The effects of Goldman's guys on the economic system are like the proverbial stone thrown into a pond: the ripples of their influence on the economy just continue outwards forever.
Banks and hedge funds will go to any lengths in order to make bigger and better returns. Now they are profiting again from the original crisis that they caused! Note that the article says that "Yields will be greater if forecasts for foreclosures, recoveries or refinancings among the underlying loans prove too pessimistic." In other words, more money will be made if recovery or refinancings are not carried out. (That maybe explains why foreclosed homes have not been properly refinanced through government policies.)
There is something inherently evil about a bank or hedge fund that creates more and more wealth for itself by taking advantage of the misfortunes of others!
One wonders what the hedge fund has in mind. Maybe it could buy up thousands of foreclosed upon houses and rent them. They could create higher and higher rents so that defaults will occur. CDOs based on rents could be sold to investors. Then the hedge fund could buy CDS in case of default and, wonder of wonders, we have another round of scams to contend with. Where will it all end?
GoldenTree Hires Goldman Sachs Trader Salem In Mortgage Push
By Jody Shenn - Bloomberg
. . . .
Subprime SecuritiesReturns on senior subprime securities from 2005 through 2007, the years that produced the most defaults, have averaged more than 26 percent this year, Barclays Plc index data show.
Salem joined Goldman Sachs in 2001, according to records maintained by the Financial Industry Regulatory Authority, which don’t show him involved in any regulatory actions, civil lawsuits, criminal matters or customer complaints.
During the mortgage meltdown in 2007, he was the bank’s lead trader of single-name credit-default swaps referencing residential-mortgage-backed securities, according to the 2011 report by the Senate’s Permanent Subcommittee on Investigations.
His group was “able to learn from our bad long position at the end of 2006 and layout the game plan to put on an enormous directional short,” Salem said in a 2007 self-evaluation excerpted in the report. “The results of that are obvious.”
‘Short Squeeze’Company documents also showed Goldman Sachs traders led by Michael J. Swenson sought to encourage a “short squeeze” by putting artificially low prices on swaps that would gain in value as mortgage securities fell, the panel said. The idea, abandoned after market conditions worsened, was to drive holders to sell and help the bank buy at reduced prices, according to its report.
Read the full article here
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Here's an excerpt from Levin and Coburn's report called Wall Street and the Financial Crisis: Anatomy of a Financial Collapse (p. 386-387):
Attempted Short Squeeze. In May 2007, the Mortgage Department’s Asset BackedSee the Report here
Security (ABS) Trading Desk attempted a “short squeeze” of the CDS market that was intended to compel other market participants to sell their short positions at artificially low prices.1561 Goldman’s ABS Desk was still in the process of covering the Mortgage Department’s shorts by offering CDS contracts in which Goldman took the long side. The ABS Desk devised a plan in which it would offer those CDS contracts to short parties at lower and lower prices, in an effort to drive down the overall market price of the shorts. As prices fell, Goldman’s expectation was that other short parties would begin to sell their short positions, in order to avoid having to sell at still lower prices. The ABS Desk planned to buy up those short positions at the artificially low prices it had caused, thereby rebuilding its own net short position at a lower cost.1562 The ABS Desk initiated its plan, and during the same period Goldman customers protested the lower values assigned by Goldman to their short positions as out of line with the market. Despite the lower prices, the parties who already held short positions generally kept them and did not try to sell them. In June, after learning that two Bear Stearns hedge funds specializing in subprime mortgage assets might collapse, the ABS Desk abandoned its short squeeze effort and recommenced buying short positions at the prevailing market prices. (Footnotes: 1561 9/7/2007 Fixed Income, Currency and Commodities Annual Individual Review Book, Self-Review of Deeb Salem, GS-PSI-03157-80 at 72 (hereinafter “Salem 2007 Self-Review”). 1562 Id.)
The Big Short. In mid-June 2007, the two Bear Stearns hedge funds did collapse, triggering another steep decline in the value of subprime mortgage assets. In response, Goldman immediately went short again, to profit from the falling prices. Within two weeks, Goldman had
massed a large number of CDS contracts shorting a variety of subprime mortgage assets. On
June 22, 2007, Goldman’s net short position reached its peak of approximately $13.9 billion, as calculated by the Subcommittee.1563 That total included the $9 billion in AAA ABX assets that Goldman had earlier acquired as “disaster protection,” in case the subprime market as a whole lost value. The resulting net short, referred to by Mr. Viniar as the “big short,” was nearly 40% larger than its first net short which had peaked at $10 billion in February 2007.
To lock in its profits on the $13.9 billion short, the Mortgage Department began working
to cover its shorts, buying long assets and entering into offsetting CDS contracts in which it took the long position. On July 10, 2007, the credit rating agencies issued the first of many mass rating downgrades that affected hundreds and then thousands of RMBS and CDO securities, whose values began to fall even more rapidly.1564 The Mortgage Department was able to purchase long assets at a low cost, managed to cover most of its short positions, and locked in its profits. At the same time, the Mortgage Department maintained a net short position in higher risk subprime RMBS securities carrying credit ratings of BBB or BBB-, betting that those securities would lose still more value and produce still more profits for the firm. In August, however, Goldman senior management again became concerned about the size of the Department’s net short position and its VAR levels, which had reached record levels. On August 21, 2007, Goldman’s Chief Operating Officer Gary Cohn ordered the Mortgage Department to “get down now.”