How Goldman secretly bet on the U.S. housing crash

[deminks]

Source: McClatchy Newspapers

WASHINGTON — In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting.

Goldman's sales and its clandestine wagers, completed at the brink of the housing market meltdown, enabled the nation's premier investment bank to pass most of its potential losses to others before a flood of mortgage defaults staggered the U.S. and global economies.

Only later did investors discover that what Goldman had promoted as triple-A rated investments were closer to junk.

Now, pension funds, insurance companies, labor unions and foreign financial institutions that bought those dicey mortgage securities are facing large losses, and a five-month McClatchy investigation has found that Goldman's failure to disclose that it made secret, exotic bets on an imminent housing crash may have violated securities laws.

"The Securities and Exchange Commission should be very interested in any financial company that secretly decides a financial product is a loser and then goes out and actively markets that product or very similar products to unsuspecting customers without disclosing its true opinion," said Laurence Kotlikoff, a Boston University economics professor who's proposed a massive overhaul of the nation's banks. "This is fraud and should be prosecuted."

Read more: http://www.mcclatchydc.com/227/story/77791.html

---

Great work, if you can get it. Fill a beer keg with horse manure. Sell it to someone as a fine beer, then make side bets that when they open it, it will stink to high heaven. I get it now, wow, it's the American Way! And you get a nice cushy government job afterwards. I am impressed! /sarcasm off.

[Double T]

1. YES! The criminals are in charge.

Goldman Sachs sells fraudulent securities, backs it up with fraudulent insurance, THEN is bailed out by the government bailing out AIG when the fraudulent transactions collapse. Only in the 'land of make believe' can stuff like this happen. Goldman should be out of business; their management should be in jail; BUT instead Goldman is conducting criminal business as usual.

[INdemo]

12. And Goldman insiders are running our treasury...

And remember a Goldman insider was running the treasury when this all happen..OK now does anyone believe for one minute that Paulson didnt know about these phony "AAA" investments and failed to act months ago.

[ThomCat]

2. I hope this gets investigated thoroughly enough, and documented

enough to make a really strong case. I hope investors and the public can use this to force the Obama administration to prosecute.

Not a slap on the wrist prosecution. We need to prosecute them and hold them fully responsible for the scope and damage of this fraud.

Would Obama ever seriously consider holding his favorite big donor company responsible? I seriously doubt it. He would never do it without a huge, sustained public outcry and even then he would only do it if he felt forced to. He has stacked his administration with too many Goldman Sach people and given them too many special favors, giving them billions of dollars of our money and exemptions from any accountability.

But at some point the fraud becomes so big, so damaging, and so obviously possible only because the government allowed it to be possible, that we need to take this fraud every bit as seriously as Nuclear Fucking War.

:grr:

[salin]

9. Your description per the fraud and wrong doing becoming so large

that action has to be taken makes me think of the old SAT analogies - Enron:Bush = Goldman Sachs:Obama.

[clear eye]

26. Actually he wouldn't do it unless foreign bankers demanded it.

But seems like he cut a deal in Pittsburgh that he will put the U.S's biggest banks on a more solid footing (by restraing executive pay excesses and increasing reserves, for instance) if he doesn't have to prosecute the biggest perpetrators or put them under the same regs under which the European banks operate.

You know, "don't look back, look forward".

[slipslidingaway]

3. knr nt

[Scooter24]

4. Goldman provided the market for the loans and was not the lender...

I think McClatchy doesn't understand the difference. Goldman in their advisory capacity is not responsible for purchases or trades made from use of their analysis information unless it can be proven that it was done to intentionally manipulate the market. Proving that is going to be a monumental feat and I highly doubt that this news service was able to discover such a noticeable breach of securities law by reviewing SEC filings and interviewing lawyers. Nice try though.

As for Goldman's bets, during the housing bubble it would have been hard to find an analyst who was shorting the market. Some, like Goldman and John Paulson, who had the knowledge and capital to make quiet, risky, high-valued bets have in turn made billions off the mortgage failures. Not illegal but not something you want to champion as an accomplishment either. John Paulson, of Paulson & Co., alone made nearly $3 billion in 2007 and yet we are not hearing of anyone going after him for using the same strategy and making the same bets as Goldman. I wonder why?

