Document: Goldman "Shorted" Mortgages Because World Wouldn't Expect It
Tuesday 27 April 2010
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.
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 subprime 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 photographers encircled them, setting off a rat-a-tat of clicking 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."
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 investigators 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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Comments
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Undoes the 'tsunami natural
Tue, 04/27/2010 - 13:03 — Anonarcmous (not verified)Undoes the 'tsunami natural economic disaster' presentation of PresGWBush when the economy quit "going gangbusters" & PEOPLE KNEW this was coming!!Only 1 thing left-> jｊｕｓｔｉｃｅ．
I'll bet Martha Stewart's
Tue, 04/27/2010 - 13:21 — ala (not verified)I'll bet Martha Stewart's laughing now! Maybe she can show Joshua Birnbaum, et al, how to crochet a nice poncho. Pink is a nice jail color. Keeps them calm and manageable. Less 'fear' that way!
How about congress create a
Tue, 04/27/2010 - 17:36 — Jweshawk (not verified)How about congress create a law to strip the citizenship of anyone who undermines the security of the USA? Betting 'short' on housing futures in my honest opinion is doing just that. Then we can see these dogs of commerce scramble to live in some other country that does not offer the security that we take for granted here. Oh yes and of course these non-citizens would never again be able to set foot in our country again.
Got ROPE?
Tue, 04/27/2010 - 19:58 — Anonymous (not verified)Got ROPE?
we also have pitchforks and
Tue, 04/27/2010 - 21:08 — Anonymous (not verified)we also have pitchforks and we are not afraid to use them!
"The smartest people in the
Wed, 04/28/2010 - 05:03 — farang (not verified)"The smartest people in the room."
Smart people know when the jig is up. Smart people know when to show remorse and humility.
Smart people don't antagonize the regulators, nor those that make the regulations.
These are folks filled with hubris, motivated by greed, with a certainty that the bribes, er, "lobbyist funding" they funnel to the ones that make the regulations, are bought and paid for and below them, and that this is just an "inconvenience" they should not have to "endure." Isn't their attitude and demeanor obvious? "Who do you US Senators think you are calling us here?"
They are wrong. Goldman-Sachs: Not So Smart after all.
What we have here now is the "between a rock and a hard place" situation: Goldman-Sachs is committing Fraud. Obvious, in-your-face ongoing Fraud.
They were certain they had paid off all the necessary folks (Goldman-Sachs CEO: "Russian Mafia" Capo???), but now those same sleazebags are cornered by the US voters: someone is gonna go to prison, and it ain't 300 million Americans.
EVERY ONE of the "too-big-to-fail" corporate execs need close scrutiny and serve prison time for their Financial Terrorism. They can cry on their Rabbi's shoulder.
Willingly and happily committed against those of us holding only one passport: American
farang: You wrote:
Wed, 04/28/2010 - 10:44 — W. MacKenzie (not verified)farang:
You wrote: "...They can cry on their Rabbi's shoulder."
--------------------------
Careful now, you don't want to inflame the ADL or AIPAC Lobby groups do you?
You seriously think
Wed, 04/28/2010 - 12:40 — Anonymous (not verified)You seriously think so-called reigious beliefs or the so-called lack thereof should be discussed in this case of fraud? That's irresponsible. Al Franken and Jason Alexander are both hilarious, smart, entertaining and light years more ethically outspoken then these Wall Street cads. None of this warrants mention of their respective religious upbringings either
I'm not seeing the word
Wed, 04/28/2010 - 14:05 — Adoregon (not verified)I'm not seeing the word "fiduciary."
Did not Goldman Crack have a fiduciary relationship with its clients?
If no fiduciary relationship exists, then those who did business with Goldman Crack were not clients, but mere customers.
Clearly, anyone who does business with Goldman Crack must always and in all ways remember, "caveat emptor."
Unlikely, investors are
Thu, 04/29/2010 - 10:31 — Anonymous (not verified)Unlikely, investors are being protected. That's what this whole move by the SEC is about, the investors who were lied to. All the way down at the bottom are borrowers who were given liars loans; they will lose potentially everything to their creditors, complicit investment banks like Goldman couldn't have pulled off any of this sh$t unless they screwed millions of people, but those people are NOT as important as the investors, who must be protected. (The US must have it's AAA rating or we can't start another or continue our wars, for example)
I think this is naive.
