As 2007 went on, the housing market worsened -- and Goldman's profits grew. The downturn, said Goldman's chief financial officer David Viniar in an e-mail in July 2007, "tells you what might be happening to people who don't have the big short."
"Short mortgages," Viniar e-mailed to Blankfein, "saved the day."
The more the loans backing the securities they had sold started to sour, the more Goldman profited. One e-mail to Michael Swenson in May 2007 referenced one mortgage-backed security that had gone bad.
"Bad news ... wipes out the m6s and makes a wipeout on the m5 imminent ... costs us about 2.5 [million dollars] ... good news ... we own 10 [million dollars] protection on the m6 marked at $50…we make 5 [million dollars]," he wrote, referring to the successive failure of tranches of mortgage-backed loans.
In October 2007, a presentation by chief risk officer Craig Broderick said, "Starting early in '07 our mortgage trading desk started purring on big short positions ... and did so in enough quantity that we were net short, and made money (substantial $$ in the 3rd quarter) as the subprime market weakened."
Said Levin, "Goldman profited while the market dropped, taking many Goldman clients with it, not to mention the damage that was done to the U.S. economy."
The firm's gains left its employees gloating. In Michael Swenson's performance review for the year, he said, "The 2007 year is the one that I am most proud of to date ... extraordinary profits (nearly $3bb to date) ... [D]uring the early summer of 2006 it was clear that the market fundamentals in subprime and the highly levered nature of [collateralized-debt obligations] was going to have a very unhappy ending."
The e-mails, Levin emphasized, fly in the face of the bank's public statements that it did not make "a significant amount of money in the mortgage market."
"There is no doubt they made huge money betting against the market in 2007," Levin said, arguing that the bank had made $3.7 billion in all.
But other parties involved in Goldman's deals were left hurting. At a time when many other banks were hemorrhaging money in the midst of the subprime market's collapse, Goldman was raking in the cash. The firm, however, had not been forthcoming with its clients, Levin said today.
In October 2007, an employee said in an e-mail to Daniel Sparks, the former head of Goldman's mortgage department, "Real bad feeling across European sales about some of the trades we did with clients. The damage this has done to our franchise is very significant."
But the most high-profile case of Goldman misleading clients involves banker Fabrice Tourre, charged by the SEC with misleading investors.
The feds have alleged that Goldman did not tell investors that a massive hedge fund, Paulson & Co., that had hand-picked the subprime mortgages that went into the investment was also betting against those same securities. The bank has aggressively defended itself against the agency's investor fraud charges.
Now, Levin said, internal bank documents show that Goldman knew that Paulson had designed the portfolio and bet against it.
"They knew about Paulson's involvement in the selection. They knew Paulson was going short. Their own documents show that," Levin said.