[No Elephants]

7. Huh? McClatchy is not saying that Goldman was the lender on the mortgages..

It is saying Goldman sold securities based on (or derived from) subprime mortgages and, as the economy was collapsing, sold credit default swaps, which AIG insured.

As for whether Goldman Sachs violated securities laws, we simply do not have enough information to know that.

That would depend upon what disclosures were made to investors and the famous "what did they know and when did they know it," they being the folks at Goldman (and other firms) who were in responsible positions with respect to the sales of securities.
.

My guess: Many, many firms selling securities based on subprime mortgages for years understood completely that they were selling very, very risky securities, did it anyway and failed to disclose adequately just how risky the securities were.
As to the dumping just prior to the collapse that is the subject of this article, my guess is that Goldman executives knew exactly what they were doing.

[ronnie624]

14. I can't imagine how they didn't understand what they were doing,

but it looks like their asses are covered anyway by loopholes in the disclosure laws:

"The critical moment when Goldman would have the highest liability and disclosure obligations is when they are serving as an underwriter on a registered public offering," he said. "If they are at the same time desperately seeking to get out of the field, that kind of bailout does look far more dubious than just trading activities."

Another question is whether, by keeping the trades secret, the company withheld material information that would enable investors to assess Goldman's motives for selling the bonds, said James Cox, a Duke University law professor who also has served on the NYSE advisory panel.

If Goldman had disclosed the contrary bets, he said, "One would have to believe that a rational investor would not only consider Goldman's conduct material, but likely compelling a decision to take a pass on the recommendation to purchase."

Cox said that existing laws, however, don't require sufficient disclosures about trading, and that the government would do well to plug that hole.


Somehow, we have got to get corporate money out of our political system, and lock that revolving door that allows corporate executives to serve in positions of oversight. I can't imagine any more blatant examples of conflicts of interest, yet our government representatives pretend they don't exist. The corruption of our government is actually built into the system through legislation.

[HamdenRice]

15. While I appreciate a rational, technical discussion of these financial issue for a change...

which you are providing with your post, I think there is a lot to what the OP is saying.

The problem is that G-S was underwriting mortgage backed securities (mbs) at the time.

As the underwriter, G-S helped draft the prospectus and registration statement for these securities. The Securities Act requires all the parties to a prospectus, not make a material misstatements of fact or even fail to disclose a material fact that relates to the value of the securities.

If there were analysts at G-S who had discovered serious system risk in the mortgage and mbs markets, and the G-S executives involved in underwriting mbs knew this, and they did not put that in the prospectuses of securities they underwrote and sold to the public, they are probably criminally liable for securities fraud.

[geek tragedy]

27. Such disclosures typically revolved around the credit quality

and geographic location of the underlying mortgages. The future prospects of the mortgage market was not a 'fact' and thus not subject to a misrepresentation.

The markets are a gamble. If Goldman figured it out and everyone else didn't, that's not a crime.

The real culprits are the dirtbags who bet other people's money on the subprime market.

[HamdenRice]

29. I've drafted dozens of asset backed security prospectuses back in the 90s

as well as more general prospectuses and they do contain discussions of how general market conditions can affect the security.

Unless there was a Chinese Wall between the analysts who predicted mortgage problems and the mbs underwriters, in my estimate, they are guilty of securities fraud.

[geek tragedy]

30. Sure they contain those discussions. But, those statements are generally

vague and of the 'no duh' variety, such as 'if the housing market tanks and foreclosures go up, these securities could lose a lot of value.'

These transactions are arms-length between very sophisticated parties. Neither party is entitled to the benefit of the other parties' internal analysis and predictions.

[No Elephants]

32. First, not all investors are highly sophisticated. Second, you are mistaken

about who is entitled to what. The offeror is legally obligated to furnish the offeree with with information. And the type of disclosures you claim to have seen are nowhere near adequate for securities based upon subprime mortgages.

[geek tragedy]

40. They're obliged to disclose facts about the securities themselves.

Including the credit composition, geographic location, terms, etc.

