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
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
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
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
"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.