Senate panel: Goldman hurt customers

By David Ellis, staff writer


NEW YORK (CNNMoney.com) -- Goldman Sachs bet aggressively against the U.S. mortgage market, but also profited at the expense of some clients, according to a series of company documents released by lawmakers Monday.

Drawing from internal e-mails, employee reviews as well as presentations to its board of directors, a Senate panel alleged that Wall Street's top firm effectively pulled off a "big short" against the nation's housing market, in part, by betting against the same-type of complex-mortgage securities it helped create.

"Goldman Sachs repeatedly put its own interests and profits ahead of the interests of its clients," said Sen. Carl Levin, D-Mich., who chairs the Permanent Subcommittee on Investigation of the Senate Homeland Security Committee.

The revelations come just a day before current and former executives at the company, including CEO Lloyd Blankfein, are due to appear before that subcommittee over its role in the financial crisis.

It also builds on a series of e-mails released by the subcommittee over the weekend, which showed the firm, with the knowledge of its executives, bet on the collapse of the U.S. housing market.

Monday's revelations however paint a far more incriminating picture of Goldman's actions before the U.S. housing market went into freefall. Goldman had said all along that it merely took bets on the housing market to hedge its bets.

"Although broader weakness in the mortgage markets resulted in significant losses in cash positions, we were overall net short the mortgage market and thus had very strong results," according to one presentation made to Goldman's board of directors in late 2007 that was released Monday.

Other documents issued Monday also revealed more than one instance in which Goldman (GS, Fortune 500) appeared to engage in other questionable practices, including selling complex securities they believed could fail.

One instance was that of a $1 billion so-called collateralized debt obligation, or CDO, the company sold to investors in early 2007 called "Timberwolf I", whose value was partly pegged to risky mortgages that were first sold by the failed Seattle-based lender Washington Mutual. WaMu was subsequently bought by JPMorgan Chase (JPM, Fortune 500).

Within five months, the investment had lost 80% of its value, hurting investors including a hedge fund operated by a division of investment bank Bear Stearns, which is also now a part of JPMorgan Chase. The investment was ultimately liquidated in 2008, according to officials familiar with the matter.

"Great job ... trading us out of our entire Timberwolf Single-A position," according to one undated internal Goldman e-mail.

Goldman's public relations machine has been working overtime to beat back some of the charges that have been lodged against the firm in recent weeks.

On Saturday, the company released its own series of documents that suggested it lost $1.2 billion on 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.

Goldman Sachs was not immediately available to respond to the allegations raised by the documents issued Monday.

In all likelihood however, it will represent another black eye for the financial firm and certainly raise the stakes for Tuesday's hearing.

Seven current and former Goldman executives are slated to testify on Capitol Hill Wednesday, including Fabrice Tourre, the 31-year-old French trader who allegedly helped broker the infamous CDO deal that is now the subject of a civil fraud suit brought by the Securities and Exchange Commission earlier this month. To top of page

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