How Goldman Sachs secretly bet on the housing crash
Banker's actions were fraud, some experts say
By Greg Gordon
McClatchy Newspapers
WASHINGTON -- In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting.
Goldman Sachs' sales and its clandestine wagers on falling home prices, completed at the brink of the housing market meltdown, enabled one of the nation's premier investment banks to pass most of its potential losses to others before a flood of mortgage loan defaults staggered the U.S. and global economies.
Only later did investors discover that what Goldman Sachs promoted as triple-A investments were closer to junk.
Californians Irma Aninger (right) and Melissa Toy, among risk analysts hired to review subprime mortgages before Goldman Sachs and other Wall Street firms bought them, said their supervisors routinely overrode their challenges to loans. (Jamie Rector/MCT)
Now, pension funds, insurance companies, labor unions and foreign financial institutions that bought those dicey mortgage securities are facing large losses. A five-month McClatchy Newspapers investigation has found that Goldman Sachs' failure to disclose that it made secret, exotic bets on an imminent housing crash may have violated securities laws.
"The Securities and Exchange Commission should be very interested in any financial company that secretly decides a financial product is a loser and then goes out and actively markets that product or very similar products to unsuspecting customers without disclosing its true opinion," said Laurence Kotlikoff, a Boston University economics professor who's proposed a massive overhaul of the nation's big banks. "This is fraud and should be prosecuted."
John Coffee, a Columbia University law professor who served on an advisory committee to the New York Stock Exchange, said investment banks have wide latitude to manage their assets, and so the legality of Goldman Sachs' maneuvers hinges on what its executives knew at the time.
"It would look much more damaging," Coffee said, "if it appeared that the firm was dumping these investments because it saw them as toxic waste and virtually worthless."
Lloyd Blankfein, Goldman Sachs' chairman and chief executive, declined to be interviewed for this article.
A Goldman Sachs spokesman, Michael DuVally, said the firm decided in December 2006 to reduce its mortgage risks and did so by selling subprime-related securities and making myriad insurancelike bets, called credit-default swaps, to hedge against a housing downturn.
Although the company had secretly bet on a downturn, DuVally said Goldman Sachs "had no obligation to disclose how it was managing its risk, nor would investors have expected us to do so. ... Other market participants had access to the same information we did."
In piecing together Goldman Sachs' role in the subprime meltdown, McClatchy reviewed hundreds of documents, SEC filings, copies of secret investment circulars and lawsuits, and interviewed numerous people familiar with the firm's activities.
McClatchy's inquiry found that Goldman Sachs:
Bought and converted into high-yield bonds tens of thousands of mortgages from subprime lenders that became the subjects of FBI investigations into whether they'd misled borrowers or exaggerated applicants' incomes to justify making hefty loans.
Used offshore tax havens to shuffle its mortgage-backed securities to institutions worldwide, including European and Asian banks, often in secret deals run through the Cayman Islands, a British territory in the Caribbean used by companies to bypass U.S. disclosure requirements.
Has dispatched lawyers across the country to repossess homes from bankrupt or financially struggling owners, many of whom lacked sufficient credit or income but got subprime mortgages because Wall Street made it easy for them to qualify.
With the help of more than $23 billion in direct and indirect federal aid, Goldman Sachs appears to have emerged intact from the economic implosion, and by repaying $10 billion in direct federal bailout money -- a 23 percent taxpayer return that exceeded federal officials' demand -- the firm has escaped tough federal limits on 2009 executive bonuses that accompanied bailout money.
It announced record earnings in July, and is on course to surpass $50 billion in revenue in 2009 and pay its employees more than $20 billion in year-end bonuses.
From 2001 to 2007, Goldman Sachs hawked at least $135 billion in bonds keyed to risky home loans, according to analyses by McClatchy and the industry newsletter Inside Mortgage Finance.
Its financial panache made its sales pitches irresistible to policy-makers and investors alike, and helps explain why so few of them questioned the risky securities Goldman Sachs sold off in a 14-month period that ended in February 2007.
Since the collapse of the economy, however, some investors have changed their views of Goldman Sachs.
Several pension funds, including Mississippi's Public Employees' Retirement System, have filed lawsuits, seeking class-action status, claiming that Goldman Sachs and other Wall Street firms negligently made "false and misleading" representations of the bonds' true risks.
Mississippi Attorney General Jim Hood, whose state lost $5 million of the $6 million it invested in Goldman Sachs' subprime mortgage-backed bonds in 2006, said the state's funds are likely to lose "hundreds of millions of dollars" on those and similar bonds.
California's huge public employees retirement system, known as CalPERS, purchased $64.4 million in subprime mortgage-backed bonds from Goldman Sachs on March 1, 2007. In July, CalPERS listed the bonds' value at $16.6 million, a drop of nearly 75 percent, according to documents obtained through a state public records request.
