Goldman's Defense: We Lost Money on Subprime Market


When Goldman Sachs CEO Lloyd Blankfein and six other company executives testify before a Senate subcommittee on Tuesday there likely will be talk about how the firm manages risk, a lot about how they took actions to protect the firm and its clients during the subprime crisis, and that above all, they did not make money betting against the housing market.

Documents released by Goldman Sachs and used to prepare Blankfein and other executives for the hearing provide an intimate view into Goldman's vaunted risk management practices. They also point out the firm lost $1.7 billion in residential mortgage related products in 2007, a year after the firm began downsizing its exposure to the market.

Blankfein, CFO David Viniar and the others, including Fabrice Tourre, are testifying before the Senate Subcommittee on Permanent Investigations.

Tourre is the only employee charged with fraud in the SEC's recent suit against the investment bank. The SEC is alleging Goldman Sachs withheld material information from investors in a synthetic CDO, or collateralized debt obligation.

Led by Senator Carl Levin (D-Mich.), the subcommittee is looking into investment banks' role in the subprime crisis, and is using Goldman Sachs as a "case study."

In a statement Levin said, "Investment banks such as Goldman Sachs were not simply market makers, they were self-interested promoters of risky and complicated financial schemes that helped trigger the crisis."

Levin released an email dated Nov. 18, 2007 from Blankfein to Vinier, Goldman president Gary Cohn and others that reads. "Of course we didn't dodge the mortgage mess. We lost money, made some more than we lost because of the shorts. Also, its not over so who knows how it will turn out ultimately."

Goldman spokesman Lucas van Praag said the firm's profit and loss statements for its mortgage business attest to net losses in residential mortgage related products for the two years combined adding, "It is concerning that the Subcommittee seems to have reached its conclusion before holding a hearing."

The documents used to prep the Goldman executives also include several email exchanges between Tourre and his girlfriend where he jokes about selling Abacus CDOs to Belgian "widows and orphans," likens a CDO to Frankenstein "turning against his own inventor," and the process of creating a CDO to "pure intellectual masturbation."

Following are copies of the Goldman communications: