Goldman CEO lauded profit from subprime shorts

WASHINGTON Sat Apr 24, 2010 1:52pm EDT

Goldman Sachs CEO Lloyd Blankfein attends a speech by U.S. President Barack Obama about financial regulation at Cooper Union in New York April 22, 2010. REUTERS/Natalie Behring

Goldman Sachs CEO Lloyd Blankfein attends a speech by U.S. President Barack Obama about financial regulation at Cooper Union in New York April 22, 2010.

Credit: Reuters/Natalie Behring

WASHINGTON (Reuters) - Goldman Sachs Group Inc's top executive boasted in late 2007 about the money the investment bank was making from betting against risky mortgages, according to a collection of e-mails released by a Senate panel on Saturday.

The emails were released ahead of a hearing on Tuesday by the Senate Permanent Subcommittee on Investigations into the origins of the financial crisis and come as the bank battles a fraud suit by the Securities and Exchange Commission.

The emails could also help bolster support for financial regulation legislation that is due to come to the floor of the Senate on Monday.

"Of course we didn't dodge the mortgage mess. We lost money, then made more than we lost because of shorts," Goldman Sachs Chief Executive Lloyd Blankfein said in an e-mail dating from November 2007.

"Sounds like we will make some serious money," said Goldman Sachs executive Donald Mullen in a separate group of e-mails from October 2007 about the performance of deteriorating second-lien positions in a collateralized debt obligation, or CDO.

The SEC suit charges Goldman hid vital information from investors about a subprime mortgage-linked security.

The subcommittee is due to hear from Blankfein and other Goldman executives about the role of investment banks in the financial crisis.

Senator Carl Levin, the chairman of the subcommittee, said the emails showed Goldman "made a lot of money by betting against the mortgage market."

"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 said in a statement.

Lucas van Praag, a spokesman for Goldman, said Levin's subcommittee had "cherry-picked just four e-mails from almost 20 million pages of documents and e-mails provided to it by Goldman Sachs. It is concerning that the subcommittee seems to have reached its conclusion even before holding a hearing."

Van Praag said that Goldman's profit and loss statements for 2007 and 2008 demonstrated "conclusively" that the firm did not make a "significant amount of money" in the mortgage market.

"What it does show," he said, "is that we had net losses of over $1.2 billion in residential mortgage-related products in the period. As a firm, we obviously could not have been significantly net short since we lost money in a declining housing market."

FORETELLING THE CRASH

Goldman says it did not act against its clients' interests.

An internal briefing paper prepared by Goldman for Tuesday's hearing says there was debate among Goldman executives in the spring of 2007 about the direction of the subprime residential market.

But some at Goldman were certain the subprime mortgage market was going to crash.

The Wall Street Journal quoted a March 2007 email from Fabrice Tourre, a bond trader and the only individual defendant in the SEC suit, as saying subprime borrowers would not last long.

"According to Sparks, that business is totally dead, and the poor little subprime borrowers will not last so long!!!" Tourre wrote to his girlfriend, the journal said.

Daniel Sparks, a former head of the mortgages department at Goldman, and Tourre, are among those due to testify to Levin's subcommittee.

The SEC's April 16 lawsuit accuses Goldman of fraud for failing to tell clients that the debt securities they were buying had input from hedge fund Paulson & Co, which stood to benefit if the securities lost value.

John Paulson said his firm, not investors, will pay any legal fees related to the SEC lawsuit, the journal reported.

Five senior executives at Goldman sold company stock after the firm received notice from the SEC in July of possible fraud charges, the journal also reported.

The sales, totaling $65.4 million between October 2009 and February 2010, were made by co-general counsel Esta Stecher, vice chairmen Michael Evans and Michael Sherwood, principal accounting officer Sarah Smith and board member John Bryan, it said.

(Reporting by Dan Margolies, Karey Wutkowski, and Steve Eder in New York; Editing by Tim Dobbyn)

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