Thu, 04/29/2010 - 10:33 — Anonymous (not verified)I think this is naive. Plenty of astute folks saw the bubble as a case of temporary insanity. "No way" are those prices going to continue to rocket upwards, and someone will be left holding the bag. (taxpayers). Any many will lose their homes.
Derivatives not worth the
Thu, 04/29/2010 - 11:49 — CAFR1 (not verified)Derivatives not worth the paper they are written on - NOT TRUE!
by Walter Burien - 04/28/10
Derivatives are a trading vehicle. They are "advance commitments" for a buyer or seller with time commitments at set prices. (placing a bet)
The Commodity Futures Market are all derivative contracts - http://www2.barchart.com/mktcom.asp?code=BSTK
Categories cover [ Metals; Currencies; Energy; Grains; Meats; etc,]
A derivative contract can be traded in and out of in 5 minutes; five hours; five days; or a year or two. (no significance in the use of five, it was just an example of time)
If you are a buyer, and let's use gold as an example: You think gold is going from $1000 per oz to $1500 in three months so you buy one August 2010 gold contract at $1000 (if the current market price that day is $1000) and if your objective is reached of $1500 per oz two months from now you then sell one August Gold contract at $1500 and that closes the trade.
A gold contract is 100 oz so here a net $500 per oz was locked in on the trade X 100 or a profit of $50,000
Now on the other hand if Gold was at $1000 and you though the price was going to collapse down to $500 per oz, you would then sell first. So you sell one August Gold contract at $1000 and if in two months gold did collapse down to $500 per oz you then buy one AUG Gold contract closing out the trade X 100 or a profit of $50,000
So up or down it does not make a difference the same profit can be pulled. The same applies if you are a day trader and are going for a $10 move in gold.
EXAMPLE: at 8:30 AM in the morning gold is at $1073 per oz and you think it is going to pop to $1083 (or drop to $1063) you enter your position to buy a contract (long) or sell a contract (short). If 10 minutes later gold moves $10 (up or down to your target price depending if you are long or short) you then close out your trade and walk with the cash, or $10 x 100 = $1000 made on the trade.
The same, same on all of the other commodities also. The catch here is when you take a position there is a set margin requirement (good faith money against loss) set for each and every commodity before you can enter a trade> Additionally, you must maintain that dollar value if the trade goes against you and if you can not, the "house" will force liquidate your trade locking in the loss on your account. If you have a profit on the position there is no problem, but a loss the margin set must be maintained.
A derivative trade is yes only a paper record. But when it allows for transfer of wealth to the tune of trillions of dollars a year, those that say derivatives are worthless have their heads stuck in a very dark, warm, and wet place.
Sounds easy for walking with tons of cash right? Wrong! 95% of the public looses all of their money. The public is caught in "the only thing to fear is fear itself" syndrome. Oh. it is going up, no down, no up - - - CRASH - loss on trade!
Keep in mind this is all about wealth transfer. Collective Government is the #1 institutional trader in the derivatives market(thousands of separate accounts).
They work hand in hand (networked through private associations) with the syndicated media; political parties; controlled education locked tighter than two dogs in heat in cooperation DUE TO THE MONEY AND CONTROL INVOLVED.
Government through the CFTC (Commodity Futures Trading Commission) and SEC (Security Exchange Commission) know every trade entered by the public; institutional; etc., on a minute by minute basis. They also have access to all historical trades over decades. They know historically if they move the market with their own activity how many people will over extend themselves; or bail on positions depending on how fast the markets are moved and with what sound-bite conditioning the public is being saturated with at the time.
They are pros at baiting the public into certain trades and then cutting their you know what off and this amounts to MASSIVE wealth transfer from the public each and every year. (Derivatives used, cash on the trades accomplished!)
People who trade metals from the public seem to have very short term memories. Over the last twenty years the same games were played in conjunction with the same sound-bite conditioning (with a few modifications) to run the price up over weeks and then to slam the price down in a few days with most from the public in the trading arena getting their you know what cut off so many times they could start a restaurant serving Rocky Mountain Oysters and never run out.
