Goldman Sachs and “War Profiteering”
Monday, April 26, 2010
••• Embattled Wall Street investment giant Goldman Sachs has hit back at claims it used the U.S. sub-prime mortgage crisis to make tens of millions of dollars in profit.
The financial giant, already facing fraud charges, found itself in the middle of a new firestorm on Saturday after emails released by a U.S. Senate panel suggested Goldman executives made huge profits out of the 2007 crisis.
Goldman fired back on Sunday, accusing the Senate Permanent Subcommittee on Investigations of having ‘cherry-picked just four emails from the 20 million pages of documents and emails provided to it’.
‘It is concerning that the subcommittee seems to have reached its conclusion even before holding a hearing,’ added Goldman Sachs spokesman Lucas van Praag.
The emails come at a bad time for Goldmans Sachs.
Earlier this month, the U.S. Securities and Exchange Commission announced it was charging the company with fraud, accusing it of ‘defrauding investors by misstating and omitting key facts’ about a product based on subprime, or higher-risk mortgage-backed securities.
On Saturday, subcommittee chairman Democratic Senator Carl Levin said Goldman Sachs and other investment banks had acted as ‘self-interested promoters of risky and complicated financial schemes that helped trigger the crisis’.
He said the bank had bundled toxic mortgages into complex financial instruments, got credit rating agencies to label them as AAA securities, and then sold them to investors, magnifying and spreading risk throughout the financial system.
In addition, Levin said, the bank often bet against the instruments it sold and rolled in profits as a result.
Van Praag said on Sunday the company had net losses of over $1.2 billion in residential mortgage-related products in 2007 and 2008.
‘This demonstrates conclusively that we did not make a significant amount of money in the mortgage market,’ he said.
But the four emails released by the subcommittee suggest that the company was able to make massive profits by shorting products including residential mortgage-backed securities and collateralised debt obligations (CDOs).
In one email, Goldman Sachs chairman and chief executive officer Lloyd Blankfein appeared to gloat about the strategy in an exchange with other top Goldman executives.
‘Of course we didn’t dodge the mortgage mess. We lost money, then made more than we lost because of shorts,’ the message said.
In another, a Goldman Sachs manager noted that the firm had bet against 32 billion dollars in mortgage-related securities that had been downgraded by credit rating agencies, causing losses for many investors.
‘Sounds like we will make some serious money,’ the manager wrote.
‘Yes, we are well positioned,’ his colleague responded.
In a third email, Goldman employees discussed securities that were underwritten and sold by the company and tied to mortgages issued by Washington Mutual Bank’s subprime lender, Long Beach Mortgage.
One employee reported the ‘wipeout’ of one Long Beach security and the ‘imminent’ collapse of another as ‘bad news’ that would cost the firm $2.5 million.
The ‘good news,’ the employee wrote, was that Goldman had bet against the very securities it had assembled and sold, meaning the failure would net the company five million dollars.
Blankfein and other current and former company personnel are scheduled to testify before the subcommittee on Tuesday.