Report: Goldman Profited Big on Anti-Client Bets; CEO Denies

Goldman Sachs CEO Lloyd BlankfeinGoldman Sachs & Co. went beyond hedging strategies and shifted to a “large bet against the mortgage market” starting in late 2006, making billions of dollars and creating a conflict between its own interests and those of its clients, a Senate subcommittee report said.
Goldman profited substantially, said the panel’s statement on the report released today, by re-securitizing residential mortgage-backed securities into pooled collateralized debt obligations (CDOs).
The firm then sold the CDOs to clients, and took short positions through credit default swaps, the type of derivative that lawmakers are proposing to heavily regulate or restrict, the statement said.
Goldman  “cashed in very large short positions, generating billions of dollars in gain,” according to the report by the Senate Permanent Subcommittee on Investigations, whose chairman is Sen. Carl Levin, D-Michigan.
The panel will hear from Goldman Sachs Chief Executive Officer Lloyd Blankfein, Chief Financial Officer David Vinier and other executives Tuesday as the panel continues its investigation into the factors behind the financial crisis.
The report is the result of an18-month investigation of Goldman Sachs strategies and those of other firms during the housing bubble build-up. Its findings refute public statements by Blankfein and other executives that they did not profit by betting against products sold to clients.
Blankfein will deny the panel’s allegations when he testifies Tuesday.
“We didn’t have a massive short against the housing market and we certainly did not bet against our clients,” Blankfein will tell the Permanent Subcommittee on Investigations, according to a prepared text of his remarks.
But Blankfein said he can understand how such complex transactions can be perceived by the public as suspect.
“What we and other banks, rating agencies and regulators failed to do was sound the alarm that there was too much lending and too much leverage in the system — that credit had become too cheap,” Blankfein said in the text.
The premise behind the panel’s allegation is also at the heart of the civil fraud case against Goldman made public on April 16. The Securities and Exchange Commission alleges that the investment banking giant and a top bond trader created a synthetic CDO, a product that derives returns to investors from various pools of subprime mortgages.
The SEC said the firm sold the product to investors with the help of a hedge fund that was strategizing a short position against it, and failed to disclose that connection.
Levin’s panel is using Goldman as a case study, but said other investment banks followed suit.
“In Goldman’s case, this activity included underwriting securities backed by or related to mortgages from some of the most notorious subprime mortgage lenders, including Washington Mutual’s Long Beach subprime subsidiary, Fremont Investment & Loan, and New Century Mortgage,” the panel’s statement said.
The subcommittee’s statement said it will examine internal reports and emails during Tuesday’s hearing showing that Goldman took a significant net short positions when high-risk mortgages began to incur record delinquency rates throughout 2007, and “cashed in shorts that generated substantial income.”

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