Goldman Sachs Ripped Off And Misled Clients

[TampaYankee]

Goldman Sachs Ripped Off And Misled Clients, Senate Report Says

Shahien Nasiripour shahien@huffingtonpost.com

Goldman Sachs, the nation's fifth-largest bank by assets, systematically misled clients, sold them financial instruments it knew to be junk, bet against them and profited off of their losses, according to a Senate report released this week.

The report, the product of a two-year investigation, paints the firm as Exhibit A of Wall Street's evolution from a place that raises and deploys capital to worthy businesses into a vulturous creature that preys on unwitting investors.

Goldman's conduct in the two years leading up to the near-implosion of the financial system show a firm dedicated to "sticking it to their own clients," said Senator Carl Levin, a Michigan Democrat who chairs the panel that produced the report. "Goldman gained at the expense of their clients, and used abusive practices to do it."

In 2006 and 2007, Goldman recorded more than $21 billion in profit thanks to a strategy that ensured earnings as the housing bubble inflated and then popped. It also dodged a loss in 2008 -- one of the few firms to do so -- during a year that saw the demise of three of its direct competitors.

The "abusive" tactics the firm employed helped gain those winnings, according to the report by the Senate Permanent Subcommittee on Investigations. While Goldman was betting -- or "shorting," in Wall Street parlance -- that securities would collapse, clients were on the losing end.

"Of course we didn't dodge the mortgage mess," Goldman chairman and chief executive Lloyd C. Blankfein explained to a colleague in a Nov. 18, 2007 email documented in the report. "We lost money, then made more than we lost because of shorts."

Four complex financial instruments with names like Timberwolf and Abacus show how the firm profited while others lost, according to the Senate report.

Goldman declined to comment for this article.

Timberwolf was a $1 billion collateralized debt obligation squared, meaning it was a financial instrument comprised of other CDOs that were backed by various types of securities, like mortgage bonds and insurance contracts. Goldman issued the security, formally called Timberwolf I, in March 2007. It began to lose value almost immediately upon issuance.

But Goldman was a step ahead of its clients. It immediately shorted about 36 percent of the assets underlying Timberwolf, meaning it would profit off their demise. Investors were kept in the dark about this development, according to the Senate report.

In May 2007, Goldman promised one future buyer it could earn a 60 percent return on its investment in Timberwolf, even though Goldman's interval valuations of the security showed the CDO was continuing to fall in value, the report notes.

The prospective buyer, a hedge fund named Basis Capital, finally bought slices of Timberwolf on June 18 of that year, at prices of 84 cents and 76 cents on the dollar. Less than a month later, Goldman marked them down to 65 and 60 cents.

Even Goldman salesmen had second thoughts about the firm's practice of marking down securities within days or weeks of a client's purchase.

"Real bad feeling across European sales about some of the trades we did with clients," one of the firm's salesmen wrote in an October 2007 email to the head of Goldman's mortgage unit, Daniel Sparks. "The damage this has done to our franchise is significant. Aggregate loss for our clients on just...5 trades alone is 1bln+ [more than $1 billion]."

A few months earlier, a senior Goldman executive warned his colleagues about selling clients securities at one price and then immediately devaluing them.

"[D]on't think we can trade this with our clients [and] then mark them down dramatically the next day," Harvey Schwartz wrote in a May 11 email.

On July 13, Basis told Goldman that one of its funds was in "real trouble," according to the Senate report. Three days later, Goldman marked down those securities to 55 and 45 cents on the dollar. Within weeks, Basis Capital liquidated its hedge fund.

Goldman bought back the Timberwolf securities at prices of 30 and 25 cents on the dollar.

Another Timberwolf buyer, Bank Hapoalim, purchased a $9 million slice at about 78 cents on the dollar. The Israeli-based bank didn't know that Goldman's internal valuations at the same time pegged the slice at just 55 cents on the dollar.

Last week, another bank, Wells Fargo was fined $11 million by the Securities and Exchange Commission because the firm it took over, Wachovia, did something similar when it sold a client a slice of a security at 90-95 cents on the dollar even though Wachovia internally valued it at 52.7 cents on the dollar. In announcing the settlement, the SEC's director of enforcement, Robert Khuzami, said the lender violated "basic investor protection rules -- don't charge secret excessive markups, and don't use stale prices when telling buyers that assets are priced at fair market value."

