MarketNeutral
24th April 2010, 09:19 PM
http://online.wsj.com/article/SB10001424052748704627704575203882067718088.html?m od=rss_Today's_Most_Popular
Newly released emails show that Goldman Sachs Group Inc. trader Fabrice Tourre foresaw the meltdown of the subprime-mortgage market and compared the product he helped create to a "Frankenstein turning against his own inventor."
The new documents about Goldman Sachs also included some emails released by Senate investigators in which top Goldman executives cheered the gains they were reaping as subprime-mortgage securities collapsed in value in 2007.
Goldman on Saturday morning released its own description of its involvement in the mortgage market, as well as a collection of emails including Mr. Tourre's. The firm said it didn't make the big profits some have described and didn't have any special information that caused it to know the U.S. housing market would collapse. Goldman said the Senate investigators cherry-picked emails to make a point, although the firm released some of the same messages.
The new information came ahead of a hearing Tuesday at which Goldman executives including Chief Executive Lloyd Blankfein will testify before the Senate Permanent Subcommittee on Investigations.
On April 16, the Securities and Exchange Commission charged Goldman and Mr. Tourre with fraud in a civil suit. The SEC alleged that Goldman deceived clients in a deal involving mortgage-linked securities by failing to disclose that a big hedge fund betting on a collapse of the mortgage market helped choose the securities in the deal.
The SEC suit has stoked a broader debate about Goldman, which survived the financial crisis in relatively strong shape and announced this past week that it made $3.46 billion in the most recent quarter. That was Goldman's second-highest quarterly profit on record.
Goldman's critics say the firm let clients bet that the mortgage market would remain healthy even as Goldman itself anticipated trouble ahead and tried to profit from the market's decline. Goldman says it was merely trying to protect itself from losses and didn't have a crystal ball. It says it was serving clients that wanted to make the bets.
The SEC issued a confidential Wells notice to Goldman in the summer of 2009, warning that the staff intended to bring charges against the firm. In September 2009, Goldman responded to the SEC's allegations in two documents. ( Here and here .)
Since the SEC's suit, broader questions have re-emerged about Goldman's conduct during the mortgage meltdown. In this document released Saturday, Goldman gives its version of the firm's trading in 2006-07, contending that it sought to protect itself from losses but didn't take advantage of clients. Goldman also released emails from the period in which executives discussed the mortgage market.
Meanwhile, the Senate Permanent Subcommittee on Investigations is preparing to hear testimony from Goldman executives Tuesday. The subcommittee on Saturday released a statement and its own selection of Goldman emails in which executives cheer their profits from trades betting the mortgage market would weaken.
In a statement Saturday, Sen. Carl Levin, chairman of the subcommittee that will hear the Goldman testimony, said investment banks such as Goldman Sachs "were self-interested promoters of risky and complicated financial schemes that helped trigger the crisis."
In 2007, Mr. Tourre was a vice president in Goldman's New York office arranging deals on mortgage-related securities. Emails to his girlfriend in the first half of that year suggest Mr. Tourre recognized that the boom in subprime mortgages—which lay behind the products he was marketing—was nearing an end.
"According to Sparks, that business is totally dead, and the poor little subprime borrowers will not last so long!!!" Mr. Tourre wrote in a March 2007 email to his girlfriend, referring to Goldman mortgage executive Dan Sparks.
In January 2007, he described creating a thing "which has no purpose, which is absolutely conceptual and highly theoretical." He added, "It sickens the heart to see it shot down in mid-flight … it's a little like Frankenstein turning against his own inventor."
At the time, Mr. Tourre was putting together a synthetic collateralized-debt obligation called Abacus 2007-AC1. Unlike securities that are backed by actual mortgages, the synthetic CDO represented a bet on a set of "reference" mortgage-backed securities. The SEC alleges Mr. Tourre didn't tell clients including a German bank that hedge fund Paulson & Co. helped select the reference securities and was betting against them.
Goldman says it disclosed all material information and the clients were sophisticated investors who knew what they were getting into.
As concerns about subprime mortgages grew in late 2006, Goldman took steps to protect itself against possible declines. According to the account Goldman released Saturday, Chief Financial Officer David Viniar told risk managers on Dec. 14, 2006, to reduce exposure to possible subprime losses. The company wanted to get "closer to home," the summary said.
Emails released by Goldman provide a window into the back and forth between senior managers in its mortgage department. "This is a time to just do it, show respect for risk," wrote Mr. Sparks, the mortgage executive, on Feb. 22, 2007, urging his team to sell billions of dollars of mortgage-related securities. "You called the trade right, now monetize on it."
The emails give a real time view into Goldman's executive suite as managers watched the mortgage market begin to crumble. "I think this may be a big problem and a lot worse than currently thought," wrote firm co-president Jon Winkelried in a March 14, 2007, email to other managers about mortgage data he had just seen.
However, Goldman said the emails also show the firm wasn't sure where the market was going. Goldman executive Richard Ruzika responded to Mr. Winkelried's email: "It does feel to me like the market in general underestimates how bad it could get. And now could be overestimating where we are heading."