In May, without admitting wrongdoing, Goldman Sachs became the first firm to settle with the Massachusetts attorney general's office as it investigated Wall Street's subprime dealings. The firm agreed to pay $60 million to the state, most of it to reduce mortgage balances for 714 aggrieved homeowners.
McClatchy Newspapers researcher Tish Wells contributed to this report.
I think GS should not have gotten any bailout, etc... but complaining that they hedged their mortgage exposure is a minor item. I'm not sure I even see the fraud angle, but it's human nature to blame someone.
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somebody's heroes...somebodies heros. Tell me all about finance AND english, you brainchild.
The fact is, virtually no one who posts here knows anything about finance. (Yes, I know there are those that do, but most do not post daily with eviscerating attacks)
From a finance blog:
As to professor Kotlikoff’s assertion at the top of the page: Goldman’s defense would likely be “Of course we did not know the future. One division sold this product, another division made a bet against the sector. But it was a gamble, one that hardly anyone else (Aside from John Paulson) took. After the fact, it may look like prescient, but an investment opinion is not the same as knowing the future. That is, of course, impossible.”
Case dismissed . . .
Of course, you never fail to comprehend that the pension boards and consultants and asset management firms were demanding these products.
I can work for Hershey and not eat chocolate. If the world wants to eat chocolate and get fat, fine. I can make a lot of money selling them chocolate. If no one buys chocolate, I wont make any money selling them chocolate. But no where does it say that I have to eat chocolate myself. I'm a business selling people what they want.
What is so amusing is that the truly uninformed simply point at a shiny object and say...Goldman's fault! It is far easier to do that than to understand the problem and come up with your own rational thoughts.
somebody's heroes...somebodies heros. Tell me all about finance AND english, you brainchild.
The fact is, virtually no one who posts here knows anything about finance. (Yes, I know there are those that do, but most do not post daily with eviscerating attacks)
From a finance blog:
As to professor Kotlikoff’s assertion at the top of the page: Goldman’s defense would likely be “Of course we did not know the future. One division sold this product, another division made a bet against the sector. But it was a gamble, one that hardly anyone else (Aside from John Paulson) took. After the fact, it may look like prescient, but an investment opinion is not the same as knowing the future. That is, of course, impossible.”
Case dismissed . . .
Of course, you never fail to comprehend that the pension boards and consultants and asset management firms were demanding these products.
I can work for Hershey and not eat chocolate. If the world wants to eat chocolate and get fat, fine. I can make a lot of money selling them chocolate. If no one buys chocolate, I wont make any money selling them chocolate. But no where does it say that I have to eat chocolate myself. I'm a business selling people what they want.
What is so amusing is that the truly uninformed simply point at a shiny object and say...Goldman's fault! It is far easier to do that than to understand the problem and come up with your own rational thoughts.
Its amazing that the only thing you do is attempt to put people down and talk about your intellectual superiority at any given attempt or point.
__________________
Never underestimate the predictability of stupidity.
Ha, is anyone surprised someone working in hedge funds would do anything other than defend those that bank on screwing over the general public?
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Working "hard," or the perception of working hard, doesn't really mean anything. Sweating, vomiting, and breathing hard could be a good workout or a tropical disease kicking in.-Dan John
Authorities that regulate investment banking (the FSA in the United Kingdom and the SEC in the United States) require that banks impose a Chinese wall which prohibits communication between investment banking on one side and equity research and trading on the other.
oh. well now we're in a bit of a pickle, aren't we?
I don't mind political humor when it has some basis in reality. That skit had nothing based on any fact.
Thus, not funny.
It was satirizing all of the rush to keep Goldman surviving at the expense of everyone else.
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"When you begin to believe nothing is heavy, all weights become light." -Rossbow
"Just remember, somewhere there is a little Chinese girl warming up with your max."-Jim Convroy
"It's a round hole, dammit. Everyone fits."--Anonymous Mod at Strengthmill
Goldman Sachs, for instance, sharply cut nearly all bonuses it paid last year but gave some executives more options than usual.
The company gave its general counsel, for example, 104,868 stock options and 14,117 shares in December, when the bank’s stock was around $78.
Now the bank’s shares have more than doubled in value, making that stock and option award worth nearly $12 million, according to Equilar, an executive compensation research firm in Redwood Shores, Calif.
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"A government big enough to give you everything you want is a government big enough to take from you everything you have."
It was satirizing all of the rush to keep Goldman surviving at the expense of everyone else.
