Probe: Goldman Eyed Profits from Housing Bust
Updated 6:30 p.m. ET
Goldman Sachs developed a strategy to profit from the housing meltdown and reaped billions at the expense of clients, a Senate investigation has found.
Top Goldman executives misled investors in complex mortgage securities that became toxic, investigators for a Senate panel allege. They point to e-mails and other Goldman documents obtained in an 18-month investigation. Excerpts from the documents were released Monday, a day before a hearing that will bring CEO Lloyd Blankfein and other top Goldman executives before Congress.
Watch complete coverage of Blankfein's Senate testimony on CBSNews.com starting at 10 a.m. EDT Tuesday
Blankfein says in his own prepared remarks that Goldman didn't bet against its clients and can't survive without their trust.
The Securities and Exchange Commission this month filed a civil fraud case against the bank, saying it misled investors about securities tied to home loans. The SEC says Goldman concocted mortgage investments without telling buyers they had been put together with help from a hedge fund client, Paulson & Co., that was betting on the investments to fail.
Goldman disputes the charges and says it will contest them in court.
At the hearing, Blankfein will repeat the company's argument that it lost $1.2 billion in the residential mortgage meltdown in 2007 and 2008 that touched off the financial crisis and a severe recession.
Special Section: Wall Street Under Fire
Blankfein: Goldman Didn't Bet Against Clients
He also will argue that Goldman wasn't making an aggressive negative bet - or short - on the mortgage market's meltdown.
"We didn't have a massive short against the housing market, and we certainly did not bet against our clients," Blankfein says in the prepared remarks released by Goldman. "Rather, we believe that we managed our risk as our shareholders and our regulators would expect."
But Sen. Carl Levin, D-Mich., chairman of the Senate Permanent Subcommittee on Investigations, said Monday: "I think they're misleading the country. ... There's no doubt they made huge money betting against the (mortgage) market."
At a company presentation, Goldman's chief risk officer effectively admitted what the Senate committee claims, reports CBS News correspondent Anthony Mason.
"Early in '07 our mortgage trading desk started putting on big short positions … and made money … as the subprime market weakened." the risk officer said.
Goldman is accused of knowingly deceiving clients that one of its mortgage related investments, "Abacus," was designed to fail. The e-mails suggest Goldman was having trouble finding an outside manager to vouch for Abacus. Fabrice Toure, a Goldman banker at the center of the deal, reports one manager "declined given their negative views on most of the credits."
Goldman found another manager for abacus. But in a later e-mail, Toure warned Goldman's mortgage chief that of the play's "reputational risk," Mason reports.
Goldman "knew of Paulson's involvement in the selection" of securities, Levin told reporters. "They knew Paulson was going short."
"Need to decide if we want to do 1-3 (billion) of these trades for our book or engage customers," a December 2006 e-mail exchange between two Goldman executives says.
On one group of securities, "I'd say we definitely keep for ourselves. On (another), I'm open to sharing to the extent that it keeps these customers engaged with us."
The subcommittee provided excerpts of e-mails showing a progression from late 2006 through the full-blown mortgage crisis a year later. Levin said they show Goldman shifted in early 2007 from neutral to a short position, betting that the mortgage market was likely to collapse.
"That directional change is mighty clear," Levin said. "They decided to go gangbusters selling those securities" while knowing they were toxic.
The issue of how much Goldman executives pushed such policies and were aware of the mortgage trading department's practices is a key one emerging before the Senate hearing.
Some experts say damage to Goldman's reputation has already been done and might be long-lasting.
Regardless of the outcome of the SEC's case, "Goldman Sachs has lost," said James Cox, a Duke University law professor and securities law expert. "It's lost in the arena of public opinion."
The 140-year-old investment house's trading strategy in recent years enabled it to weather the financial crisis better than most other big banks. It earned a blowout $3.3 billion in the first quarter.
Even before the SEC filed its fraud charges on April 16, Goldman denied that it bet against clients by selling them mortgage-backed securities while reducing its own exposure to them by taking short positions.
