Goldman Sachs Messages Show It Thrived as Economy Fell

Editor’s Note: Now the truth as reported here two years ago.
  • There were no losses.
  • They were making money hand over fist.
  • And this article focuses only on a single topic — some of the credit default swaps — those that Goldman had bought in its own name, leaving out all the other swaps bought by Goldman using other banks and entities as cover for their horrendous behavior.
  • It also leaves out all the other swaps bought by all the other investment banking houses.
  • But most of all it leaves out the fact that at no time did the investment banking firms actually own the mortgages that the world thinks caused enormous losses requiring the infamous bailout. It’s a fiction.
  • In nearly all cases they sold the securities “forward” which means they sold the securities first, collected the money second and then went looking for hapless consumers to sign documents that were called “loans.”
  • The securities created the intended chain of securitization wherein first the investors “owned” the loans (before they existed and before the first application was signed) and then the “loans” were “assigned” into the pool.
  • The pool was assigned into a Special Purpose Vehicle that issued “shares” (certificates, bonds, whatever you want to call them) to investors.
  • Those shares conveyed OWNERSHIP of the loan pool. Each share OWNED a percentage of the loans.
  • The so-called “trust” was merely an operating agreement between the investors that was controlled by the investment banking house through an entity called a “trustee.” All of it was a sham.
  • There was no trust, no trustee, no lending except from the investors, and no losses from mortgage defaults, because even with a steep default rate of 16% reported by some organizations, the insurance, swaps, and other guarantees and third party payments more than covered mortgage defaults.
  • The default that was not covered was the default in payment of principal to investors, which they will never see, because they never were actually given the dollar amount of mortgages they thought they were buying.
  • The entire crisis was and remains a computer enhanced hallucination that was used as a vehicle to keep stealing from investors, borrowers, taxpayers and anyone else they thought had money.
  • The “profits” made by NOT using the investor money to fund mortgages are sitting off shore in structured investment vehicles.
  • The actual funds, first sent to Bermuda and the caymans was then cycled around the world. The Ponzi scheme became a giant check- kiting scheme that hid the true nature of what they were doing.
April 24, 2010

Goldman Sachs Messages Show It Thrived as Economy Fell

By LOUISE STORY, SEWELL CHAN and GRETCHEN MORGENSON

In late 2007 as the mortgage crisis gained momentum and many banks were suffering losses, Goldman Sachs executives traded e-mail messages saying that they were making “some serious money” betting against the housing markets.

The e-mails, released Saturday morning by the Senate Permanent Subcommittee on Investigations, appear to contradict some of Goldman’s previous statements that left the impression that the firm lost money on mortgage-related investments.

In the e-mails, Lloyd C. Blankfein, the bank’s chief executive, acknowledged in November of 2007 that the firm indeed had lost money initially. But it later recovered from those losses by making negative bets, known as short positions, enabling it to profit as housing prices fell and homeowners defaulted on their mortgages. “Of course we didn’t dodge the mortgage mess,” he wrote. “We lost money, then made more than we lost because of shorts.”

In another message, dated July 25, 2007, David A. Viniar, Goldman’s chief financial officer, remarked on figures that showed the company had made a $51 million profit in a single day from bets that the value of mortgage-related securities would drop. “Tells you what might be happening to people who don’t have the big short,” he wrote to Gary D. Cohn, now Goldman’s president.

The messages were released Saturday ahead of a Congressional hearing on Tuesday in which seven current and former Goldman employees, including Mr. Blankfein, are expected to testify. The hearing follows a recent securities fraud complaint that the Securities and Exchange Commission filed against Goldman and one of its employees, Fabrice Tourre, who will also testify on Tuesday.

Actions taken by Wall Street firms during the housing meltdown have become a major factor in the contentious debate over financial reform. The first test of the administration’s overhaul effort will come Monday when the Senate majority leader, Harry Reid, is to call a procedural vote to try to stop a Republican filibuster.

