Goldman executives: We made money betting against mortgage market

McClatchy NewspapersApril 24, 2010 

WASHINGTON — In an internal e-mail released Saturday, Goldman Sachs chief executive Lloyd Blankfein wrote in November 2007 that the firm "didn't dodge the mortgage mess," but "made more than we lost" by betting against the U.S. housing market.

Blankfein's e-mail, which a Senate investigations panel released with three other subpoenaed company documents, appears to contradict Goldman's denials that it profited from the subprime mortgage meltdown by secretly betting that housing prices would fall. At the same time, Goldman was selling tens of billions of dollars in risky mortgage securities.

Goldman has said that its contrary bets were largely on behalf of its clients.

The release of the documents sets the stage for a confrontation on Tuesday, when Blankfein and six other present and former Goldman executives are scheduled to testify to the Senate Permanent Subcommittee on Investigations, which will begin revealing the results of a yearlong investigation.

In a second e-mail, in July 2007, Goldman's chief financial officer, David Viniar, updated company President Gary Cohn on the performance of residential mortgage securities.

"Tells you what might be happening to people who don't have the big short," Viniar wrote, referring to Goldman's negative — or "short" — bets on housing.

Goldman Sachs, the world's most elite investment bank, was the only major Wall Street firm to escape much of the subprime crash that set off the global economic crisis.

Goldman reported $1.7 billion in mortgage-related losses, but the company has never divulged how much it earned from exotic contrary bets using insurance-like contracts known as credit-default swaps.

McClatchy reported last November that Goldman marketed $57 billion in risky mortgage securities, including $39 billion backed by risky home loans in 2006 and 2007 without telling investors it was secretly shorting the housing market.

Sen. Carl Levin, a Michigan Democrat who chairs the committee, said in a statement releasing the e-mails that Goldman Sachs and other investment banks were "self-interested promoters of risky and complicated financial schemes that helped trigger" the economic crisis ravishing the nation the past two years.

"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," Levin said. "These e-mails show that, in fact, Goldman made a lot of money by betting against the mortgage market."

Goldman responded Saturday with a release of corporate profit and loss information that it said, "demonstrates conclusively that we did not make a significant amount of money in the mortgage market," according to a statement from spokesman Lucas van Praag. He said the documents show that Goldman had net losses of more than $1.2 billion in residential mortgage-related products in the period.

"As a firm, we obviously could not have been significantly net short since we lost money in a declining housing market," he said.

He also chastised Levin's committee, saying it had "cherry-picked just four e-mails from the almost 20 million pages of documents and e-mails provided to it by Goldman Sachs. It is concerning that the Subcommittee seems to have reached its conclusion even before holding a hearing."

Among Tuesday's witnesses will be Goldman mortgage trader Michael Swenson and his colleague Josh Birnbaum, whom some people say reaped $4 billion in profits for Goldman in 2007.

The e-mails released Saturday included an Oct. 11, 2007 exchange between Swenson and another Goldman employee, Donald Mullen. Swenson appraised Mullen that Moody's Investors Service was issuing a series of downgrades of offshore bundles of mortgage securities, which meant that Goldman's negative bets would be winners.

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

"Yes, we are well positioned," Swenson said.

Blankfein's remarks on Nov. 18, 2007, came as the company sought to avoid damage from a New York Times story, due to be published the next day, describing how Goldman had dodged the mortgage crash.

Van Praag advised half a dozen senior company officials in an e-mail of the pending story, commenting that it would "of course, have 'balance' (ie stuff we don't like)."

Blankfein replied: "Of course we didn't dodge the mortgage mess. We lost money, then made more than we lost because of shorts." He added that "it's not over, so who knows how it will turn out ultimately."

However, by November 2007 Goldman had largely shed its residential mortgage-related risks.

The disclosure comes a little more than a week after the Securities and Exchange Commission sued Goldman for civil fraud, accusing the firm and one of its vice presidents of allowing a long-time hedge fund client to help select the securities for a deal without telling the investors that the client planned to bet against the securities.

The client, Paulson and Co., made $1 billion and the investors lost that much. The Goldman vice president, Fabrice Tourre, is also expected to testify on Tuesday. Goldman has denied the charges.

(Chris Adams contributed to this article.)

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