Goldman Sachs Hedges on Its Role in Financial Crisis

(Right) Lloyd C. Blankfein, Chairman/CEO; (Left) Gary D. Cohn, President.Goldman Sachs, the investment banking giant that Wall Street naysayers love to hate, defended short-selling strategies in its annual letter to shareholders released today, and hedged some more on the firm’s controversial role in the financial crisis.
“We certainly did not know the future of the residential housing market in the first half of 2007 any more than we can predict the future of markets today,” Goldman said in its letter, co-signed by CEO Loyd Blankfein and President Gary Cohn.
In the heady days leading up to the collapse of the financial markets in 2008, Goldman Sachs was notable for short-selling the mortgage market – or betting against mortgage-backed securities.
After seeing losses in its residential mortgage-related products in 2007, Goldman Sachs reduced its exposure based on the uncertainty of future prices and overall volatility, Goldman said in its letter.
“The firm did not generate enormous net revenues or profits by betting against residential mortgage-related products, as some have speculated; rather, our relatively early risk reduction resulted in our losing less money than we otherwise would have when the residential housing market began to deteriorate rapidly,” Goldman said in its letter.
Goldman repaid a $10 billion U.S. bailout in June 2009, as one of the highest-profile recipients in the U.S. Treasury’s Troubled Asset Relief Program. In January, the Financial Crisis Inquiry Commission attributed blame to Goldman for contributing to the financial crisis.
“Although Goldman Sachs held various positions in residential mortgage-related products in 2007, our short positions were not a ‘bet against our clients.’ Rather, they served to offset our long positions,” Goldman’s letter said. “Our goal was, and is, to be in a position to make markets for our clients while managing our risk within prescribed limits.”
Goldman’s rebound has been rapid and robust, and it continues to be a favorite target for its executive bonuses of the past. The financial services firm reported a 2009 profit of $13.4 billion on revenue of $45.2 billion.
In December, Goldman announced that its management committee would receive “100 percent of their discretionary compensation in the form of Shares at Risk.” The compensation has a five-year period allowing the firm to “recapture the shares” if employees demonstrate improper risk analysis or fail to report concerns about those risks.
“As the last two years demonstrated, no one can predict the future. While we are encouraged by the prospects for a sustainable economic recovery, we continue to place a premium on conservatism and prudence,” Goldman’s letter said.

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