GQ, you know this is just a lazy and completely untrue statement. From the start Goldman said they didn't really need the bailout money, and paid it back right away. Very much UNLIKE every other wall street firm. And yes, they were paid back by AIG. At that time, the Goldman CEO basically said that they were indifferent to it, they had a proper hedge in place against AIG's downfall. The fact is, Goldman is a target because they are successful. Morgan Stanley gets 1200 vaccinations, Citigroup gets 1000...and the press goes after Goldman for getting 200. It makes virtually no sense. Goldman has become a convenient bogeyman/strawman for everyone in the world and only 3% of the claims hold any validity. Usually, we see people with no idea about finance or the inner workings using Goldman as the strawman of choice. I wouldn't have thought you would look at the past year and claim that Goldman was kept surviving at the expense of others. I'm not sure how you can defend that statement at all.
Again, this is simply rhetoric. Goldman was responsible for the crisis? Really? Matt, rather than simply writing useless garbage, defend your point (for once). I can't wait for this read...
GQ, you know this is just a lazy and completely untrue statement. From the start Goldman said they didn't really need the bailout money, and paid it back right away. Very much UNLIKE every other wall street firm. And yes, they were paid back by AIG. At that time, the Goldman CEO basically said that they were indifferent to it, they had a proper hedge in place against AIG's downfall. The fact is, Goldman is a target because they are successful. Morgan Stanley gets 1200 vaccinations, Citigroup gets 1000...and the press goes after Goldman for getting 200. It makes virtually no sense. Goldman has become a convenient bogeyman/strawman for everyone in the world and only 3% of the claims hold any validity. Usually, we see people with no idea about finance or the inner workings using Goldman as the strawman of choice. I wouldn't have thought you would look at the past year and claim that Goldman was kept surviving at the expense of others. I'm not sure how you can defend that statement at all.
Calm down, I was explaining the purpose of the skit. Do you think the skit was talking about something else? OG said it has no basis on realty, but like it or not (and Im sure you do not) thats the popular sentiment that the skit was playing to based on my viewing. Whether its factual or not is a different issue and I didnt address that all in my post. I am aware that BOA and Citi are way more costly an fucked up than GS.
I am aware that GS has paid back the TARP and AIG. Have they done anything with the $30B from the FDIC or $11B from the Fed (serious question since I havent seen anything about it)?
What I find confusing about your posts is that you believe that bailouts were necessary to avoid a possible catastrophe. Its not like Goldman is a non-integrated entity and its not like Paulson didnt know anything about GS. They had about $30B in revenue in 2007 generated from trading and principal investments (comprising about 75% of its revenue), down to about $8B in 2008 and now about $25B (with less of their revenue coming from asset management and investment).
Given this, you say GS was hedged against AIG. So do you believe that GS would be successful without the $70B from AIG, TARP, Fed, and FDIC? Do you believe that GS would still be standing if AIG fell? If so, why would they take any of this money? If so, why would you argue for bailouts against a systemic catastrophe rather than let the free market reward those with proper hedges and punish those who were foolish enough not to follow GS' lead?
__________________
"The strongest steel goes through the hottest fires."-Anonymous
"When you begin to believe nothing is heavy, all weights become light." -Rossbow
"Just remember, somewhere there is a little Chinese girl warming up with your max."-Jim Convroy
"It's a round hole, dammit. Everyone fits."--Anonymous Mod at Strengthmill
Again, this is simply rhetoric. Goldman was responsible for the crisis? Really? Matt, rather than simply writing useless garbage, defend your point (for once). I can't wait for this read...
So the guys in the Fed and Treasury Dept. that pushed the bailout weren't ex-Goldman execs? That's pretty much public record, so I don't see what's to defend.
Seriously.
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So the guys in the Fed and Treasury Dept. that pushed the bailout weren't ex-Goldman execs? That's pretty much public record, so I don't see what's to defend.
Seriously.
Never mind those facts that they are all chums patting each other on the back. They are just so far superior in intelligence and economic prowess that mere mortals can't seem to comprehend the good that they are doing for the country...
__________________
Never underestimate the predictability of stupidity.
of course, before you start working there, you should consider this:
Quote:
Being smarter than the average bear is one thing, but to be a Goldmanite you have to work harder than the average bear too. Ask Sarah Smith, 50, a former convent schoolgirl from Bromley in Kent who left Britain to become Goldman’s chief accountant. "It’s a 24/7 culture," she says. "When you’re needed, you’re here. And if you’re needed and you’re not answering your phone, you won’t be needed very long."
Smith, whose office is a BlackBerry throw away from the Embassy Suites hotel where Goldman staff go for an hour or two’s sleep when they have been up so long that they start sleepwalking along the hallways, only had a few days’ holiday last year. How many weeks off does she get a year?
