'As Lloyd Blankfein and Gary Cohn explained in a letter to shareholders on April 7, 2010, "The firm did not generate enormous net revenues or profits by betting against residential mortgage-related products, as some have speculated; rather, our relative early risk reduction resulted in our losing less money than we otherwise would have when the residential housing market began to deteriorate rapidly.... Although Goldman Sachs held various positions in residential mortgage-related products in 2007, our short positions were not a 'bet against our clients.' Rather, they served to offset our long positions. Our goal was, and is, to be in a position to make markets for our clients while managing our risk within prescribed limits." ' (from WSJ's Goldman Sachs: Risk Management and the Residential Mortgage Market)
However, despite Goldman's claims, others (i.e., the SEC) would strongly disagree with Blankfein's characterization of the bank's activities:
'The SEC alleges that Goldman Sachs structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities (RMBS). Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.
'"The product was new and complex but the deception and conflicts are old and simple," said Robert Khuzami, Director of the Division of Enforcement. "Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party."
'Kenneth Lench, Chief of the SEC's Structured and New Products Unit, added, "The SEC continues to investigate the practices of investment banks and others involved in the securitization of complex financial products tied to the U.S. housing market as it was beginning to show signs of distress."
'The SEC alleges that one of the world's largest hedge funds, Paulson & Co., paid Goldman Sachs to structure a transaction in which Paulson & Co. could take short positions against mortgage securities chosen by Paulson & Co. based on a belief that the securities would experience credit events.' (from SEC document entitled SEC Charges Goldman Sachs With Fraud in Structuring and Marketing of CEO Tied to Subprime Mortgages)
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Every small win over Goldman Sachs is important:
Supreme Court Refuses to hear Goldman Sachs RMBS case
By Kerri Ann Panchuk - Housingwire
The U.S. Supreme Court punted on a chance to hear a case that could have a significant impact on the scope and size of residential mortgage-backed securities cases in the Second Circuit.
A panel of Second Circuit judges held an institutional investor can claim standing to sue Goldman Sachs ($161.68 0%) over mortgage-backed securities transactions even if some of those claims relate to offerings that parties—other than the plaintiff—were involved in.
The case involves allegations made on behalf of NECA-IBEW Health & Welfare Fund in which the institutional investor claimed Goldman Sachs made material misrepresentations and omissions in offerings of mortgage-backed securities, leading to losses on those securities later on.
Read the whole article here