The future of the market is not a present fact.

[HamdenRice]

36. The point isn't what "usually" is in the general market discussions

The point is that if the underwriter knew that the general market would lead to a wave of foreclosures, and that these foreclosures would affect the value of mbs, that analysis had to be disclosed. Failure to disclose what they knew was failure to disclose a material fact, which is one basis for securities fraud.

As No Elephants mentions, it doesn't matter how sophisticated most or even all buyers are.

The "sophisticated" investor exception applies generally to private placements. If the security was registered (and they were) then the prospectus has to treat all buyers as though they are the general public.

[geek tragedy]

39. But Goldman didn't 'know' that the market

would tank and cause those securities to be worthless. They had analyses that lead them to that conclusion, but that was a theory, not a fact. They guessed right.

[No Elephants]

31. A subprime mortgage is, by definition, riskier than other mortgages. Someone had an

obligaion to disclose that, even if it seems obvious. And yes, the markets are a gamble, but some investments are riskier than others. You mustt at least make full and fair disclosure of the nature and extent of the risks. That kind of disclosure is the basis of our securities laws.

It is also my responsiblity to tell you if I am trying to sell you something while I myself am dumping it beccause I, with all my financial and securities expertise as an investment banker, am dumping it as fast as I can because I think housing is about to go bust.


People who are cavalierly concluding that Goldman Sachs has committed no crime have no basis whatever for that conclusion unless they have a very good understanding of what securities laws say and why that say what they do and what Goldman's prospectuses said, plus have taken depositions of the Goldman employees involved. So, I have to wonder why Democrats are leaping to conclusions on the basis of almost zero for Goldman's sake.

[geek tragedy]

41. If they passed off subprime mortgages as having prime-level

risk, then they'd be liable.

If they told the buyers the actual credit composition of the collateral loans, then there's probably not any fraud.

The future state of the market is not subject to fraud claims absent some really elaborate scheme to bring about certain conditions. If you can show that Goldman triggered the collapse of the housing market, then you have a case.

[Electric Monk]

5. This is old news to folks who were reading Krugman in April '08. nt

nt

[No Elephants]

34. That was as all was only a few months before August '08, though. Way too late for most investors.

[barbtries]

6. but will they ever be prosecuted?

man i hope so.

[No Elephants]

8. Goldman Sachs is only the tip of the iceberg. Let's see who had to participate.

Financial entities had to sic their lobbyists on Congress and the President to change or abolish entirely laws and regulations that had been set up over a long time for the protection of the economy and investors.

Lobbyists had to do their bosses bidding, probably knowing that ordinary Americans might suffer as a result.

Congresses and Presidents had to do the bidding of the lobbyists and their employers, also probably knowing that ordinary Americans might suffer some as a result. And, somewhere along the line, government even decided to push home ownership, which gave people an illusion of wealth and well-being, even as they were being robbed. Earlier in the last century, a chicken in every pot had been the promise. Early in this century, a home for every wannabe homeowner was the vision being sold to Americans.

Banks had to market subprime mortgages, which they did aggressively, sometimes paying loan originators MORE for bringing in risky loans than they paid them to bring in safe loans.

Appraisers had to appraise homes for more than they were actually worth, so that the banks could make the risky loans seem safer to bank regulators.

All kinds of middlemen had to bundle and market the risky loans, ultimately to financial firms like Goldman Sachs, Lehman, etc. to sell as risky securities.

Bond Raters had to give the highly risky securities ratings formerly reserved only for the least risky of securities.

AIG had to insure the steaming pile of securities.

The Securities and Exchange Commission and the securities regulators of fifty states had to fail to do their jobs, along with the Federal Reserve and many bank regulators.

All along the way, many, many lawyers and accountants and financial pundits of all kinds had to keep silent about the nakedness of the Emperor and, often, even lavish generous praise on the Emperor's gorgeous clothes.

All of the above had to fail to give a turd for American investors, including pension plans and the like.

And all of the above had to go on for years before it was sufficiently widespread to threaten the global economy.

Dumping more securities at the very end may be the easiest thing to focus on, but don't be distracted by it, folks. The frauds hat went on for years and years are what got us here. The dumping at the end was only the cherry on top of the crap sundae.