Republicans have contended that the renewed focus on Goldman stems from Democrats’ desire to use anger at Wall Street to push through a financial reform bill.

Carl Levin, Democrat of Michigan and head of the Permanent Subcommittee on Investigations, said that the e-mail messages contrast with Goldman’s public statements about its trading results. “The 2009 Goldman Sachs annual report stated that the firm ‘did not generate enormous net revenues by betting against residential related products,’ ” Mr. Levin said in a statement Saturday when his office released the documents. “These e-mails show that, in fact, Goldman made a lot of money by betting against the mortgage market.”

A Goldman spokesman did not immediately respond to a request for comment.

The Goldman messages connect some of the dots at a crucial moment of Goldman history. They show that in 2007, as most other banks hemorrhaged losses from plummeting mortgage holdings, Goldman prospered.

At first, Goldman openly discussed its prescience in calling the housing downfall. In the third quarter of 2007, the investment bank reported publicly that it had made big profits on its negative bet on mortgages.

But by the end of that year, the firm curtailed disclosures about its mortgage trading results. Its chief financial officer told analysts at the end of 2007 that they should not expect Goldman to reveal whether it was long or short on the housing market. By late 2008, Goldman was emphasizing its losses, rather than its profits, pointing regularly to write-downs of $1.7 billion on mortgage assets and leaving out the amount it made on its negative bets.

Goldman and other firms often take positions on both sides of an investment. Some are long, which are bets that the investment will do well, and some are shorts, which are bets the investment will do poorly. If an investor’s positions are balanced — or hedged, in industry parlance — then the combination of the longs and shorts comes out to zero.

Goldman has said that it added shorts to balance its mortgage book, not to make a directional bet that the market would collapse. But the messages released Saturday appear to show that in 2007, at least, Goldman’s short bets were eclipsing the losses on its long positions. In May 2007, for instance, Goldman workers e-mailed one another about losses on a bundle of mortgages issued by Long Beach Mortgage Securities. Though the firm lost money on those, a worker wrote, there was “good news”: “we own 10 mm in protection.” That meant Goldman had enough of a bet against the bond that, over all, it profited by $5 million.

Documents released by the Senate committee appear to indicate that in July 2007, Goldman’s daily accounting showed losses of $322 million on positive mortgage positions, but its negative bet — what Mr. Viniar called “the big short” — came in $51 million higher.

As recently as a week ago, a Goldman spokesman emphasized that the firm had tried only to hedge its mortgage holdings in 2007 and said the firm had not been net short in that market.

The firm said in its annual report this month that it did not know back then where housing was headed, a sentiment expressed by Mr. Blankfein the last time he appeared before Congress.

“We did not know at any minute what would happen next, even though there was a lot of writing,” he told the Financial Crisis Inquiry Commission in January.

It is not known how much money in total Goldman made on its negative housing bets. Only a handful of e-mail messages were released Saturday, and they do not reflect the complete record.

The Senate subcommittee began its investigation in November 2008, but its work attracted little attention until a series of hearings in the last month. The first focused on lending practices at Washington Mutual, which collapsed in 2008, the largest bank failure in American history; another scrutinized deficiencies at several regulatory agencies, including the Office of Thrift Supervision and the Federal Deposit Insurance Corporation.

A third hearing, on Friday, centered on the role that the credit rating agencies — Moody’s, Standard & Poor’s and Fitch — played in the financial crisis. At the end of the hearing, Mr. Levin offered a preview of the Goldman hearing scheduled for Tuesday.

“Our investigation has found that investment banks such as Goldman Sachs were not market makers helping clients,” Mr. Levin said, referring to testimony given by Mr. Blankfein in January. “They were self-interested promoters of risky and complicated financial schemes that were a major part of the 2008 crisis. They bundled toxic and dubious mortgages into complex financial instruments, got the credit-rating agencies to label them as AAA safe securities, sold them to investors, magnifying and spreading risk throughout the financial system, and all too often betting against the financial instruments that they sold, and profiting at the expense of their clients.”

