Emails Show Goldman Foresaw the Meltdown of Subprime

Goldman Sachs (GS) made a lot of money by shorting the heck out of the subprime market, a collection of internal e-mails released by a Senate panel showed on Saturday.

Senator Carl Levin (D-MI), whose office released the emails ahead of a hearing on Tuesday at which Goldman execs including CEO Lloyd Blankfein will testify on the causes and consequences of the financial crisis, said that “these e-mails show that, in fact, Goldman made a lot of money by betting against the mortgage market”.

“Sounds like we will make some serious money,” Goldman Sachs executive Donald Mullen wrote in a series of e-mails from October 2007 about the deteriorating conditions in second-lien positions in a CDO.

In an email from November 18, 2007, Lloyd Blankfein, apparently aware that the gains his bank was making were as a result of the subprime-mortgage securities nosediving in value in 2007 wrote:  “Of course we didn’t dodge the mortgage mess. We lost money, then made more than we lost because of shorts.”

Another Goldman Sachs email by Goldman executive David Viniar shows the perception that Goldman’s brass had on the state of the subprime market in July, 2007.  “Tells you what might be happening to people who don’t have the big short,” Viniar wrote to a fellow executive in response to a report on the Goldman’s trading activities, showing that – in one day – the firm had raked in over $50 million shorting the mortgage market.

These emails seem to indicate that Goldman Sachs was indeed a short player in the mortgage-related investments as the housing bubble was bursting.

“There it is, in their own words: Goldman Sachs taking ‘the big short’ against the mortgage market,” Sen. Levin said in a statement. “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.”

It is not known how much money in total Goldman made on its housing short bets.

Some excerpts from Sen. Levin’s press release:

“[Goldman] 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.” The 2009 Goldman Sachs annual report stated that the firm “did not generate enormous net revenues by betting against residential related products.” Levin said, “These e-mails show that, in fact, Goldman made a lot of money by betting against the mortgage market.”

The four exhibits released today are Goldman Sachs internal e-mails that address practices involving residential mortgage-backed securities and collateralized debt obligations (CDOs), financial instruments that were key in the financial crisis.
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In a [another] 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” – that the failure would bring the firm $5 million from a bet it had placed against the very securities it had assembled and sold.

[A] Goldman Sachs manager reacted to news that the credit rating agencies had downgraded $32 billion in mortgage related securities – causing losses for many investors – by noting that Goldman had bet against them: “Sounds like we will make some serious money.” His colleague responded: “Yes we are well positioned.”

Goldman Sachs Chairman and Chief Executive Officer Lloyd Blankfein and other current and former company personnel are scheduled to testify at Tuesday’s hearing.

In one of the e-mails released today, Mr. Blankfein stated that the firm came out ahead in the mortgage crisis by taking short positions…

[G]oldman 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” – that the failure would bring the firm $5 million from a bet it had placed against the very securities it had assembled and sold… [emphasis added]