And, when it all collapsed, whom did the Republicans blame? The poor shlep who borrowed to have a place to live in, assuming that banks, as had been their practice for centuries, would not deliberately making him or her a risky loan. "Liar loans!" the pigs cried, hoping to deceive us even more and escape the hared of the American taxpayer, pensioneer, etc. Well, actually, they probably did not give a rat's tail about the hatred. They just didn't wantt Americans to rise up and insist that Washington, D.C. FINALLY start doing its job again.

Apparently, they needn't have worried. Even after all the above, the only Americans who are rising up are carrying tea bags and trying o block health care reform.

Aaaaarrrrrggggggghhhhhhh!!!!!!1111!!!!!!

And that is only with respect to mortgage-backed securities. I have not touched the shafting of Mr. and Mrs. Six Pack that took away their jobs and union protections, even apart from all of the above.

Oh, my America, what will it take before you hold your federal and state governments accountable? Will you ever? If not know, when?

[glowing]

10. +100 You nailed it.

[grasswire]

17. your list ought to be a separate post (eom)

[yurbud]

20. pretty much everyone who got an MBA in the last 30 would have served society better as dogfood

[No Elephants]

33. I do believe there are very ethical people in all fields, including MBA's.

[yurbud]

37. yes, but if you are attracted to a field with the sole intent of making money

that would tend to make them more rare.

[no_hypocrisy]

11. It wasn't hard to predict. I saw it coming in the early part of the decade

b/c of the fast and easy credit and memories of how stocks were inflated with fast & easy credit before the Crash in the twenties.

[bvar22]

16. I SAW it in 2005, in New Orleans, after Katrina.

I went to New Orleans to try to salvage and sell the remains of our family home.

I stood in the middle of square miles of destroyed homes and talked to a Realtor to try and determine the "worth" of these properties.

She showed me a binder with glossy photos of homes in that neighborhood and said insane things like "Now this house is worth $200,000" while pointing to a pre-Katrina glossy photo in her binder.

I pointed across the street at the destroyed house, sitting crooked on its foundation, filled with 5' of muck and said, "THAT house is worth $200,000 ?"

She pointed back at her glossy photo and replied, "YES, because THAT is what The Banks have determined it is worth. The storm makes NO difference. It is worth what The Banks say it is worth."

I looked up at the miles of destroyed homes and realized, "My god. The banks are holding BILLIONS in worthless mortgages."

I called my brothers and told them to sell everything they own, cash out their IRAs and any bank stocks, and move to The Woods.
They didn't.
My wife and I did.

I still believe that the "Housing Collapse" began in New Orleans in 2005.

[DemReadingDU]

18. How could some of us connect the dots

and yet most people still can't see what's happening. No one in my family believes that houses still are falling in prices, and the entire economy is sliding further into recession. I warned them of the stock market decline in 2008. No one listened, and their portfolios lost plenty in value. I've been warning them again that the market is heading downward. You'd think they might believe me this time and sell. Nope.

[No Elephants]

35. No, but hat is when and where you discovered it and I'm glad you did.

[Mudoria]

13. If they can prove it that would make my day seeing these execs doing the perp walk..

[yurbud]

19. can the justice department PLEASE start rounding these bastards up, so us peasants...

don't have to get the pitchforks and torches?

[yurbud]

21. forward this one to white house, justice, your senators, rep, and just for the hell of it, to...

Tim Geithner.

Obama
http://www.whitehouse.gov/contact

Senate
http://senate.gov/general/contact_information/senators_cfm.cfm

House
https://writerep.house.gov/writerep/welcome.shtml

Dept. of Justice: [e-mail]

SEC
https://tts.sec.gov/acts-ics/do/question

Treasury's page is a #@*&ing mess. If you figure out which link within this page is appropriate, let me know.

http://www.ustreas.gov/contacts.shtml

I went to their FAQ and tried to find an answer and couldn't but they had a link to suggest new FAQs, so I suggested CRIMES BY FINANCIAL INSTITUTIONS.

