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Goldman Stung by Its Own Secrecy

Goldman Sachs CEO Lloyd Blankfein
Jim Watson | AFP | Getty Images
Goldman Sachs CEO Lloyd Blankfein

If Goldman Sachs is to be believed when it comes to its positions in the mortgage markets 2007, it has no one to blame but itself for the widespread and potentially toxic misunderstandings of those positions.

Goldman is now claiming that the report issued in April by the Senate panel on investigations got several things wrong about Goldman's mortgage exposure.

The report claimed that Goldman was "net short"—that is, positioned to profit from a decline in mortgages—in 2007. Several internal documents submitted by Goldman support that position.

For instance, here's a quote from one document prepared by risk managers of Goldman Sachs explaining the firm's position, apparently to the firm's tax department.

A quick word on our own market and credit risk performance in this regard. In market risk - you saw in our 2nd and 3rd qtr results that we made money despite our inherently long cash positions.—because starting early in '07 our mortgage trading desk started putting on big short positions, mostly using the ABX index, which is a family of indices designed to replicate cash bonds. And did so in enough quantity that we were net short, and made money (substantial $$ in the 3rd quarter) as the subprime market weakened. (This remains our position today)

There are lots of other instances of people inside of Goldman insisting that the firm was "net short."

Goldman says that these folks got it wrong. The firm was just hedging its risk, not betting on the decline in US housing. And now it has leaked documents to Wall Street Journal reporter Liz Rappaport which show that the firm had billions in long positions off-setting the shorts. What's more Goldman insists that the Senate panel had these documents but chose to ignore them.

So why has Goldman taken this long to reveal these documents? It's hard to escape the impression that Goldman just has an instinct for secrecy. Time and again, the firm has refused to explain the details of the long trades it said it was off-setting with its shorts. It just demanded that we trust the words of its top executives—even when those words were contradicted by publicly available evidence.

If Goldman really does have the goods to prove its case, shareholders should demand that executives explain why it took them this long to offer the evidence to the public. The long delay seems irresponsible.

Almost malfeasant.

Goldman has had at least two years to open up and show the world that it isn't all tentacles and blood funnels. Why did it wait?

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