April 25, 2010 in Nation/World

Goldman scored on ‘shorts’

Executives boasted of making ‘serious money’ on mortgage mess
Jim Puzzanghera Tribune Washington bureau
 
Associated Press photo

Goldman Sachs CEO Lloyd Blankfein attends President Barack Obama’s speech in New York on Thursday.
(Full-size photo)

WASHINGTON – Goldman Sachs executives bragged in internal e-mails in 2007 that they were making “some serious money” as the real estate bubble burst, according to documents released Saturday by a Senate subcommittee.

The e-mails released contradict previous statements made by Goldman officials that the investment bank did not aggressively bet against the housing market and that it, too, lost money on mortgage-related investments along with many of its clients.

The blunt comments are likely to further fuel the backlash against Goldman and came as seven top executives prepared to be grilled at a high-profile Senate hearing Tuesday about the legendary Wall Street company’s role in the financial crisis.

“Of course we didn’t dodge the mortgage mess. We lost money, then made more than we lost because of shorts,” chief executive Lloyd Blankfein wrote in a Nov. 18, 2007, e-mail to Goldman executives, referring to the practice of “shorting,” or betting against an investment. “Also, it’s not over, so who knows how it will turn out ultimately.”

The e-mails go to the heart of civil fraud allegations brought this month by the Securities and Exchange Commission against the investment bank. The agency alleges that Goldman sold mortgage-backed securities to investors that the company knew would fail. Goldman has denied the allegations and reiterated Saturday that that it did not make money by betting that the mortgage market would collapse.

The investment bank expressed concern that the Senate subcommittee “seems to have reached its conclusion even before holding a hearing,” Goldman spokesman Lucas Van Praag said. “In its statement, the U.S. Senate subcommittee has cherry-picked just four e-mails from the almost 20 million pages of documents and e-mails provided to it by Goldman Sachs.”

Democrats have seized on the allegations as they push for sweeping legislation to tighten regulation of Wall Street, a top priority heading into this fall’s congressional elections.

The e-mail exchange was one of four released by the Senate Permanent Subcommittee on Investigations, which independently has been probing the role of Goldman Sachs and other investment banks in the financial crisis. The subcommittee will release many more internal Goldman documents on Monday ahead of the hearing and more at the session itself.

Sen. Carl Levin, D-Mich., the subcommittee’s chairman, said its 18-month investigation into the causes of the financial crisis has found that Goldman and other investment banks helped trigger the mortgage meltdown and then profited from it.

“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.”

Goldman on Saturday denied the allegations. As part of an aggressive defense, it released a 12-page memo it prepared in advance of Tuesday’s hearing that said the company had total net losses of more than $1.2 billion in residential mortgage-related products in 2007 and 2008.

“Goldman Sachs did not take a large directional ‘bet’ against the U.S. housing market, and the firm was not consistently or significantly net ‘short the market’ in residential mortgage-related products in 2007 and 2008, as the performance of our residential mortgage-related products business demonstrates,” the document said. It added that even as the market was faltering, “there was continued debate amongst senior managers” about its direction.


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