Sunday, November 01, 2009
McClatchey has a damning investigative report out on the dealings of Goldman Sachs a few years ago, back when the housing and credit bubbles were reaching their maximum point of inflation. It should further endear the Wall Street firm to the American public.
In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting.Well, that could be a real problem for an ordinary investment bank.
Goldman's sales and its clandestine wagers, completed at the brink of the housing market meltdown, enabled the nation's premier investment bank to pass most of its potential losses to others before a flood of mortgage defaults staggered the U.S. and global economies.
Only later did investors discover that what Goldman had promoted as triple-A rated investments were closer to junk.
Now, pension funds, insurance companies, labor unions and foreign financial institutions that bought those dicey mortgage securities are facing large losses, and a five-month McClatchy investigation has found that Goldman's failure to disclose that it made secret, exotic bets on an imminent housing crash may have violated securities laws.
Fortunately for Goldman Sachs, they basically run the executive branch of the U.S. government (and portions of the legislative branch), otherwise, this could be real trouble.
Why, just two weeks ago, the SEC appointed a new chief for their enforcement division, Adam Storch, who just so happens to be an outgoing Goldman Sachs vice president.
That should make for a much smoother handling of this matter if it ever reaches them. Of course, given recent revelations about this agency related to the Madoff investigation, a Goldman VP heading up SEC enforcemen is probably overkill.
A Goldman spokesman, Michael DuVally, said that the firm decided in December 2006 to reduce its mortgage risks and did so by selling off subprime-related securities and making myriad insurance-like bets, called credit-default swaps, to "hedge" against a housing downturn.There's much more to this piece, none of it reflecting well on Goldman, and it joins the growing list of investigations and commentary about the Wall Street firm that has emerged from the financial crisis in better shape than any other, with the possible exception of JP Morgan.
DuVally told McClatchy that Goldman "had no obligation to disclose how it was managing its risk, nor would investors have expected us to do so ... other market participants had access to the same information we did."
For the past year, Goldman has been on the defensive over its Washington connections and the billions in federal bailout funds it received. Scant attention has been paid, however, to how it became the only major Wall Street player to extricate itself from the subprime securities market before the housing bubble burst.
To piece together Goldman's role in the subprime meltdown, McClatchy reviewed hundreds of documents, SEC filings, copies of secret investment circulars, lawsuits and interviewed numerous people familiar with the firm's activities.
McClatchy's inquiry found that Goldman Sachs:
* Bought and converted into high-yield bonds tens of thousands of mortgages from subprime lenders that became the subjects of FBI investigations into whether they'd misled borrowers or exaggerated applicants' incomes to justify making hefty loans.
* Used offshore tax havens to shuffle its mortgage-backed securities to institutions worldwide, including European and Asian banks, often in secret deals run through the Cayman Islands, a British territory in the Caribbean that companies use to bypass U.S. disclosure requirements.
* Has dispatched lawyers across the country to repossess homes from bankrupt or financially struggling individuals, many of whom lacked sufficient credit or income but got subprime mortgages anyway because Wall Street made it easy for them to qualify.
* Was buoyed last fall by key federal bailout decisions, at least two of which involved then-Treasury Secretary Henry Paulson, a former Goldman chief executive whose staff at Treasury included several other Goldman alumni.
Has anything really changed on Wall Street in the last hundred years?