On another occasion in February 2007, Goldman President Gary Cohn noted there was a big trade brewing that would "get us out of our short risk," suggesting the firm didn't want to make a big bet on the mortgage market in either direction.
By late 2007, the meltdown was in full swing, heading toward the peak in September 2008 when Lehman Brothers Holdings collapsed.
Goldman executives made a presentation to the board in September 2007 on the residential-mortgage market. The presentation gave bullet points on the firm's response to the downturn including "shut down residential mortgage warehouses," and "increased protection for disaster scenarios." It said in the third quarter of that year Goldman "actively managed risk exposure to hedge funds."
For the first time Goldman disclosed the gross revenue it made from its mortgage business in 2007. For the year the division posted revenue of $1.02 billion, with much of that, $735 million, coming in the fiscal third quarter alone. In the second quarter, it had negative revenue of $86 million.
The emails released by Senate investigators, collected as part of an 18-month investigation, showed Goldman executives realized they dodged a bullet through "short" positions in which the firm bet on a market decline.
In one of the email exchanges, Mr. Blankfein appears to bluntly acknowledge the firm's strategy in broad terms. "Of course we didn't dodge the mortgage mess," Mr. Blankfein said in an email on Nov. 18, 2007. "We lost money, then made more than we lost because of shorts. Also, it's not over, so who knows how it will turn out ultimately."
Mr. Blankfein sent the email after he was told about an upcoming New York Times article on Goldman. The article, with the headline "Wall St. Firm Rakes in Profit in Credit Crisis," appeared on Nov. 19, 2007.
A Goldman official noted in one of the emails that the New York Times piece followed an earlier Wall Street Journal article. That article, on Nov. 14, described Goldman's "standout results" amid the "mortgage maelstrom that has been swirling around Wall Street."
The emails also show other Goldman officials cheering the news that some mortgage-related securities were being downgraded by credit-rating firms in late 2007.
Top trader Michael Swenson said that as a result of the downgrades, certain payments Goldman owed to investors would "go to zero."
"Sounds like we will make some serious money," responded another executive, Donald Mullen.
At another point in July 2007, Goldman executives appear to discuss how their mortgage investment numbers were up, despite big losses on securities known as collateralized debt obligations and residential mortgages.
"Tells you what might be happening to people who don't have the big short," Mr. Viniar wrote in an email.
Goldman Sachs spokesman Lucas van Praag said Saturday: "As a firm, we obviously could not have been significantly net short since we lost money in a declining housing market."
Mr. van Praag said the subcommittee "cherry-picked" four emails from almost 20 million pages of documents. "It is concerning that the subcommittee seems to have reached its conclusion even before holding a hearing," he said.
Newly released emails show that Goldman Sachs Group Inc. trader Fabrice Tourre foresaw the meltdown of the subprime-mortgage market and compared the product he helped create to a "Frankenstein turning against his own inventor."
The new documents about Goldman Sachs also included some emails released by Senate investigators in which top Goldman executives cheered the gains they were reaping as subprime-mortgage securities collapsed in value in 2007.
Goldman on Saturday morning released its own description of its involvement in the mortgage market, as well as a collection of emails including Mr. Tourre's. The firm said it didn't make the big profits some have described and didn't have any special information that caused it to know the U.S. housing market would collapse. Goldman said the Senate investigators cherry-picked emails to make a point, although the firm released some of the same messages.
The new information came ahead of a hearing Tuesday at which Goldman executives including Chief Executive Lloyd Blankfein will testify before the Senate Permanent Subcommittee on Investigations.
On April 16, the Securities and Exchange Commission charged Goldman and Mr. Tourre with fraud in a civil suit. The SEC alleged that Goldman deceived clients in a deal involving mortgage-linked securities by failing to disclose that a big hedge fund betting on a collapse of the mortgage market helped choose the securities in the deal.
The SEC suit has stoked a broader debate about Goldman, which survived the financial crisis in relatively strong shape and announced this past week that it made $3.46 billion in the most recent quarter. That was Goldman's second-highest quarterly profit on record.
Goldman's critics say the firm let clients bet that the mortgage market would remain healthy even as Goldman itself anticipated trouble ahead and tried to profit from the market's decline. Goldman says it was merely trying to protect itself from losses and didn't have a crystal ball. It says it was serving clients that wanted to make the bets.
The SEC issued a confidential Wells notice to Goldman in the summer of 2009, warning that the staff intended to bring charges against the firm. In September 2009, Goldman responded to the SEC's allegations in two documents. ( Here and here .)
Since the SEC's suit, broader questions have re-emerged about Goldman's conduct during the mortgage meltdown. In this document released Saturday, Goldman gives its version of the firm's trading in 2006-07, contending that it sought to protect itself from losses but didn't take advantage of clients. Goldman also released emails from the period in which executives discussed the mortgage market.
Meanwhile, the Senate Permanent Subcommittee on Investigations is preparing to hear testimony from Goldman executives Tuesday. The subcommittee on Saturday released a statement and its own selection of Goldman emails in which executives cheer their profits from trades betting the mortgage market would weaken.