By the Senate subcommittee's reckoning, Goldman made about $3.7 billion from its short positions in several complex mortgage securities called collateralized debt obligations in 2006-2007. The short positions made up about 56 percent of its total risk during the period, the investigators found.
But the company says it lost $1.2 billion when it sold home mortgage securities in 2007 and 2008.
The firm's correspondence to the SEC dated Oct. 4, 2007 includes this: "During most of 2007, we maintained a net short subprime (mortgage) position and therefore stood to benefit from declining prices in the mortgage market."
In his prepared remarks, Blankfein acknowledges, "We have to do a better job of striking the balance between what an informed client believes is important to his or her investing goals and what the public believes is overly complex and risky."
He adds, "If our clients believe that we don't deserve their trust, we cannot survive."
© 2010 CBS Interactive Inc. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. The Associated Press contributed to this report. Goldman Sachs developed a strategy to profit from the housing meltdown and reaped billions at the expense of clients, a Senate investigation has found.
Top Goldman executives misled investors in complex mortgage securities that became toxic, investigators for a Senate panel allege. They point to e-mails and other Goldman documents obtained in an 18-month investigation. Excerpts from the documents were released Monday, a day before a hearing that will bring CEO Lloyd Blankfein and other top Goldman executives before Congress.
Watch complete coverage of Blankfein's Senate testimony on CBSNews.com starting at 10 a.m. EDT Tuesday
Blankfein says in his own prepared remarks that Goldman didn't bet against its clients and can't survive without their trust.
The Securities and Exchange Commission this month filed a civil fraud case against the bank, saying it misled investors about securities tied to home loans. The SEC says Goldman concocted mortgage investments without telling buyers they had been put together with help from a hedge fund client, Paulson & Co., that was betting on the investments to fail.
Goldman disputes the charges and says it will contest them in court.
At the hearing, Blankfein will repeat the company's argument that it lost $1.2 billion in the residential mortgage meltdown in 2007 and 2008 that touched off the financial crisis and a severe recession.
Special Section: Wall Street Under Fire
Blankfein: Goldman Didn't Bet Against Clients
He also will argue that Goldman wasn't making an aggressive negative bet - or short - on the mortgage market's meltdown.
"We didn't have a massive short against the housing market, and we certainly did not bet against our clients," Blankfein says in the prepared remarks released by Goldman. "Rather, we believe that we managed our risk as our shareholders and our regulators would expect."
But Sen. Carl Levin, D-Mich., chairman of the Senate Permanent Subcommittee on Investigations, said Monday: "I think they're misleading the country. ... There's no doubt they made huge money betting against the (mortgage) market."
At a company presentation, Goldman's chief risk officer effectively admitted what the Senate committee claims, reports CBS News correspondent Anthony Mason.
"Early in '07 our mortgage trading desk started putting on big short positions … and made money … as the subprime market weakened." the risk officer said.
Goldman is accused of knowingly deceiving clients that one of its mortgage related investments, "Abacus," was designed to fail. The e-mails suggest Goldman was having trouble finding an outside manager to vouch for Abacus. Fabrice Toure, a Goldman banker at the center of the deal, reports one manager "declined given their negative views on most of the credits."
Goldman found another manager for abacus. But in a later e-mail, Toure warned Goldman's mortgage chief that of the play's "reputational risk," Mason reports.
Goldman "knew of Paulson's involvement in the selection" of securities, Levin told reporters. "They knew Paulson was going short."
"Need to decide if we want to do 1-3 (billion) of these trades for our book or engage customers," a December 2006 e-mail exchange between two Goldman executives says.
On one group of securities, "I'd say we definitely keep for ourselves. On (another), I'm open to sharing to the extent that it keeps these customers engaged with us."
The subcommittee provided excerpts of e-mails showing a progression from late 2006 through the full-blown mortgage crisis a year later. Levin said they show Goldman shifted in early 2007 from neutral to a short position, betting that the mortgage market was likely to collapse.
"That directional change is mighty clear," Levin said. "They decided to go gangbusters selling those securities" while knowing they were toxic.
