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Senate Probe Finds Goldman Won Big Betting on Housing Collapse

Goldman Sachs is battling ""allegations that it misled investors"":http://dsnews.comarticles/goldman-faces-charges-from-sec-for-defrauding-mortgage-investors-2010-04-16 in its mortgage securities business. That battle may have just gotten a little tougher.


The Senate Permanent Subcommittee on Investigations has released ""several internal documents"":http://levin.senate.gov/newsroom/supporting/2010/PSI.Exhibits.pdf obtained from the Wall Street firm that reveal it made ""some serious money"" betting against the housing market, as Sachs' top execs' put it.

Sen. Carl Levin (D-Michigan), chairman of the committee, said in a statement to the press, ""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 continued, ""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.""

Goldman Sachs 2009 annual report stated that the firm ""did not generate enormous net revenues by betting against residential related products.""

But Levin says, ""These e-mails show that, in fact, Goldman made a lot of money by betting against the mortgage market.""

In one of the internal e-mails released by the Committee, Sachs' CEO Lloyd Blankfein stated that the firm came out ahead in the mortgage crisis by taking short positions. In an e-mail exchange with other top company execs, he wrote: ""Of course we didn't dodge the mortgage mess. We lost money, then made more than we lost because of shorts.""


In a second e-mail, CFO David Viniar responded to a report on the firm's trading activities, showing that in one day, the firm netted over $50 million by taking short positions that increased in value as the mortgage market cratered. Viniar wrote: ""Tells you what might be happening to people who don't have the big short.""

Sen. Levin commented, ""There it is, in their own words: Goldman Sachs taking ‘the big short' against the mortgage market.""

In a third e-mail, Goldman employees discussed the ups and downs of securities that were underwritten and sold by Goldman and tied to mortgages issued by Washington Mutual Bank's subprime lender, Long Beach Mortgage Company. Reporting the ""wipeout"" of one Long Beach security and the ""imminent"" collapse of another as ""bad news"" that would cost the firm $2.5 million, a Goldman Sachs employee then reported the ""good news"" â€" that the failure would bring the firm $5 million from a bet it had placed against the very securities it had assembled and sold.

In a fourth e-mail, a Goldman Sachs manager reacted to news that the credit rating agencies had downgraded $32 billion in mortgage securities â€" causing losses for many investors â€" by noting that Goldman had bet against them: ""Sounds like we will make some serious money."" His colleague responded: ""Yes we are well positioned.""

The evidence brought to light may soil Goldman Sachs' claims that the firm suffered heavy losses from the mortgage downturn just like everyone else, seeing as how profits from shorts put the firm out in front. Nevertheless, the Wall Street fixture is mounting a strong defense against the SEC's charges.

Goldman Sachs maintains the argument that it had no way of knowing whether home prices would continue to climb or take a nosedive, and did not pursue any actions that conflicted with the interests of its investor clients.

A separate congressional panel, the House Committee on Oversight and Government Reform, has asked the SEC's inspector general to look into the timing of the civil fraud charges brought against Sachs to determine if politics were the central motivation. The suit was filed just days before the Senate began debating financial reform legislation and the president headed to New York's financial district to drum up support for the bill from Wall Street.

About Author: Carrie Bay

Carrie Bay is a freelance writer for DS News and its sister publication MReport. She served as online editor for DSNews.com from 2008 through 2011. Prior to joining DS News and the Five Star organization, she managed public relations, marketing, and media relations initiatives for several B2B companies in the financial services, technology, and telecommunications industries. She also wrote for retail and nonprofit organizations upon graduating from Texas A&M University with degrees in journalism and English.

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