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Shocker: Goldman Tried To Make Money

From an outraged Washington Post:

Goldman Sachs CEO Lloyd Blankfein (R) and his colleague Gary Cohn (L), president and COO, attend a speech by U.S. President Barack Obama about new financial regulation at Cooper Union in New York April 22, 2010.

Goldman executives cheered housing market’s decline, newly released e-mails show

By Zachary A. Goldfarb
Sunday, April 25, 2010; A01

As the U.S. housing market began its epic fall nearly three years ago, top executives at Wall Street powerhouse Goldman Sachs cheered the large financial gains the firm stood to make on certain bets it had placed, according to newly released documents.

The documents show that the firm’s executives were celebrating earlier investments calculated to benefit if housing prices fell, a Senate investigative committee found. In an e-mail sent in the fall of 2007, for example, Goldman executive Donald Mullen predicted a windfall because credit-rating companies had downgraded mortgage-related investments, which caused losses for investors.

"Sounds like we will make some serious money," Mullen wrote.

Lawmakers said the internal e-mails, released Saturday by the Senate Permanent Subcommittee on Investigations, contradict what they said are Goldman’s assertions that the bank was not trying to profit from the decline of the housing market in 2007 and was merely seeking to protect itself if prices collapsed.

Goldman admits it had reduced its exposure to the overheated U.S. property market and had sought to limit possible losses through a strategy that would make money if home prices fell. It says such "hedging" is a routine part of its business and is intended to moderate risk to the firm, an especially vital function when markets shift violently, as they did in 2008

"Investment banks such as Goldman Sachs . . . were self-interested promoters of risky and complicated financial schemes that helped trigger the crisis," said Carl M. Levin (D-Mich.), chairman of the Senate panel. "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." …

Goldman… denies the allegations that it committed fraud or acted inappropriately.

"We did not make a significant amount of money in the mortgage market," Lucas van Praag, a Goldman spokesman, said Saturday. Van Praag said Goldman, which turned over 18 million pages of documents to the Senate committee, lost $1.2 billion in its mortgage business in 2008. "As a firm, we obviously could not have been significantly net short since we lost money in a declining housing market," van Praag said.

Levin said the documents obtained by his committee 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 one of the e-mails obtained by the committee, Goldman’s chief financial officer, David A. Viniar, responded to a report that the firm earned $50 million in one day with "short" positions, or 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 the securities of one subprime mortgage lender the company worked with were facing "wipeout" and another collapse was "imminent." Goldman helped this lender bundle and sell its loans to investors. But one executive, Deeb Salem, wrote that 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 a November 2007 e-mail, Blankfein wrote that the firm "lost money" on the housing market, "then made more than we lost because of shorts."

The e-mails portray a different narrative than the one Goldman conveys in an internal document summarizing the company’s experience in the mortgage crisis.

On Dec. 14, 2006, Viniar called Goldman’s mortgage traders and risk managers to a meeting and concluded they would reduce overall exposure to the subprime mortgage market. This was largely done by making bets against the market to cancel out bets it had placed that the market would rebound. The company’s document acknowledges that Goldman at times shorted the overall market but describes those periods as temporary while the firm was rebalancing its portfolio.

At some moments, executives were actually considering making new investments in mortgages, buying potentially undervalued securities that could pay off when the market turned around. A day after Viniar met with the traders and risk managers, he wrote to Tom Montan, co-head of the securities division, saying, "There will be very good opportunities as the market goes into what is likely to be even greater distress and we want to be in position to take advantage of them."

This back-and-forth typified exchanges at the firm over whether to continue to neutralize its exposure to subprime mortgages or expand investment in them well into 2007. 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.

Where exactly in the cited emails do the Goldman Sachs executives “cheer the housing market decline,” as the Washington Post claims?

Of course, we realize that the intention of this article is to demonize Goldman Sachs, along with the rest of Wall Street, in order to help Mr. Obama push through his draconian ‘financial reforms.’

But the record shows that Goldman Sachs lost billions because of mortgages to people who could not afford them that the government had forced upon all of the banks.

Shouldn’t that satisfy the ‘social justice’ needs of both Mr. Levin and the Washington Post?

So what is the crime here? That Goldman Sachs was still trying to find a way to make money?

Don’t even readers of the Washington Post realize that it is Goldman Sachs’ duty to try to profit from whatever happens in the financial markets?

Aren’t Goldman Sachs being criminalized for merely doing a job expected of them by the people who invest through them? Would they not be remiss to do otherwise?

By the way, remember the Washington Post and Congress’ outrage at George Soros, who actually has been one of the top profiteers from the market turndown in the last couple of years – having reaped billions in profit?

We don’t either.

This article was posted by Steve on Sunday, April 25th, 2010. Comments are currently closed.

3 Responses to “Shocker: Goldman Tried To Make Money”

  1. Petronius says:

    SG: “Aren’t Goldman Sachs being criminalized for merely doing a job expected of them by the people who invest through them? Would they not be remiss to do otherwise?”

    Yes, one would certainly think so.

    Unfortunately, however, Liberal doctrine has insinuated itself even into every nook and cranny of the business world, where the idea of putting the interests of owners or investors first is now often frowned upon. In fact, modern doctrine teaches that investors are placed last.

    Thus the hierarchy of interests –– as now taught by university business schools in mandatory management courses labeled Corporate Social Responsibility –– is this:
    1. customers
    2. employees
    3. community
    4. owners or shareholders

    Johnson & Johnson is often held up as a prime example of this social-business model. (Perhaps it is only fitting, therefore, that Johnson & Johnson is on the path to becoming a GSE.)

    So, if you are one of the old school, who still believes that profits and investors come first, you would do well to keep your opinion to yourself.

    In the old days accepted doctrine held that there were two sides to every transaction. One side betting the investment would go up, the other betting it would go down. That is what makes a market.

    And so the gods of the copybook headings once taught us that shorts and hedging help markets work.

    And I might add that any investor could have done well in today’s markets by shorting Nerobama and his regime, e.g., by investing in precious metals, strong foreign currencies such as the Australian dollar and Canadian dollar, oil, emerging markets, and funds that profit from the rising trend in interest rates.

    In fact, shorting Nerobama’s regime is a prudent investment.

  2. proreason says:

    “Goldman… denies the allegations that it committed fraud or acted inappropriately”

    How can forming a symbiotic fascist alliance with a future president to elect him at any cost and reap billions in profits now and forever possibly be illegal?

    As the boy king tells us over and over…..”l’etat, c’est moi”

  3. wterrier says:

    Great observations Petronius. Also, there is the USD carry trade due to Bernanke’s ZIRP. Money has always demanded a wage, and if Bernanke wants to pay Zero, then folks will “carry” their dollars to other higher-paying assets.

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