The issue of how much Goldman executives pushed such policies and were aware of the mortgage trading department's practices is a key one emerging before the Senate hearing.
Some experts say damage to Goldman's reputation has already been done and might be long-lasting.
Regardless of the outcome of the SEC's case, "Goldman Sachs has lost," said James Cox, a Duke University law professor and securities law expert. "It's lost in the arena of public opinion."
The 140-year-old investment house's trading strategy in recent years enabled it to weather the financial crisis better than most other big banks. It earned a blowout $3.3 billion in the first quarter.
Even before the SEC filed its fraud charges on April 16, Goldman denied that it bet against clients by selling them mortgage-backed securities while reducing its own exposure to them by taking short positions.
By the Senate subcommittee's reckoning, Goldman made about $3.7 billion from its short positions in several complex mortgage securities called collateralized debt obligations in 2006-2007. The short positions made up about 56 percent of its total risk during the period, the investigators found.
But the company says it lost $1.2 billion when it sold home mortgage securities in 2007 and 2008.
The firm's correspondence to the SEC dated Oct. 4, 2007 includes this: "During most of 2007, we maintained a net short subprime (mortgage) position and therefore stood to benefit from declining prices in the mortgage market."
In his prepared remarks, Blankfein acknowledges, "We have to do a better job of striking the balance between what an informed client believes is important to his or her investing goals and what the public believes is overly complex and risky."
He adds, "If our clients believe that we don't deserve their trust, we cannot survive."
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yes - it's the MAJOR TRAVESTY of the foxes guarding the hen coop.
These parasitic 'financier'/nation-wreckers destroyed the lives of tens of millions and perhaps hundreds of millions, and get rewarded for that.
THE U.S. GOVT
The flood of so-called money that is printed by The US Govt, is fiat currency, and is tantamount to counterfeit money.
As measured by percentage - not by raw numbers - there is little backing for the US Dollar. Since our dollar is no longer based on gold or silver, it has become a 'Federal Reserve Note', which is merely a paper I.O U. loan issued by a 'drowning-in-debt' U.S. Govt.
TO EXPAND QUICKLY VIA CREDIT: INSECURE/UNSECURED
And credit they expanded.
And Yankee Doodle went to town [riding on a phony (dollar)]!
Hence, the accumulation of gold - by both private and government sectors - on a grand scale this world has never witnessed.
THAT IT CAN BRING A NATION'S ENTIRE ECONOMY TO ITS KNEES,
AND BRING RUIN TO SO MANY MILLIONS OF LIVES,
such should qualify for consideration under treasonous 'nation-wrecking' laws, making those who calculated and plotted such massive swindles against an entire nation, eligible for capital punishment.
These greedy, unconscionable parasitic investment banker/'financiers' continue to take so much from us and contribute nothing but pain, and destroyed lives that they directly should be held responsible for.
Absence of justice with regard to these 'financiers' crimes will likely breed more corruption and further disrespect and disregard for our laws and for people's lives.
The people and the victims call for lengthy prison terms with hard labor for these criminals at the very least, and call for capital punishment for those who were the masterminds and who deliberately planned this financial destruction on such massive scale - AGAINST ALL OF US !
Again, it's the MAJOR TRAVESTY of the fox guarding the hen coop.
If they offered solutions rather than oppose every democratic solution without offering any meaningful solutions of their own, they could argue they are deserving of consideration this November.
Its time for the republicans to stop under performing in their jobs and start participating in the reform debate.
For our naton's sake make some deals with the democrats to make some modications to solve the problem.
This all or nothing attitude does not help anyone.
System. The Federal Reserve kept interest rates too low for too long, effectively
"Paying" financial firms to Borrow money. These firms then turned around and lent
the money to under-qualified borrowers -- yea, the US Govt. MANDATED that they
lend more to "under-served" (i.e., unqualified) Borrowers. Regulation (or not)
had very little to do with just following the Perverse Incentives laid out by
the US Govt. Now, everyone is clamoring for the US Govt. to once again put the
fox (the Federal Reserve) in charge of the hen house (after they almost burnt
it to the ground the last time). See any problem with your logic there, pardner?