Goldman knew it profited in crisis

By Mark M. Meinero, assistant managing editor


NEW YORK (CNNMoney.com) -- Internal Goldman Sachs e-mails released on Capitol Hill Saturday show how the firm used bets on mortgage securities in a bid to profit as the housing market began to plummet several years ago.

A lawmaker set to grill company executives on Tuesday says the documents show that Goldman executives knew their bets would profit the firm.

But the firm said that all of the documents turned over to the panel reveal a different picture -- that the firm lost $1.2 billion in residential mortgage-backed securities in 2007 and 2008.

"Of course we didn't dodge the mortgage mess," Goldman CEO Lloyd Blankfein told company executives in an e-mail dated Nov. 18, 2007 that was released by both the committee and Goldman. "We lost money, then made more than we lost because of shorts," or trading bets aimed at profiting when a bond drops in value.

But Blankfein added: "Also, it's not over, so who knows how it will turn out ultimately."

Four Goldman exhibits were released by Sen. Carl Levin, D-Mich., who chairs the Permanent Subcommittee on Investigation of the Senate Homeland Security Committee.

The e-mails, Levin said, "show that, in fact, Goldman made a lot of money by betting against the mortgage market" and contradict the firm's claim that it was merely buying and selling securities for clients.

The dispute previews an expected showdown on Tuesday when Blankfein and other Goldman executives appear before Levin's committee.

For Goldman (GS, Fortune 500), one of Wall Street's most profitable banks, the stakes are enormous. The firm is staring down fraud charges filed April 16 by the Securities & Exchange Commission for failing to disclose conflicts in a 2007 sale of mortgage securities.

Among the other Goldman executives scheduled to testify Tuesday is Fabrice Tourre, the only individual named in the SEC lawsuit.

'We will be making some serious money'

The Blankfein e-mail was part of one of the exhibits released by the panel in advance of the hearing.

In a second exhibit, Goldman Sachs management committee member Donald Mullen, on hearing of a Moody's mortgage downgrade that would cause losses for many investors, said of the company's bets against those securities: "Sounds like we will be making some serious money."

A third exhibit released by the panel describes the impact of a wipeout of a Long Beach Mortgage Securities Corp. security by saying the "bad news" of the loss costs the firm $2.5 million, but the "good news" is that "we own protection" against the loss. "We make $5mm," meaning $5 million, the e-mail said.

The Senate committee said the fourth document, much of which has been redacted, describes a big loss in the mortgage market in July 2007.

"Tells you what might be happening to people who don't have the big short," David Viniar, Goldman's chief financial officer, said in an e-mail.

The SEC alleges that Goldman allowed Paulson & Co., a New York-based hedge fund, to help select securities in a collateralized debt obligation known as Abacus 2007-ACl, without telling other investors that Paulson was betting the CDO's value would decline.

When the value of the CDO plunged shortly after it was issued, Paulson walked away with $1 billion, while investors lost the same amount, the SEC said.

In a response Saturday to CNNMoney.com, Goldman Sachs spokesman Lucas van Praag said the firm has turned over documents showing that it did not make a significant amount of money in the mortgage market in 2007 and 2008.

"In its statement, the U.S. Senate Subcommittee has cherry-picked just four e-mails from the almost 20 million pages of documents and e-mails provided to it by Goldman Sachs," van Praag said. "It is concerning that the subcommittee seems to have reached its conclusion even before holding a hearing."

Among the documents released by Goldman was a 12-page report on risk management and the residential mortgage market prepared for the Senate hearing. Topics addressed included the accusation of dealing against some of the firm's clients.

"Goldman Sachs did not engage in some sort of massive 'bet' against our clients," the report said. "The risk management of the firm's exposures and the activities of our clients dictated the firm's overall actions, not any view of what might or might not happen to any security or market."

Goldman also released several e-mails written by Tourre that show his belief that the mortgage market was in trouble.

"The summary of the US subprime business is that it is not too brilliant," Tourre tells his French girlfriend in an e-mail dated March 7, 2007. He says that, according to an associate, "that business is totally dead, and the poor little subprime borrowers will not last so long!!!"

The Senate-released documents also offer a rare behind-the-scenes glimpse into Goldman's dealings with the media.

"Tomorrow's story will, of course, have 'balance' (ie stuff we don't like)," van Praag wrote in an e-mail to Blankfein and other top executives about a story due to appear in the New York Times.

"The article references the extraordinary influence GS alums have," van Praag continued in the e-mail dated Nov. 18, 2007. Several former Goldman Sachs executives have held high-level government positions -- most notably then-Treasury Secretary Henry Paulson, the former head of the firm.

Critics say that Goldman benefits from such connections to the government. The Times story, van Praag wrote, would not go "as far as suggesting that there is a credible conspiracy theory. [It] does, however, make the point that it feels like GS is running everything." To top of page

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