"I don’t know. No one really knows how much holiday you get because nobody ever takes it all."
and probably, also this:
Quote:
Insecurity is hard-wired into the system. You feel it even before you are hired. Most applicants are interviewed at least 20 times before they are made an offer and some more than 30 times. Once hired, each staff member is constantly and confidentially reviewed by those they work with. There’s a metric for every aspect of performance and each staffer is measured against their department and the firm as a whole. Every year, staff are put into one of four quartiles by the Human Capital Management department. Note the "Capital". At Goldman, people are money. The top are richly rewarded, while the fourth quartilers? Who cares? They won’t be around much longer. It’s up, or out. "We say goodbye to the bottom 3-5% every year [about 1,500 people]," says Richard Gnodde, 49, co-boss of the European operation, based in London.
If you want, just shoot me your resumes and I'll see what I can do for you two.
Whatever the truth behind the bail-out, not even the smartest Goldmanite can deny that it is only thanks to government aid that the bank still has a financial system to work with.
and this:
Quote:
Blankfein dismisses any suggestion that Gold-man needed to be bailed out, and, by extension, rejects any notion that the firm is now profiting from public support. Sure, he took $10 billion from Washington’s Troubled Asset Relief Program (Tarp). But the bank has since repaid the cash, with healthy interest — 23%. Goldman also bene-fited from the federal bail-out of the huge US insurance firm AIG. Goldman had bought $20 billion worth of insurance from AIG and received billions of dollars — perhaps as much as $13 billion — when Washington pumped $90 billion into the stricken giant. But Blankfein insists Goldman was "hedged" against any AIG losses, in the best possible way — with cash. So even if AIG had gone under, Goldman would not have suffered. Critics say that had AIG gone bust, the entire financial system could have collapsed, taking Goldman with it. What’s more, at the height of the crisis, the Federal Reserve broke with an 80-year-old tradition and let Goldman turn itself from a pure investment bank into a bank holding company. This meant it could borrow funds at the same cheap rate as commercial banks for as long as it wanted. Blankfein says Goldman changed status not for the money, but because it had become clear, following the collapse of Bear Stearns and Lehman, that the market had lost faith in the ability of the US Securities and Exchange Commission to regulate investment banks. Being regulated by the central bank, the Federal Reserve, would help to restore confidence in the financial system as a whole.
So NFL, I will ask you again:
Quote:
I am aware that GS has paid back the TARP and AIG. Have they done anything with the $30B from the FDIC or $11B from the Fed (serious question since I havent seen anything about it)?
And:
Quote:
Given this, you say GS was hedged against AIG. So do you believe that GS would be successful without the $70B from AIG, TARP, Fed, and FDIC? Do you believe that GS would still be standing if AIG fell? If so, why would they take any of this money? If so, why would you argue for bailouts against a systemic catastrophe rather than let the free market reward those with proper hedges and punish those who were foolish enough not to follow GS' lead?
Add this: Do you think GS didnt need to change its operations with Fed approval?
__________________
"The strongest steel goes through the hottest fires."-Anonymous
"When you begin to believe nothing is heavy, all weights become light." -Rossbow
"Just remember, somewhere there is a little Chinese girl warming up with your max."-Jim Convroy
"It's a round hole, dammit. Everyone fits."--Anonymous Mod at Strengthmill
Matt, JV, you guys want me to submit your resumes to Goldman? Maybe try to get you two interviews?
Yes.
Now do you want to dispense with your usual red herrings, or do we just start with the stupid personal attacks?
Or perhaps you could actually try having a discussion without pointless appeals to emotion and the distraction tactics you like to use?
To clarify: this is the Current Events equivalent of a Bro-Down "post pics, labcoat!" post. I can point out that Bernanke, Paulson, et al, are Goldman alums that are heavily involved in the entire fiasco, and NFL can point out that I'm not qualified to work at Goldman, as if that somehow negates any criticism.
Convenient.
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The same guys they were working for before as if an election makes any difference. You know how I stand on party politics OG its all bullshit we all end up getting to take a bite of that sandwich that I always keep referring back to.
__________________
Never underestimate the predictability of stupidity.
It is interesting following this because both views are valid.
GS works harder and smarter than their peers. They outlasted and outsmarted their peers and deserve the reward for that. They serve a necessary function in raising capital for our manufacturing and research base.
On the other hand, much of what they created has no real value. It produced nothing and, in fact, destroyed much. GS has so much influence that much of what they do benefits no one but GS and is a detriment to other businesses.
Finally, GS has a tin ear. Even if they are the good guys and we misunderstand them, they are doing nothing to convince us of this and it could ultimately result in harm to them.
I think Corzine's connection to GS led, in no small measure, to his loss.
Goldman Sachs somebodies heros...
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