The transaction at the center of the S.E.C.’s case against Goldman also came up at the hearings on Friday, when Mr. Levin discussed it with Eric Kolchinsky, a former managing director at Moody’s. The mortgage-related security was known as Abacus 2007-AC1, and while it was created by Goldman, the S.E.C. contends that the firm misled investors by not disclosing that it had allowed a hedge fund manager, John A. Paulson, to select mortgage bonds for the portfolio that would be most likely to fail. That charge is at the core of the civil suit it filed against Goldman.

Moody’s was hired by Goldman to rate the Abacus security. Mr. Levin asked Mr. Kolchinsky, who for most of 2007 oversaw the ratings of collateralized debt obligations backed by subprime mortgages, if he had known of Mr. Paulson’s involvement in the Abacus deal.

“I did not know, and I suspect — I’m fairly sure that my staff did not know either,” Mr. Kolchinsky said.

Mr. Levin asked whether details of Mr. Paulson’s involvement were “facts that you or your staff would have wanted to know before rating Abacus.” Mr. Kolchinsky replied: “Yes, that’s something that I would have personally wanted to know.”

Mr. Kolchinsky added: “It just changes the whole dynamic of the structure, where the person who’s putting it together, choosing it, wants it to blow up.”

The Senate announced that it would convene a hearing on Goldman Sachs within a week of the S.E.C.’s fraud suit. Some members of Congress questioned whether the two investigations had been coordinated or linked.

Mr. Levin’s staff said there was no connection between the two investigations. They pointed out that the subcommittee requested the appearance of the Goldman executives and employees well before the S.E.C. filed its case.

FDIC Weighs Loan Principal Cuts to Fight Foreclosure

Sheila Bair has finally let the trial balloon out of the bag. Just watch what Wall Street does to position Bair as some kind of kook. In truth, she ought to be running the financial part of this recovery although the FDIC is supposed to insure deposits, not necessarily write offs of bad loans. Bottomline, there will be no recovery without principal reduction. This will never be over without a sharing of the losses created by Wall Street. If you are looking for a non-litigation method, and I am not sure there is one,  to reach out and touch everyone in distress look no further than my first entries back in October 2007 under the heading “Amnesty for Everyone” or read Brad Keiser’s post right here from June 2008 entitled “Mortgage Meltdown: Fingers of Blame” where he predicted that homeowners would be the last group to be granted any “amnesty.”

It’s not about ideology. It’s about practicality. In a mess this big you fix it and stop arguing about it. Leave the argument till later. Divide the losses amongst ALL the players based upon their ability to withstand it and yes, that DOES include the taxpayer now that we have so totally screwed up this recovery. Nothing real has occured. No regulation, no turning over the upside down ship of finance, no sharing of the losses —- that has simply been turned onto the taxpayer past,present and future. Municipalities, cities, counties, state budgets and yes many non-profits and charitable foundations and organizations whose budgets or investment base have been wrecked even if they were not invested with Bernie Madoff. Folks we are in this together.

EVERYONE is effected by the housing crisis in one form or another. Let the justice system take care of the criminal enterprises through law enforcement. We are finding inertia through finding blame of borrowers, blame of title companies, mortgage brokers, appraisers, rating agencies, investment banks …  et al.

Everyone knows it but only a few people are willing to say it: principal reduction. Hundreds of thousands who are not in foreclosure are $100k-$300k underwater, are they supposed to continue to pay on their mortgage for 10 years and hope they break even? Questionable business decision when you look at it mathematically. They have been damaged and no one has a program for them…wait until this part of the populace starts making noise. The financial sector shoulders SOME of the losses not just arguably because they should but because they can. It means that borrowers shoulder SOME of the losses not because they should but because they must. It means that where borrowers cannot withstand the burden even after principal reduction, the GOVERNMENT steps in with Taxpayer money and shoulders SOME of the losses not because it should but because it must. Property values in entire cities and regions are at stake, which gets to tax base, which impacts school systems…which impacts our children and grandchildren.

