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THE PROGRESSIVE REVIEW - April 29, 2010
Document: Goldman "Shorted" Mortgages
Because World Wouldn't Expect It
by: Chris Adams and Greg Gordon
McClatchy Newspapers
Washington - A key Goldman Sachs trading manager indicated
in his personnel performance review that he could use the
"fear" in the market of a coming collapse in the nation's
mortgage market to make profits for the Wall Street firm,
documents released Tuesday show.
Former trader Joshua Birnbaum wrote that because "the world
would think" Goldman Sachs would invest in the mortgage
market for the long term, the firm should "flip our risk"
and bet on an impending crisis.
"We could use that fear to our advantage if we could flip
our risk," he wrote.
The disclosure was among hundreds of documents the Senate
Permanent Subcommittee on Investigations, chaired by
Michigan Democrat Carl Levin, released at the beginning
of a hearing into the role of investment banks - and
particularly Goldman Sachs - in the nation's recent
economic collapse.
The Birnbaum memo also suggests that Goldman executives
were creating a strategy to profit from risky mortgages
at the same time they were selling similar products to
unsuspecting clients.
Birnbaum began testifying about 11 a.m. Goldman chief
executive Lloyd Blankfein is scheduled to testify later
today, the last of seven Goldman officials due to testify
under oath.
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In his testimony, Birnbaum said there was a vigorous debate
within Goldman about which way the housing market was
headed. He said that nobody from senior management told
him to make an overall "directional bet" against the sub-
prime market, but simply to reduce risk overall.
He said he is "very proud" of his tenure at Goldman. "We
provided significant liquidity to our customers in a
difficult and challenging market while also managing to
post a profit during this period," he said.
Comparing his panel's investigation to inquiries into the
causes of the Great Depression, Levin said that what
investigators see now is similar to what they saw in the
1930s. "The parallels are unmistakable to today's events,"
Levin said.
Held before a packed, standing-room only Senate room, the
hearing met all the criteria of a Washington zoo, with
protesters in prison uniforms demanding that Goldman
executives do jail time and dozens of cameras trailing
witnesses as they walked into the room.
When four current and former Goldman traders took seats at
the witness table, they quickly learned what it means to
be in the middle of a Washington scandal. A crush of photo-
graphers encircled them, setting off a rat-a-tat of click-
ing cameras.
In his opening statement, Levin directly took on Goldman's
contention - made repeatedly in recent weeks - that it did
not profit at its clients', or the nation's, expense.
"The evidence also shows that repeated public statements by
the firm and its executives provide an inaccurate portrayal
of Goldman's actions during 2007, the critical year when
the housing bubble burst and the financial crisis took
hold," Levin said. "The firm's own documents show that
while it was marketing risky mortgage-related securities,
it was placing large bets against the U.S. mortgage market."
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He later added that the actions Goldman took undermine the
pretense that it was acting as a mere "market-maker" on
Wall Street _ or simply working to match buyers and sellers.
"They represented major bets that the mortgage securities
market - a market Goldman helped create - was in for a
major decline," Levin said.
The hearing put under a microscope the firm's contention
that it was only responsibly managing its risk by making
negative bets on the housing market as it crested in late
2006 and 2007. Levin and his team of subcommittee investi-
gators found that instead, many of those negative bets
exploited clients, who had a reasonable expectation that
Goldman would not sell products to them that would later
drop in value.
In his opening statement, the Goldman executive at the
heart of a fraud case brought by the Securities and
Exchange Commission offered a spirited defense.
"I deny - categorically - the SEC's allegation. And I will
defend myself in court against this false claim," said
Fabrice Tourre, a London-based executive director of a
Goldman unit that prepares complex deals.
The SEC contends that Tourre, and Goldman, failed to
disclose to investors that a prominent hedge fund manager,
John Paulson, helped pick mortgages that he believed
would fail in order to bet against the complex security
being put together by Goldman.
Eric Kolchinsky, a former executive from Moody's Investors
Service, told the subcommittee last Friday that he was not
made aware of this information and it could have changed
the way the ratings agency would have rated the deal that
was eventually offered to investors as investment grade.
Tourre told Levin's panel today that others involved in
the deal were sophisticated investors and that he did in
fact disclose key information about the hedge fund manager
Paulson, whose firm famously made more than $1 billion
betting against the U.S. housing market.
Tourre denied that the complex deal being probed by the
SEC was designed to fail, and said that the securities
referenced in the deal "did not underperform" other
securities in the same ratings class and year of the
transaction.
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