Execs cheered housing collapse
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As the U.S. housing market started to slide, executives at Goldman Sachs, the most legendary investment bank on Wall Street, were trading e-mails in which they cheered the declines, even when those declines meant some of their clients were taking major losses, according to newly released documents.
The documents show that the firm's executives were celebrating earlier decisions in which they bet against the housing market, a Senate investigative committee found. In a fall 2007 e-mail, for example, top mortgage trader Michael Swenson was gleeful that credit-rating companies downgraded mortgage-related investments, which caused losses for investors.
"Sounds like we will make some serious money," Mr. Swenson wrote.
Lawmakers said the internal e-mails, released Saturday by the Senate Permanent Subcommittee on Investigations, contradict Goldman's assertions that the bank was not trying to make big profits off the decline of the housing market in 2007 and was merely seeking to protect itself if prices collapsed.
With Goldman chief executive Lloyd Blankfein and fellow executives coming to Washington on Tuesday to testify before the Senate panel, this weekend's sparring over whether the firm sought to exploit the historic decline in housing prices underscored the intensifying clash between Washington and Wall Street.
President Barack Obama and congressional Democrats are pushing hard to finalize legislation in Congress that would much more strictly regulate the activities of Goldman and other Wall Street firms. The full Senate could begin to debate financial reform legislation -- already passed by the House -- as early as Monday.
Mr. Obama sharply rebuked Wall Street in his radio address Saturday. "In the absence of common-sense rules, Wall Street firms took enormous, irresponsible risks that imperiled our financial system -- and hurt just about every sector of our economy," he said.
The findings of the Senate committee come as Goldman is also facing a fraud suit, filed earlier this month by the Securities and Exchange Commission, alleging that the bank misled its clients by selling them a mortgage investment that was secretly designed to fail. Senate investigators this weekend were interviewing Goldman vice president Fabrice Tourre, who is implicated in the fraud suit and will appear Tuesday.
The Senate committee's findings do not touch directly on the fraud suit but suggest that Goldman's behavior in that case was indicative of a larger pattern of duplicitous conduct on the eve of the economy's collapse.
"Investment banks such as Goldman Sachs ... were self-interested promoters of risky and complicated financial schemes that helped trigger the crisis," said Sen. Carl Levin, D-Mich., chairman of the Senate committee. "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."
Until recently, Goldman largely escaped the fallout from the financial crisis, quickly repaid federal aid and didn't receive the kind of scrutiny and blame that Washington had showered on such firms as Countrywide Financial, Lehman Brothers, and Fannie Mae and Freddie Mac. Countrywide and Lehman are out of business, and Fannie and Freddie are under federal control.
By contrast, Goldman is financially stronger and 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. Mr. 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.
Mr. Levin said the documents obtained by his committee contradict Goldman's assertion that it didn't seek to profit from the housing downturn.
In one of the e-mails obtained by the committee, Goldman's chief financial officer, David 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," Mr. Viniar wrote to his colleagues.
In another e-mail, Goldman executives discussed how the securities of one subprime mortgage lender the company worked with was 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, Mr. 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, Mr. Viniar called Goldman's mortgage traders and risk managers to a meeting and concluded that they would reduce the firm's overall exposure to the subprime mortgage market. This was largely done by making bets against the market to cancel out bets it had already placed that the market would rebound.
Goldman at a glance
WHAT E-MAILS? Goldman Sachs Group Inc. released e-mails Saturday from one of its traders showing he knew the subprime mortgage market was collapsing in early 2007. That was in response to a Senate subcommittee's release of e-mails showing Goldman executives boasting they were making money on mortgage investments later in the year.
WHO CARES? Goldman faces persistent criticism for allegedly profiting from the mortgage meltdown and has become a symbol of public anger toward Wall Street. The firm denies it bet against the housing market.
WHY NOW? Three reasons: The subcommittee is holding a hearing Tuesday on origins of the financial crisis and plans to use Goldman as a case study. The Senate on Monday is to start debating tougher oversight of Wall Street. And the SEC has charged Goldman and the trader with civil fraud related to two investors.
First Published April 25, 2010 12:00 am