[yurbud]

22. My letter to Obama:

I saw this story on the McClatchy wire service:

How Goldman secretly bet on the U.S. housing crash

In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting.

Goldman's sales and its clandestine wagers, completed at the brink of the housing market meltdown, enabled the nation's premier investment bank to pass most of its potential losses to others before a flood of mortgage defaults staggered the U.S. and global economies.

Only later did investors discover that what Goldman had promoted as triple-A rated investments were closer to junk.

Now, pension funds, insurance companies, labor unions and foreign financial institutions that bought those dicey mortgage securities are facing large losses, and a five-month McClatchy investigation has found that Goldman's failure to disclose that it made secret, exotic bets on an imminent housing crash may have violated securities laws.

http://www.mcclatchydc.com/227/story/77791.html

Mr. President, when will your administration begin to prosecute this moral filth that has done more damage to our country than any terrorists could ever hope too?

At least as important, when will you clear these parasites out of your administration, so we don't have to wonder whether you are protecting them or us?

[yurbud]

23. My letter to my senators and representatives:

I saw this story on the McClatchy wire service:

How Goldman secretly bet on the U.S. housing crash

In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting.

Goldman's sales and its clandestine wagers, completed at the brink of the housing market meltdown, enabled the nation's premier investment bank to pass most of its potential losses to others before a flood of mortgage defaults staggered the U.S. and global economies.

Only later did investors discover that what Goldman had promoted as triple-A rated investments were closer to junk.

Now, pension funds, insurance companies, labor unions and foreign financial institutions that bought those dicey mortgage securities are facing large losses, and a five-month McClatchy investigation has found that Goldman's failure to disclose that it made secret, exotic bets on an imminent housing crash may have violated securities laws.

http://www.mcclatchydc.com/227/story/77791.html

When will Congress investigate these big players in the financial world who bet our destruction and make the appropriate criminal referrals?

As disturbing as the accusations in this article are, more disturbing is that it implies the only crime was not informing investors that they expected the crash--NOT that they were BETTING on the crash.

Why are investors allowed to bet on the failure of a business or whole financial sector when common sense would tell anyone it is far easier to help a business fail than to help it succeed, just as it is destroy something than to build it?

If you guys can ram through a piece of crap like the Patriot Act in record time, you should be able to whip up something comparable for economic terrorists on Wall Street who have done far more damage to America than any Islamic fundamentalist squatting in a cave could ever dream of doing. At a minimum, any form of shorting stock with the expectation that an investment will fail should be illegal, as should derivatives, which are essentially bets on something the investor doesn't even own.

[yurbud]

24. LETTER TO JUSTICE:

Please pursue any relevant fraud or other criminal charges, probably including RICO charges for the complicity of regulators and elected officials in making their crimes possible.

Actions such as these have caused far more damage to the United States than any terrorists could, making it all the more urgent that this firm and others who have committed similar crimes be made an example of, so their peers can see that no one is above the law.

[bvar22]

38. They already KNOW.

They DON"T CARE.

[yurbud]

42. If they think enough of us care, they may be forced to act.

[Fire1]

25. Yep. Snake oil salesmen or con artists, all. n/t

[targetpractice]

28. Is prosecution possible or realistic?

Goldman Sachs is out-maneuvering the justice system at light speed...

They employ thousands of financial engineers working on exotic products and ways to game/exploit the financial system... They are executing transactions in such volume and at such a dizzying rate that analysts and investigators are left scratching their heads. The justice system is moving at a glacial pace in comparison. The result is that Goldman Sachs is siphoning cash from the world's economies without contributing any value to society in return.

My prediction is that "justice" will ultimately be served when we (i.e., the population, the working class, the exploited, etc.) declare and wage some form of "new war" on Goldman Sachs... I predict the people will become impatient at sitting by while the "justice system" reacts too slowly to stop the theft of wealth by Goldman Sachs. The result of our impatience will be an event unlike any other in history...

An ultimatum from society... A declaration war against a corporation.

[JohnWxy]

43. Alan Greenspan didn't even think the Government should investigate & prosecute fraud!

He thought the market would take of that too. He and Milton Friedman were perhaps the biggest idiots of the twentieth century.