by Judith Stein, Financial Analyst, BBC News and the Economist, for the BBC and the Economist's Biodun Iginla

– 50 minutes ago

NEW YORK — As the U.S. housing turned downward in January 2007, a Goldman Sachs trader wrote in e-mails to a woman he apparently was courting that investments he had sold were "like Frankenstein turning against his own inventor."

"I'm trading a product which a month ago was worth $100 and today is only worth $93," wrote Fabrice Tourre, who was charged along with the bank in a civil complaint filed this month by the Securities and Exchange Commission. "That doesn't seem like a lot but when you take into account ... (the investments) are worth billions, well it adds up to a lot of money."

Goldman Sachs Group Inc. released the e-mails and 25 other internal documents Saturday in response to a Senate panel's release of messages in which Goldman executives boast about money they were making as the market imploded in late 2007.

When credit rating agencies downgraded many billions of dollars of mortgage-backed investments in October 2007, Goldman executive Donald Mullen was unabashedly pleased.

"Sounds like we will make serious money," Mullen wrote to Michael Swenson, another executive, in one of the e-mails released by the Senate Permanent Subcommittee on Investigations.

Goldman has argued vehemently that it did not profit from the mortgage meltdown.

Swenson and Tourre, along with Goldman CEO Lloyd Blankfein, will face a public grilling on Capitol Hill Tuesday from the subcommittee.

Also this week, the full Senate will take up a proposed overhaul of financial regulation intended to toughen oversight of Wall Street and make the financial system more transparent. Republican leaders oppose the measures.

And Goldman has been in the glare of a particularly unforgiving spotlight since the SEC filed civil fraud charges this month over the investments Tourre was selling and discussing in his e-mail.

The SEC alleges Goldman misled two investors — IKB Deutsche Industriebank AG, a German bank, and ACA Management LLC, a U.S. bond insurance company — who bought complex mortgage-related products crafted in part by Paulson & Co., a New York hedge fund led by billionaire John Paulson. Paulson was betting the market would collapse. The SEC says Goldman didn't tell the investors that Paulson was involved in choosing the investments or that he was betting they would fail.

Goldman has denied wrongdoing and says it will fight the charges. It has said it lost money on the particular deal of Tourre's that the SEC charges address.

The SEC complaint contains excerpts from the same Tourre e-mail chains that Goldman released in full Saturday. The firm's move puts on full display the personal life of the trader, who had boasted that the market would implode, leaving only him standing. And it does so days before he makes his public debut.

"Obviously, the content of the e-mails is highly embarrassing, but we've found no evidence of wrongdoing," Goldman spokesman Samuel Robinson said.

Goldman's relative strength during the financial crisis and the prominence of many former Goldman executives have made the firm a lightning-rod for public anger over Wall Street's greed and recklessness. Even before the SEC charges were filed, the long-secretive bank was fighting accusations that its bets helped trigger and fuel the financial crisis.

Goldman also has become a useful symbol for Democrats in the escalating debate over the financial overhaul. In fact, Republicans charge that Democrats in the Senate and on the SEC are using the public's anger toward Goldman to build support for their plan.

The subcommittee will brief reporters about the Goldman hearing on Monday, the same day the Senate will have its first test vote on the Obama administration's financial package. The panel is expected to release documents that will be covered Monday evening online and in Tuesday's papers next to reports on the overhaul vote.

The SEC's inspector general confirmed Friday that he will look into the timing of the charges and possible leaks by the commission.

The internal e-mails among Goldman executives were released by subcommittee chair Sen. Carl Levin, D-Mich. In a statement, Levin called banks like Goldman "self-interested promoters of risky and complicated financial schemes that helped trigger the crisis."

In a statement Saturday, Goldman spokesman Lucas Van Praag said the bank lost $1.2 billion in the residential mortgage market during 2007 and 2008.

"As a firm, we obviously could not have been significantly net short since we lost money in a declining housing market," Van Praag said in a statement.

Van Praag is among the executives who wrote the e-mails the Senate committee released. He said the panel "cherry-picked" four threads out of 20 million pages Goldman provided.

"Of course we didn't dodge the mortgage mess," CEO Lloyd Blankfein wrote in a message dated Nov. 18, 2007. "We lost money, then made more than we lost because of shorts."

Short positions are bets that the market will go down. When the market went bust, people with short positions cleaned up.

Earlier in 2007, Goldman Chief Financial Officer David Viniar showed in one of the e-mail threads that the firm made more than $50 million in one day on bets the housing market would founder.

Viniar, also scheduled to testify Tuesday, summed up the contrast between Goldman's gains and the situation of investors who had not bet against the market:

"Tells you what might be happening to people who don't have the big short."

Posted by biginla at 11:20 PM BST

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by Judith Stein, BBC News Financial Analyst, for the BBC's Biodun Iginla

Sat, April 24, 2010 -- 9:52 AM ET
-----


In late 2007 as the mortgage crisis gained momentum and many
banks were suffering losses, Goldman Sachs executives traded
e-mail messages saying that they were making "some serious
money" betting against the housing markets.

The e-mails, released Saturday morning by the Senate
Permanent Subcommittee on Investigations, appear to
contradict some of Goldman's previous statements that left
the impression that the firm lost money on mortgage-related
investments.

In the e-mails, Lloyd C. Blankfein, the bank's chief
executive, acknowledged in November of 2007 that the firm
indeed had lost money initially. But it later recovered from
those losses by making negative bets, known as short
positions, enabling it to profit as housing prices fell and
homeowners defaulted on their mortgages. "Of course we didn't
dodge the mortgage mess," he wrote. "We lost money, then made
more than we lost because of shorts."

