Goldman profited on shorts, Blankfein emails show

Goldman Sachs made big profits betting against the mortgage market even though it stated in its 2009 annual report to investors that it “did not generate enormous net revenues by betting against residential related products”, according to initial findings of a Senate investigation into the bank.

The senators’ findings mark the latest setback to Goldman’s efforts to stem the public backlash against the bank’s actions during the financial crisis, its pay policies and its stunning recovery from the downturn. The bank was blindsided earlier this month by the US Securities and Exchange Commission, which charged Goldman with fraud for allegedly misleading investors in a mortgage-backed security it created.

Lloyd Blankfein, chairman and chief executive of Goldman, told other top executives in a November 2007 email exchange: “Of course we didn’t dodge the mortgage mess. We lost money, then made more than we lost because of shorts.”

He then added: “Also, it’s not over, so who knows how it will turn out ultimately.”

Other internal Goldman emails released on Saturday morning by the Senate permanent subcommittee on investigations, which conducted an 18-month-long investigation into the bank, showed that the firm was relieved it had taken short positions as the housing market worsened. When it emerged that the firm had made $50m in one day by taking short positions that gained value as the market for mortgages collapsed, David Viniar, chief financial officer, said in an email: “Tells you what might be happening to people who don’t have the big short.”

In another email, a Goldman manager reacted to the downgrade of $32bn in mortgage backed securities by credit rating agencies by noting that, unlike other investors who were taking heavy losses, the bank had bet against them. “Sounds like we will make some serious money.”

To which a colleague responded: “Yes we are well positioned.”

Carl Levin, the Democratic chairman of the Senate panel, said the subcommittee’s investigation found that Goldman and other investment banks were not simply market-makers, or disinterested parties acting on behalf of clients.

“They were self-interested promoters of risky and complicated financial schemes that helped trigger the crisis,” Mr Levin said. “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.”

Mr Blankfein and other top Goldman executives will appear before the Senate subcommittee on Tuesday. The SEC complaint has alleged that the bank committed fraud when it failed to tell investors that a hedge fund manager, John Paulson, was betting against a security that he had helped to create and was designed to fail. Goldman has denied any wrongdoing.

The Wall Street bank on Saturday accused the Senate panel of cherry-picking just four emails from almost 20m pages of documents it had handed over to congressional investigators.

“It is concerning that the subcommittee seems to have reached its conclusion even before holding a hearing,” said Lucas Van Praag, the firm’s chief spokesman. He added that Goldman was making available its residential profit and loss information for every quarter of 2007 and 2008, information that he said showed Goldman had net losses of more than $1.2bn in residential mortgage-related products in the period.

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

Revelations that Goldman shorted the mortgage market are not new. In a letter to investors early this month, the Wall Street bank acknowledged it “went short” even as it was trading its clients’ mortgage-backed securities, the financial instruments that lie at the heart of the financial crisis. But Mr Blankfein has vigorously denied any wrongdoing, suggesting that Goldman did not know the future of the market in the first half of 2007 or whether its trades would be successful or not.

The internal emails show that even in November 2007, before the worst of the economic crisis had occurred, the company was already concerned about the public perception that it had profited from the housing crisis. Discussing the publication of an article by the New York Times, Mr Van Praag, wrote to Mr Blankfein, John Rogers and other top executives that the story would contain “balance”, to which he added “ie, stuff we don’t like”.

http://www.ft.com/cms/s/0/5defa420-4fa9-11df-a1ab-00144feab49a.html

Ha, ha, ha...Oh yeah, I want to see Lucas van Praag rigging Goldman's "residential profit and loss" calculations...Hey Lucas, working overtime ? Poor guy!

 

also on
http://www.goldmansucs.com

 

We knew 2 years ago they had shorted subprime. Thanks for the scoop, Bernstein

 

What is the matter with Blankfein? Didn't he learn anything from Henry Paulson? Never ever use emails.

... and don't adjust your tie when you are leering at the whores in congress.