Wall Street powerhouse Goldman Sachs helped create a housing bubble by selling securities backed by risky subprime mortgage loans and then profited off that bubble's bursting by secretly betting against the market, a Senate investigation has found.
A day before a high-profile hearing featuring numerous Goldman Sachs officials, the Senate Permanent Subcommittee on Investigations released a flurry of excerpts from internal bank documents that the panel says show that the embattled firm misled the American public about its role in the build-up to the financial crisis in September 2008.
"The evidence shows that Goldman Sachs helped build and operate that conveyor belt that fed toxic mortgages and mortgage securities into the financial system and then made large bets against the market that it helped create -- taking the big short, and reaping the profits from it," the panel's chairman Sen. Carl Levin said at a briefing today.
"In doing so, it sold to its clients products that it clearly no longer believed in. The ultimate harm here is not just to the clients that were not well served by their investment bank -- the harm here is to all of us. The toxins that Goldman Sachs and others have helped inject into the financial system have done incalculable harm to people."
In summary, Levin said, "They misled the country."
In testimony prepared for the subcommittee's hearing, Goldman Sachs CEO Lloyd Blankfein defended the firm against the panel's findings.
"We didn't have a massive short against the housing market and we certainly did not bet against our clients. Rather, we believe that we managed our risk as our shareholders and our regulators would expect," he said.
Blankfein said while Goldman did find the last two years of the financial crisis to be profitable, it lost about $1.2 billion "from activities in the residential housing market."
Blankfein also thanked the government for Goldman's $10 billion share of the hundreds of millions of dollars of Troubled Asset Relief Program funds invested by the government into U.S. banks at the height of the financial crisis in 2008.
"I want to express my gratitude and the gratitude of our entire firm. We held the government's investment for approximately eight months and repaid it in full along with a 23 (percent) annualized return for taxpayers," he said.
In early 2007, Goldman e-mails reveal, the firm decided to take short positions -- in other words, to bet against -- the mortgage market, after the firm had sold billions of dollars worth of securities comprised of risky loans that would soon go sour.
In a 2007 performance review, Goldman's Josh Birnbaum, former managing director of the structured products group, wrote, "I concluded that we should not only get flat, but get VERY short. ... Much of the plan began working by February as the market dropped 25 points and our very profitable year was underway."
An e-mail from Blankfein in early 2007 asked, "Could/should we have cleaned up these books before and are we are doing enough right now to sell off cats and dogs in other books throughout the division."