In a statement Saturday, Sen. Carl Levin, chairman of the subcommittee that will hear the Goldman testimony, said investment banks such as Goldman Sachs "were self-interested promoters of risky and complicated financial schemes that helped trigger the crisis."
In 2007, Mr. Tourre was a vice president in Goldman's New York office arranging deals on mortgage-related securities. Emails to his girlfriend in the first half of that year suggest Mr. Tourre recognized that the boom in subprime mortgages—which lay behind the products he was marketing—was nearing an end.
"According to Sparks, that business is totally dead, and the poor little subprime borrowers will not last so long!!!" Mr. Tourre wrote in a March 2007 email to his girlfriend, referring to Goldman mortgage executive Dan Sparks.
In January 2007, he described creating a thing "which has no purpose, which is absolutely conceptual and highly theoretical." He added, "It sickens the heart to see it shot down in mid-flight … it's a little like Frankenstein turning against his own inventor."
At the time, Mr. Tourre was putting together a synthetic collateralized-debt obligation called Abacus 2007-AC1. Unlike securities that are backed by actual mortgages, the synthetic CDO represented a bet on a set of "reference" mortgage-backed securities. The SEC alleges Mr. Tourre didn't tell clients including a German bank that hedge fund Paulson & Co. helped select the reference securities and was betting against them.
Goldman says it disclosed all material information and the clients were sophisticated investors who knew what they were getting into.
As concerns about subprime mortgages grew in late 2006, Goldman took steps to protect itself against possible declines. According to the account Goldman released Saturday, Chief Financial Officer David Viniar told risk managers on Dec. 14, 2006, to reduce exposure to possible subprime losses. The company wanted to get "closer to home," the summary said.
Emails released by Goldman provide a window into the back and forth between senior managers in its mortgage department. "This is a time to just do it, show respect for risk," wrote Mr. Sparks, the mortgage executive, on Feb. 22, 2007, urging his team to sell billions of dollars of mortgage-related securities. "You called the trade right, now monetize on it."
The emails give a real time view into Goldman's executive suite as managers watched the mortgage market begin to crumble. "I think this may be a big problem and a lot worse than currently thought," wrote firm co-president Jon Winkelried in a March 14, 2007, email to other managers about mortgage data he had just seen.
However, Goldman said the emails also show the firm wasn't sure where the market was going. Goldman executive Richard Ruzika responded to Mr. Winkelried's email: "It does feel to me like the market in general underestimates how bad it could get. And now could be overestimating where we are heading."
On another occasion in February 2007, Goldman President Gary Cohn noted there was a big trade brewing that would "get us out of our short risk," suggesting the firm didn't want to make a big bet on the mortgage market in either direction.
By late 2007, the meltdown was in full swing, heading toward the peak in September 2008 when Lehman Brothers Holdings collapsed.
Goldman executives made a presentation to the board in September 2007 on the residential-mortgage market. The presentation gave bullet points on the firm's response to the downturn including "shut down residential mortgage warehouses," and "increased protection for disaster scenarios." It said in the third quarter of that year Goldman "actively managed risk exposure to hedge funds."
For the first time Goldman disclosed the gross revenue it made from its mortgage business in 2007. For the year the division posted revenue of $1.02 billion, with much of that, $735 million, coming in the fiscal third quarter alone. In the second quarter, it had negative revenue of $86 million.
The emails released by Senate investigators, collected as part of an 18-month investigation, showed Goldman executives realized they dodged a bullet through "short" positions in which the firm bet on a market decline.
In one of the email exchanges, Mr. Blankfein appears to bluntly acknowledge the firm's strategy in broad terms. "Of course we didn't dodge the mortgage mess," Mr. Blankfein said in an email on Nov. 18, 2007. "We lost money, then made more than we lost because of shorts. Also, it's not over, so who knows how it will turn out ultimately."
Mr. Blankfein sent the email after he was told about an upcoming New York Times article on Goldman. The article, with the headline "Wall St. Firm Rakes in Profit in Credit Crisis," appeared on Nov. 19, 2007.
A Goldman official noted in one of the emails that the New York Times piece followed an earlier Wall Street Journal article. That article, on Nov. 14, described Goldman's "standout results" amid the "mortgage maelstrom that has been swirling around Wall Street."
The emails also show other Goldman officials cheering the news that some mortgage-related securities were being downgraded by credit-rating firms in late 2007.
Top trader Michael Swenson said that as a result of the downgrades, certain payments Goldman owed to investors would "go to zero."
"Sounds like we will make some serious money," responded another executive, Donald Mullen.
At another point in July 2007, Goldman executives appear to discuss how their mortgage investment numbers were up, despite big losses on securities known as collateralized debt obligations and residential mortgages.
"Tells you what might be happening to people who don't have the big short," Mr. Viniar wrote in an email.
Goldman Sachs spokesman Lucas van Praag said Saturday: "As a firm, we obviously could not have been significantly net short since we lost money in a declining housing market."
Mr. van Praag said the subcommittee "cherry-picked" four emails from almost 20 million pages of documents. "It is concerning that the subcommittee seems to have reached its conclusion even before holding a hearing," he said.