Business, Economics and Jobs

Did Goldman screw its clients?


Code Pink demonstrators hold placards during a Senate hearing on April 27, 2010. Goldman Sachs denied reaping vast profits from the collapse of the US housing market as its top executive and a star trader faced hostile questions in Congress over the 2008 financial meltdown.


Chip Somodevilla

It was document blizzard, conducive to a whiteout.

A Senate Subcommittee investigating how hundreds of billions of dollars vanished in the financial crisis aimed its sights at Goldman Sachs, firing off "13 document subpoenas as well as multiple document request letters."

Goldman complied, bigtime. "The Subcommittee obtained tens of millions of pages ofdocuments, including internal reports, memoranda, correspondence, spreadsheets, and email," it notes on page 376 of its 639 page tome.

The bottom line is searing (at least by government report standards): Goldman "profited from the collapse of the mortgage market and engaged in troubling and sometimes abusive practices that raise multiple conflict of interest concerns." By betting against the mortgage market, Goldman's Structured Products Group earned a record $3.7 billion in 2007. That more than wiped out losses the firm suffered on other crumbling mortgage investments, resulting in a net $1.1 billion gain from the mortgage squeeze. Not bad, eh?

But such a large paper storm is hard for the average person to peruse, and therefore vulnerable to obfuscation.

Today, ProPublica's Pulitzer Prize winning financial journalist Jesse Eisinger reports that Goldman "appears to be trying to clear its name" by claiming that it didn't have a "Big Short" on mortgages. Eisinger essentially explains that in its defense, Goldman deploys that time honored public relations favorite: the distraction.

The size of Goldman's bet isn't in the issue. Nor is the fact that it bet against the mortgage market: "There’s nothing wrong with that. Don’t we want banks to reduce their risk when they see trouble ahead, as Goldman did in the mortgage markets?" Eisinger writes.

The problem, as the Senate Committee pointed out, is how it did this.

In a nutshell, he says the bank bet against a big pile of junk that it had on its balance sheet, by creating what's known as synthetic collateralized debt obligations (Eisinger does a good job of explaining the big picture details; here's my attempt at a simple real world analogy illustrating synthetic derivatives — which, believe it or not, are making a comeback).

This was a scorched earth approach. By taking it, Goldman significantly boosted its profits, and the damage to the economy. It had the effect of dumping billions more worth of bad investments into the market — robbing, it turned out, the taxpayer.

It wasn't an easy heist to pull off: When the sales people ran into trouble finding people to buy into Goldman's scheme, they "begged for help from the executives who created [the investments]," Eisinger reports.

In other words, they deployed the full force of Goldman's venerable reputation to screw their clients.

"[T]he bank’s customers were 'only first in the same way that on Thanksgiving, the turkey is first,'" according to an anonymous source who used to peddle in this type of investment, Eisinger reports.

The article is worth a read.