Read More:
http://www.nytimes.com/2010/04/25/business/25goldman.html?emc=na

-----

Posted by biginla at 5:53 PM BST

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Goldman Sachs charged by the SEC

by Judith Stein, BBC News and the Economist's Financial Analyst, for the BBC's and the Economist's Biodun Iginla

The charges against Goldman could have far wider consequences

Apr 16th 2010 | NEW YORK | From The Economist online

IS THE most powerful and controversial firm on Wall Street about to get the comeuppance that so many think it deserves? On Friday April 16th America’s Securities and Exchange Commission (SEC) filed civil charges against Goldman Sachs and one of its vice-presidents, Fabrice Tourre, for allegedly defrauding investors by failing to disclose vital information about a financial product linked to subprime mortgages, as America’s housing market was starting to wobble. Goldman’s shares tumbled, dragging down stockmarkets.

The instrument in question, structured and marketed by Goldman, was a synthetic collateralised debt obligation (CDO), whose performance was tied to that of residential mortgage-backed securities. Goldman told its investors, who included some European banks, that the securities bundled together to form the CDO had been selected by an independent third party, ACA Management. The SEC alleges that the investment bank failed to disclose that another firm, Paulson & Co, a big hedge-fund manager, had in fact had a hand in choosing what went into the CDO.

This was a crucial omission, since Paulson & Co—run by John Paulson, who made billions in 2007-08 betting against the housing market—had taken a short position against the CDO; in other words, his firm would profit if the instrument performed poorly. “The product was new and complex but the deception and conflicts are old and simple,” said Robert Khuzami, head of the SEC’s enforcement division.

Goldman called the charges “completely unfounded” and said it would contest them vigorously. Paulson & Co has not been charged; the firm issued a statement saying that ACA, as the third-party collateral manager, had sole authority over the selection of securities in the CDO. In a more detailed response issued later, Goldman said it had itself lost money on the transaction and insisted that extensive information about the portfolio had been provided to the buyers, who were sophisticated investors aware of the risks.

According to the complaint, Paulson shorted the portfolio it helped to select by purchasing protection against the default of certain layers through credit-default swaps (CDSs) it entered into with Goldman. The SEC argues that these derivatives gave the hedge fund an incentive to select mortgage securities that would bomb. And bomb they did. The deal closed in April 2007; by the end of January 2008, 99% of the portfolio had been downgraded by credit-rating agencies.

Mr Tourre was responsible for the CDO, known as ABACUS. He is alleged not only to have known about Paulson’s undisclosed short position, but also to have misled ACA into believing that Paulson & Co had ploughed around $200m into the equity of the CDO.

The charges could hardly come at a worse time for Goldman. The firm has been under fire on a number of fronts, including over the handsome payout it secured from the New York Fed as a derivatives counterparty of American International Group, an insurer that almost failed in 2008. In a string of negative articles over the past year, Goldman has been accused of everything from double-dealing for its own advantage to planting its own people in the Treasury and other agencies to ensure that its interests were looked after. One profile memorably likened the firm to a “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

Goldman has continued to insist that it fared better than most of its rivals because of smart risk management, not because of any conflicts or duplicity. Its boss, Lloyd Blankfein, launched a vigorous defence of the firm’s practices in his recently published letter to shareholders.

But this week’s hammer-blow will unleash waves of Schadenfreude. Sceptics will say it confirms their suspicions that, for all the talk of helping its customers (Mr Blankfein used the words “client” or “clients” 56 times in his letter), Goldman puts its own interests, and those of favoured trading partners, first. The SEC’s move “marks an escalation in the battle to expose conflicts of interest on Wall Street” and exposes a “cynical, savage culture” that allows dealers to deceive one customer to benefit another, said Christopher Whalen of Institutional Risk Analytics.

The charges also have implications for financial regulation. American senators are caught up in a heated debate over a wide-ranging reform bill, a key part of which covers over-the-counter derivatives, especially CDSs, which many see as having exacerbated the crisis. The head of the Senate’s powerful agriculture committee has proposed that large banks be forced to spin off their derivatives-trading units. Goldman’s problems could make it more difficult to see off such draconian measures.

The cost of any penalties to Goldman, if found guilty, is likely to be in the tens, possibly hundreds, of millions. The SEC is seeking the return of any ill-gotten gains plus a penalty. Investors in the CDOs are said to have lost more than $1 billion. But the damage could be much greater, if the affair shatters Goldman’s fragile reputation, weakened as it has been by all the negative publicity of recent months. In a sign of how seriously the market views the civil charges, Goldman’s shares were down by more than 15% at one point on Friday.

Its rivals should not feel too smug. The SEC has been working hard to beef up enforcement. The case is the first to be brought by its new structured-products group. It will not be the last. On a call with reporters, Mr Khuzami said the team was looking at other instruments, some of them no doubt structured by other firms. Goldman’s rivals have long been envious of its prowess. Some of them may soon be empathising with its plight.

Posted by biginla at 9:40 PM BST

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by Judith Stein, BBC News Financial Analyst, for the BBC's Biodun Iginla

Investment giant Goldman Sachs has been accused of mortgage fraud in a civil suit by the US regulator, causing a sharp drop in its shares.

For more details: http://news.bbc.co.uk/2/hi/business/8625931.stm

Posted by biginla at 4:56 PM BST

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