ALL the players who were intermediaries in the securitization chain from originating lenders, to underwriters that sold the MBS to state retirement systems, insurers who issued default insurance, ratings agencies…they all made a KILLING with little or no capital at risk, they should but because they were part of the problem, they got paid to play and now that the game didn’t turn out so well they get to share SOME of the losses.

By Alison Vekshin

Dec. 3 (Bloomberg) — Federal Deposit Insurance Corp. Chairman Sheila Bair may ask lenders to cut the principal on as much as $45 billion in mortgages acquired from seized banks, expanding her bid to aid homeowners as unemployment rises.

The FDIC, which has taken over 124 failed banks this year, may seek to have lenders that sign loss-sharing agreements when acquiring the assets do more than cut interest rates or defer the loan’s principal, Bair said today in an interview at Bloomberg’s Washington office.

“We’re looking now at whether we should provide some further loss sharing for principal write downs,” Bair said. “Now you’re in a situation where even the good mortgages are going bad because people are losing their jobs. So you have other factors now driving mortgage distress.”

Bair, 55, is stepping up her effort to prevent U.S. home foreclosures, using the agency’s relationship with lenders to make change. She has pressed mortgage-servicing companies to modify loan terms for struggling borrowers and unsuccessfully lobbied last year to have the Treasury Department use the Troubled Asset Relief Program to curb foreclosures.

The FDIC set up a foreclosure-relief program last year at IndyMac Federal Bank, a failed California mortgage lender, to be a model for the banking industry. The program, using a combination of interest-rate reductions, term or amortization extensions and principal forbearance, led to agreements to modify about a third of IndyMac’s eligible loans.

Rising Unemployment

In September, Bair urged banks that are sharing losses with her agency to temporarily reduce mortgage payments for out-of- work borrowers. U.S. unemployment soared to a 26-year high of 10.2 percent in November.

The agency now is considering whether lenders that acquire banks should share a larger portion of the losses on loans whose principal is cut and whether the FDIC will recover the additional subsidy through reduced foreclosure rates.

“I think we’re going to gain by reducing re-default rates or delinquencies with people walking away,” Bair said. “We’ll obviously lose by providing loss-share for principal writedowns.”

Under the average loss-sharing agreement, the FDIC pays as much as 80 percent of losses on a residential mortgage up to a set threshold, with the acquiring bank absorbing 20 percent. Any losses exceeding the threshold are reimbursed at 95 percent of the losses booked by the acquirer.

$80 Billion

The FDIC has loss-sharing agreements on $109.1 billion of failed-bank assets, including $44.7 billion for single-family home loans, spokesman Andrew Gray said.

“For the acquiring banks, it’s great because now they get more protection for the assets that they’re picking up and they have more flexibility in dealing with the problems,” John Douglas, who leads the bank regulatory practice at Davis Polk & Wardwell LLP in New York and is a former FDIC attorney, said in a telephone interview.

Principal reductions will help borrowers who are “underwater” on their payment-option adjustable-rate mortgages, whose principal expands over time, said Julia Gordon, senior policy counsel at the Center for Responsible Lending.

“In order to make those loans affordable and give those homeowners a reason to stay rather than walk away, principal reduction is going to be key,” Gordon said.

The U.S. Treasury Department plans to pressure lenders to complete modifying home loans to troubled borrowers under a $75 billion program. Almost 651,000 loan revisions had been started through the Obama administration’s Home Affordable Modification Program as of October, up from 487,080 as of September, according to the Treasury.

The Washington-based FDIC insures deposits at 8,099 institutions with $13.2 trillion in assets. The agency is charged with dismantling failed banks and manages an insurance fund it uses to reimburse customers for deposits of as much as $250,000 when a lender collapses.

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