debt (about $64,000 per citizen) and personal debt. Deserve the death sentence by firing squad for Treason.
Obama, your New World Order is Totalitarian and we Patriots, American free citizens, will fight for our Democracy, Independence and Freedom.
Blankfein exudes the considerable charm, good looks, and fine moral character of Gollum, formerly known as Smeagol. And, in his insatiable lust for wealth and power he too, like Gollum, may yet fulfill a vitally important role in the survival of Middle Earth.
Old news.
Closing the barn door after the barn has burned down.
Goldman Sachs also shorted USD with the bailout money they got from the US taxpayer.
Buffet is supposed to have made $5 billion on the GS good quarter that resulted.
Why is no one mentioning Buffet then?
This is all strictly PR. The real elite took their profits and now throw GS to the papier mache regulatory wolves.
Same happened with Madoff.
American naifs just keep coming back for more.
The real behind the scenes elite who own ninety percent of the assets are laughing at the rest of you, including at your indignation at GS.
Put them in Gitmo for life ( financial terrorists) , and then hand them some Monopoly money; that way they can't hurt anyone.
Guantanamo is Cuba's. They will have it back soon enough.
A gulag in Alaska is just right, don't you think? Footcloths, pouring concrete at 40 degrees below zero, the works.
What I'd like to know is how GS thought deliberately sabotaging its client's investments was doing good business. To use one of the silly analogies the media has come up with: just how long would a car company stay in business selling dangerous cars, no matter how much insurance it had on buyers. Consumers would surely catch on rather quickly. It doesn't make sense.
Thanks for that Lloyd ; that makes sense.
There is a good possibility that Goldman Sachs has no intention of being in business very much longer. Depends on how severe you think the present financial and economic state is and whether GS' real purpose was simply to unload as much as possible among the greater fools.
The people who profited from GS' manipulation, including Buffet, and like those who got considerable mileage out of Madoff, are safely way. GS is now dispensable and makes a convenient scapegoat for the last fools in.
All this was known BEFORE the bailout when GS took Federal bailout money and shorted USD.
"just how long would a car company stay in business selling dangerous cars, no matter how much insurance it had on buyers."
Probably one big difference is that a car is supposed to do something and if it doesn't then it's pretty easy to know that. If the cars are sold with no brakes, or plastic ones, everyone is going to know it and fast. But investments, financial markets? They have no real function in the real economy so who is able to say with certainty that the paper doesn't work, or hasn't any brakes, so to speak. I think that is why they can get away with this kind of chicanery and for so long.
The DEVIL you say!
The name of VAMPIRE SQUID will be with them all their days.
But that won't help us poor middle class Squid Fodder.
...and Mom & Pop Investor will stay out of the water until this Squid is Totally Dead.
We shouldn't be looking backwards at these past transgressions - we should be looking forward!
What was it that doomed the British Empire? The Roman Empire? The Spanish Empire?
Ah yes, now I remember: Corruption and endless war.
These Israeli-American Dual citizen bankers are the enemy of us all. They won't be happy until we're all broke and all in chains.
Money is their religion, and they will stop at nothing to keep stealing it from the taxpayer. They are bad for America and bad for the world. It's time to confiscate all personal wealth over a million dollars and break every Fortune 500 company into little local pieces. Then we can re-build a Green America and put everybody back to work.
But first, let's return the stolen loot. Let's see, Seven Trillion Dollars in fake bail outs before the bushmonkey left office (including Freddie and Fannie) divided by 300 million Americans works out to a refund check of $23,000 for each citizen.
That ought to stimulate the main street economy!
TJ
Is it really that bad?
In the history of all the world famous confidence tricksters,
Has ever before so many been fleeced by such voracious hucksters?
Such a government of high affluance and absolute in the skies,
Still milks the money, and sprays the public with its dribbles of lies
Those negligent of honest work while raking in the public wealth.
cream all the bonuses while the rest disappears in stealth.
A cultural epidemic of fraud, and a political spending spree
So that paths are made smooth for money spinners to be free.
While the poor, black, muslim or any by money not protected,
are thrown in gaol in contempt and are legally subjected.
And millions will lose jobs and from family homes be evicted.
With access to necessities of life and health care severely restricted.
Politicians do hand over buckets of money to the financially selected,
So they in turn get paid back, and media favours the safely elected.
Not one utterance of these brands of government can ever be trusted,
As every one is at heart a corporate lie to be busted.
There is only one known cure, both radical and effectively drastic.
Previously known to restore public life towards the fantastic.
A massive popular revolt removed the rulers in bloody storm,
When in France for aristocracy the guillotine became the norm.
The surgical skill in how to ensure all the cancer is gone,
Is to remove all, sacrifice even the healthy, and then still its not done.
Apply strong radiations and chemicals, each rogue to suppress,
With vigilent checkups thereafter, and never assume final success.
The monstrous swollen tumour of democratic deceit,
Will never be harmed by those that thrive within its heat.
And the political babes will never attempt any intractable feat
Will they still greedily suck on the corporate teat.
---
Yeah, why would GS do something that didn't make any sense? Something that would look so bad. WEll, sometimes I think that there is something going on that only a few know about. Does it have to do with peak oil, climate change or someother event that could be catestrophic? Just a thought.
But then I say to myself, well, in that case, money would not mean anything anyway.
Totally different topic, but after reading about Wellpoint rescinding coverage to women once they were diagnosed with breast cancer, I wonder if they figured out a way to bet on how much debt the women would accumulate and how long they would live. They're as evil as Goldman Sachs; I wouldn't be surprised at all.
Will Goldman lose the SEC case against them?
This attorney thinks so. Here's why: ..(http://www.ritholtz.com/blog/2010/04/10-things-you-dont-know-gs-case/)....
How about a lead pipe to fix some of that expensive dental work?
I don't think his lover would approve, but then again, it could be a whole new experience without teeth.