U.S. News

Goldman Sachs to Deny It Bet Against Clients

Francesco Guerrera and Justin Baer, Financial Times

Goldman Sachs will on Wednesday rebuff accusations that it “bet against” clients in the mortgage market at the height of the financial crisis in a letter to investors that contains the most robust defense yet of the bank’s actions during the ­turmoil.

In an eight-page introduction to Goldman’s 2009 annual report, Lloyd Blankfein, chief executive, and his number two, Gary Cohn, tackle claims that their company profited from the US housing debacle and the collapse of the insurer AIG.

The move is an implicit admission that Goldman’s long-held strategy of giving short shrift to criticism of its behavior and pay policies during the crisis has done little to quell the public backlash against the Wall Street bank.

Reviewing a year in which Goldman’s near-record results came despite “considerable pressures and distractions”, Mr Blankfein and Mr Cohn describe the bank’s role as being an intermediary between investors, rather than as a trader on its own account.

The letter says Goldman’s crucial decision to reduce its exposure to the US mortgage market in December 2006, when many clients were still buying mortgage-backed securities brokered by the bank, was simply prudent risk management.

Mr Blankfein and Mr Cohn admit that Goldman had “short” positions in residential mortgages in 2007, which were designed to profit from a market deterioration, but maintain they were not “a bet against our ­clients”.

“The firm did not generate enormous net revenues or profits by betting against residential mortgage-related products, as some have speculated,” they write.

“Rather, our relatively early risk reduction resulted in our losing less money than we otherwise would have when the residential housing market began to deteriorate rapidly.”

Goldman lost about $3.1bn on mortgage-related securities in 2008, less than rivals such as Citigroup and Merrill Lynch.

The letter also dismisses accusations that Goldman hastened the demise of AIG by making aggressive collateral demands on credit protection bought from the insurer and that it received excess profits from the US government bail-out of the company.

Mr Blankfein and Mr Cohn say that, of the $12.9 billion Goldman received when the authorities rescued the company and paid out its trading counterparties in full, only $2.5 billion in collateral was a direct benefit to the bank.

A further $5.6 billion was used by Goldman to buy securities from its clients to settle three-way trades it had entered into with AIG, while $4.8 billion was in exchange for liquid securities Goldman could have sold anyway, the letter says.