Goldman Sachs e-mails suggest firm profited from mortgage crisis

United States Senate releases Goldman-Sachs emails.
Link here or click title:  http://thehill.com/images/stories/news/2010/PDFs/goldmansachs.pdf

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story by the Hill
written by Ian Swanson

The e-mails released Saturday by the Senate Permanent Subcommittee on Investigations show Goldman Sachs Chairman and CEO Lloyd Blankfein saying the bank initially lost money on the investments but then more than made those losses back.


“Of course we didn’t dodge the mortgage mess. We lost money, then made more than we lost because of shorts,” Blankfein wrote in the e-mail, dated Nov. 18.


Blankfein and other Goldman Sachs executives are scheduled to testify next week before the investigations subcommittee, which is examining the Wall Street crisis.

Sen. Carl Levin, the investigative subcommittee’s chairman, said the e-mails show Goldman “made a lot of money by betting against the mortgage market.”

“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 in a statement released Saturday.

“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.”

Levin said Goldman’s 2009 annual report said the firm “did not generate enormous net revenues by betting against residential related products” and that the e-mails show this is not the case.

Besides the e-mail from Blankfein, Levin released a second e-mail from Goldman Sachs Chief Financial Office David Viniar, who is also scheduled to testify before the panel on Tuesday.

Viniar’s e-mail indicates that in one day the firm netted more than $50 million by taking short positions that increased in value as the mortgage market cratered. “Tells you what might be happening to people who don’t have the big short,” Viniar wrote in the e-mail.

Levin said this showed Goldman was taking the “big short” against the mortgage market.

In a third e-mail released by the subcommittee, a Goldman official says the bank made “serious money” by betting against mortgage-related securities.

In comments to the Financial Times, Goldman accused Levin’s panel of cherry-picking e-mails from hundreds of documents it had handed over to it.

“It is concerning that the subcommittee seems to have reached its conclusion even before holding a hearing,” spokesman Lucas Van Praag told the Financial Times.

He said the bank had released information that showed Goldman had net losses of more than $1.2 billion in residential mortgage-related products in 2007 and 2008.

“As a firm, we obviously could not have been significantly net short since we lost money in a declining market,” he said.

The testimony next week by the Goldman Sachs executives is highly anticipated in part because of the charges the bank faces from the Securities and Exchange Commission.

The SEC says Goldman committed fraud by selling investors a mortgage-backed security that was set up by a hedge fund that was betting on the security to fail. The SEC says Goldman is at fault for not telling investors who set up the security.

Blankfein has said his bank did nothing wrong and is planning a vigorous defense of the charges. Part of Goldman’s argument is that it did not know whether housing prices would rise or fall, which could increase attention on the e-mails released by Levin on Saturday.

According to The Washington Post, Goldman has prepared a document for Blankfein’s testimony that shows the company decided in 2007 to reduce the company’s exposure to the mortgage market, in case prices fell, by making new investments that would pay off if housing prices dropped.

Goldman will testify as the Senate attempts to move forward with legislation on new rules for Wall Street. The Senate will face a procedural vote on a measure Monday, and it is unclear whether Majority Leader Harry Reid (D-Nev.) will have the votes necessary to move to a debate on the bill.

No Republican senators have offered support for the bill so far.

Democrats have tried to use the allegations against Goldman to their advantage, arguing it shows the need for their legislation.