Goldman Sachs: Here's What You Are

If someone described a bank by what it does rather than by what it says, he/she would find that getting high fees for risky and poor quality products is what matters; that creating junk CDOs for investors and using CDSs for making a huge profit is common practice; that taking a short position on the toxic mortgage market and thereby cashing in with billions of dollars at others' expense is the way to do business; that taking advantage of clients' positions and creating a conflict of interest is not material; that paying a small fine for a civil action suit where clients were not properly informed is a small price to pay for profit; and that, finally, using naked CDSs on assets it did not own to bet against the mortgage market and making huge amounts of revenue for itself shows little in the way of ethical conscience. That would be Goldman Sachs!

In the last portion of the memo (pages 12 and 13) sent by Senator Carl Levin, Subcommittee Chairman, and Senator Tom Coburn, Ranking Member, to the Members of the Permanent Subcommittee on Investigations in which they explained very clearly the role played by investment banks in "the causes and consequences of the recent financial crisis" using Goldman Sachs as a case study, are listed the Subcommittee's findings as shown below:

Subcommittee Findings. Based upon the Subcommittee’s on going investigation, we make the following findings of fact regarding the role of investment banks in the recent financial crisis.

1. Securitizing High Risk Mortgages. From 2004 to 2007, in exchange for lucrative fees, Goldman Sachs helped lenders like Long Beach, Fremont, and New Century, securitize high risk, poor quality loans, obtain favorable credit ratings for the resulting residential mortgage backed securities (RMBS), and sell the RMBS securities to investors, pushing billions of dollars of risky mortgages into the financial system.

2. Magnifying Risk. Goldman Sachs magnified the impact of toxic mortgages on financial markets by re-securitizing RMBS securities in collateralized debt obligations (CDOs), referencing them in synthetic CDOs, selling the CDO securities to investors, and using credit default swaps and index trading to profit from the failure of the same RMBS and CDO securities it sold.

3. Shorting the Mortgage Market. As high risk mortgage delinquencies increased, and RMBS and CDO securities began to lose value, Goldman Sachs took a net short position on the mortgage market, remaining net short throughout 2007, and cashed in very large short positions, generating billions of dollars in gain.

4. Conflict Between Client and Proprietary Trading. In 2007, Goldman Sachs went beyond its role as market maker for clients seeking to buy or sell mortgage related securities, traded billions of dollars in mortgage related assets for the benefit of the firm without disclosing its proprietary positions to clients, and instructed its sales force to sell mortgage related assets, including high risk RMBS and CDO securities that Goldman Sachs wanted to get off its books, creating a conflict between the firm’s proprietary interests and the interests of its clients.

5. Abacus Transaction. Goldman Sachs structured, underwrote, and sold a synthetic CDO called Abacus 2007-AC1, did not disclose to the Moody’s analyst overseeing the rating of the CDO that a hedge fund client taking a short position in the CDO had helped to select the referenced assets, and also did not disclose that fact to other investors.

6. Using Naked Credit Default Swaps. Goldman Sachs used credit default swaps (CDS) on assets it did not own to bet against the mortgage market through single name and index CDS transactions, generating substantial revenues in the process.

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