One of the many villains in the Financial Crisis Inquiry Commission report out Thursday is Goldman Sachs. According to page 235 of the report, they recognized the delusion in the subprime mortgage market and decided to short it before the crash in 2008.
Goldman came under fire following the crisis by allegedly selling clients on mortgage-backed securities and other various financial instruments it was allegedly betting against on the side. Bond insurer ACA Financial Guaranty filed suit in January seeking $30 million in compensation and $90 million in punitive damages from how Goldman marketed the synthetic collateralized debt obligation named ABACUS.
In 2010, Basis Yield Alpha Fund, a hedge fund and Goldman client, sued the firm alleging it was frauded out of $11.25 million in investments in the Timberwolf CDO.
Goldman CEO Lloyd Blankfein told an FCIC hearing on Jan. 13, 2010 that the bank regretted selling clients MBS that it believed would default while shorting them simultaneously. But the bank reversed course and issued a press release the day after the testimony, clarifying that Blankfein was “responding to a lengthy series of statements followed by a question that was predicated on the assumption that a firm was selling a product that it thought was going to default…Mr. Blankfein does not believe, nor did he say, that Goldman Sachs had behaved improperly in any way.”
But the FCIC report shows that in December 2006, Goldman executives “decided to reduce the firm’s subprime exposure” after an initial decline in its asset-backed securities indices and 10 consecutive days of trading losses.
Analysts at the firm submitted a report on “the major risk in the Mortgage business” to Chief Financial Officer David Viniar and Chief Risk Officer Craig Broderick on Dec. 13, 2006, the commission reports. The next day, executives began reducing their mortgage exposure.
What follows is a narrative of Goldman employees moving the subprime risk, and when customers began to dwindle, the FCIC cites documents indicating that the firm “targeted less-sophisticated customers in its efforts to reduce subprime exposure” rather than hedge funds that were on the same side of the trade as Goldman. From December 2006 to August 2007, Goldman sold roughly $25.4 billion of CDOs, including $17.6 billion in synthetic CDOs, according to the FCIC.
Goldman did not have a comment on the FCIC’s report, and neither did ACA Financial Guaranty. A spokesperson for Sen. Carl Levin (D-Mich.), who chairs the Permanent Subcommittee on Investigations, said that while Levin had no comment on this report, the subcommittee would have one of its own soon.
The N.Y. Times has this article today that describes more fixes for Fannie/Freddie (dubbed “Frannie”). An excerpt:
The best proposal I have heard is a remarkably simple one put forth by John Hempton of Bronte Capital, a hedge fund based in Australia. He says Frannie should simply raise the fee for its guarantee — now about 20 basis points, or one-fifth of a percentage point — every six months by five basis points. He would have the rate continue to go up until no one wanted to buy the insurance anymore and the private market was once again lending to the vast majority of borrowers.
DC is controlled by banking interests. Unfortunately this type of thing is not going to happen.
Just another subsidy for moneyed interests. Anyone care to dance on the third rail?
Of course in the Movie version (Wall Street the Color of Money) the perp does walk. . .too bad real life isn’t the same. . .Oliver Stone really did a good job in that movie of explaining what went on so everyone can understand.
I was an original contributor to HousingPanic Blog back in late 2005. If a bunch of bloggers had this figured out, I KNEW that Wall Street insiders knew also.
The perps will never walk. We don’t live in that kind of world anymore.
Everyone who worked at Goldman Sachs from 2000 to 2008 should go to prison. 3 year minimum and something like life for the Paulson types.
I’d exclude the janitors and secretaries.
SPEAKING OF PERPWALKS, You forgot one:
This lady scratches babies with her fingernails until they bleed. Lovely. Future NAR spokesperson?
The Del Mar real estate agent who admitted to pinching and scratching babies to the point of bleeding in 2009 was sentenced to up to two years in prison on Tuesday.
Lisa Hench, 45, cried in the courtroom as the sentence was announced. She pleaded guilty last December to eight misdemeanor counts of corporal injury to a child. All eight incidents were committed in 2009 on babies whose ages ranged from 3 to 19 months.
Is this her?
If so, she’s definitely a Realtor(R) and not merely a real estate agent. Realtors(R) have that extra special something about them.
Kind of creepy that she has pictures of kids on her page.
@Shadash. DC is not controlled by banking interests. As anyone in a senior position at one of the banks recently in the crosshairs can tell you, there is quite a bit of contentiousness between the government/regulators and the banks.
Aztec, sorry but I disagree. The entire regulatory apparatus of this country has been captured by financial entities. They have managed to obstruct every significant piece of legislation that would have prevented the housing bubble and would prevent further economic crisis from happening.
The banking industry controls DC utterly and completely. They’ve been bailed out at the tax payers expense and continue to be awarded bonus after bonus while the rest of the country stagnates. Malfeasant executives like Mozillo continue to roam free and guys like Blankfein still have their jobs despite having run the global economy off the tracks.
Just watch as the FIRE sector grows more profitable and the rest of the country rots. That shows you right there who’s got the power…and it ain’t us.
Everybody hates the banks, yet the real villains continue unscathed. None of this could have happened if the ratings agencies had done their job. Instead, they gave the banks what they wanted and cashed the checks. they even admitted to not knowing what they were rating. If they had done their jobs the banks never could have received the MBS ratings and sold it.