I have learned from over 32 years trading derivatives that when I say to myself "That looks like a really great buy or sell" I then have to catch and ask myself one question: "Now where would they push it to if they wanted to really screw everyone?" Now with that question being asked and adjusting my target marks accordingly, the bulls-eye is hit more often then not.
Government institutional fund management (much being handled off-shore now) has been walking off with truck loads of cash through the use of derivatives each and every year. The two years that they made the quickest killings through derivatives were the end of 2001 and the end of 2008. (Primarily short positions established)
Not a peep from the syndicated media; talking heads; political parties; or controlled education being that they do an EXCELLENT job for what they are PAID to do, and that is to ENTERTAIN the public as the wealth transfer takes place right under the public's nose and in plain sight.
What I find humorous (sadly) is that they do such a good job that they get people to parrot comments like "derivatives are worthless" when in fact they are used to transfer wealth "CASH" each and every year (day) from the public. AND in fact were used at the end of 2008 to suck 35 to 40 trillion dollars out of the world economy at the end of 2008 in just a little over one and a half months.
Promoted by the media doing their job: "Massive loses; Stock market tumbles with fortunes wiped out" Yeh right, BUT WHO TOOK THE OTHER SIDE OF THE TRADE into which those loses and fortunes were transferred into????
Might as well not keep everyone in suspense: Government institutional trading accounts (and I repeat many handled off-shore now) did.. you catch on the latest news Goldman Sachs made a profit on the collapse at the end of 2008? Well, just a sacrificial lamb mentioned to appease the masses and chump change involved compared to the collective government institutional accounts....
A good example of a domestically handled clearing operation for government institutional accounts just before the clip at the end of 2008 was the derivative holdings held by JP MORGAN CHASE BANK.
The amount shown held by them was primarily for their government institutional accounts under management or that they were acting as clearing agent for. It is a small figure of only 90 trillion dollars worth. The Federal Government report put out by the Comptroller of Currencies that shows the positions of CHASE Bank and a few others can be downloaded here (March 2008 Bank Derivatives holdings) and when downloaded go 2/3rds down in the report to "Table 1" - http://cafr1.com/STATES/US-TreasuryReports/BankDerivativesMa...
Now keep in mind this was a domestic clearing operation. Many and larger "international" clearing operations are in place now handling clearing operations for US local and federal Government institutional accounts. If you did a cross comparison of their derivatives position plays just before the market collapses at the end of 2001 and 2008, the public never stood an ice cubes chance in hell of not being decimated.
Again, IT IS ALL ABOUT WEALTH TRANSFER! And when you are talking this amount of wealth transfer in the tens of trillions of dollars it is imperative to keep the public masterfully entertained off in LA LA land parroting the exact opposite of what actually took place..
But then they do an EXCELLENT job due to the money and control involved.
I Note: Ron Paul and most in the political hierarchy are aware of this structure but they can NOT discuss it. Anyone in politics that does so qualifying a cognitive though in the masses breaches the "Silence is Golden Rule". It is political suicide to do so. Mr. Paul and many other politicians would be taken out so fast they would not know what hit them.
I like Ron Paul, he is a fence rider doing the best he can and I understand that he can not cross this line if he wishes to do what he can. I support him in whole being that he is "doing what he can"
In 1999 virtually no one knew how this game is played. Now in 2010 a lot (millions) of people now have had that cognitive thought triggered in their minds to the dismay of the control structure who desperately continues to obfuscate.
Who knows, all may be just a step away from a massive awakening of clear comprehension where no longer are they "the easy mark" and regain true ownership of their country again.
What I brought forward several months ago with the TRF (Tax Retirement Fund) http://TaxRetirement.com when it is finally understood and comprehended for it's true impact by the populace it may just burst forward like the birth of a super nova benefiting not just the people here in the USA but the entire planet with a mode of operation for government that brings forth the proverbial millennium, a thousand years of prosperity for all!
And then people like Ron Paul and others can openly discus governments true "collective" investment ownership and the income derived therefrom without fear of retaliation....
Walter Burien - CAFR1
Prior CTA (Commodity Trading Advisor) 1978 - 1992 and derivatives trader of 32 years.