In the end, though Goldman eventually lost some money on Timberwolf because it couldn't sell all of it, its losses were offset by profits made from betting those securities would fall in value. Goldman profited "at the expense of its clients," according to the report. Meanwhile, the buyers lost virtually everything. Basis Capital ended up declaring bankruptcy.

Another CDO, called Hudson Mezzanine 2006-1, was a $2 billion financial instrument brought to market in December 2006.

Goldman shorted all of Hudson, meaning it would profit if any of the slices lost value, according to the Senate report. Goldman "failed to disclose to potential investors that it was shorting the very securities [it] was selling to them," the report notes.

Instead, Goldman told investors that it had "aligned incentives" with them because it invested in a portion of Hudson. The report called that "misleading" because Goldman's $6 million bet that Hudson would rise in value was "outweighed many times over by Goldman's $2 billion short position."

Goldman also told investors that the assets underlying Hudson were "sourced from the Street," as in other Wall Street firms. In reality, all of the assets were acquired from a unit inside Goldman. Two Goldman executives later told Senate investigators that the firm's original description was accurate because Goldman was part of "the Street."

Goldman made a $1.35 billion profit off Hudson, earnings the Senate report described as coming "at the expense of [its] clients."

Similar practices occurred with two other Goldman CDOs, named Anderson Mezzanine 2007-1 and Abacus 2007-AC1.

In Abacus, Goldman allegedly helped set up the mortgage-linked investment for a favored client, designing it to fail, yet sold it anyway to its other clients, reaping the favored client nearly $1 billion. Last year, the SEC charged Goldman with securities fraud. The firm later settled the accusations for $550 million.

In Anderson, the Senate report claims Goldman bet that 40 percent of the assets underlying the deal would decline in value. Investors were never told. They also weren't told that Goldman expressed reservations about the quality of the subprime mortgages that helped make up Anderson.

Anderson investors were eventually wiped out and lost virtually their entire investments, according to the Senate investigation.

"The evidence discloses troubling and sometimes abusive practices which show...that Goldman knowingly sold high risk, poor quality mortgage products to clients around the world," according to the Senate report. It also alleges "multiple conflicts of interest" surrounding Goldman's CDO activities.

Previously, Goldman has defended its conduct and rejected accusations it did anything improper during the leadup to the financial meltdown.

"Goldman Sachs did not engage in some type of massive 'bet' against our clients," the firm said in a statement last year. "[We] never created mortgage-related products that were designed to fail."

The firm also has said that buyers of such securities were "large, sophisticated investors" that had "significant in-house research staff to analyze portfolios and structures and to suggest modifications."

The investors "did not rely upon the issuing banks in making their investment decisions," Goldman said in a December 2009 statement. Also, the firm maintains that "it is fully disclosed and well known to investors" that Wall Street firms that arranged CDOs initially shorted the securities and that "these positions could either have been applied as hedges against other risk positions or covered via trades with other investors."

"Many major banks had similar businesses," the firm noted.

The report makes note of federal securities laws that Goldman may have violated.

"Goldman...had an obligation to disclose material information that a reasonable investor would want to know," the report notes.

Levin said his investigators found a "financial snake pit rife with greed, conflicts of interest, and wrongdoing."

Last year's financial reform law includes a section authored by Levin that tries to clean up the markets by prohibiting firms from betting against securities they sell to their clients. Levin pointed to Goldman's activities as a primary reason for why he wanted that in the new law.

As of 3 p.m. New York time, Goldman shares were down more than 3 percent since Levin's report was publicly released. The Standard & Poor's 500 Index is up about 0.6 percent.

See the original article at:

http://www.huffingtonpost.com/2011/04/15/goldman-sachs-levin-investigation_n_849708.html

[Guest hitoallusa]

Not something new..

[BiBottomBoy]

"As through this world I've wandered I've seen lots of funny men.

Some rob you with a six gun. Some with a fountain pen.

As through this life I've traveled. As through this life I've roamed

I've yet to see an outlaw drive a family from their home."

Woody Guthrie

[RA1]

BBB-

I like your WG quote.

Best regards,

RA1

[BiBottomBoy]

Thanks.

It's from "Pretty Boy Floyd."

You can hear the whole song here.

[Guest Conway]

What Goldman did and lots of other large institutions do is granulate its risk across many different lines of business. The practice is acceptable and has been for years.

Every company that has portfolios the size of Goldman, makes big investments and smaller investments to counter the risk in those positions.

What Goldman should be criticized for is making too large a bet in the housing market when every research indicator told us that there was a bubble in housing inventories- which was irresponsible to its shareholders and investors

Airlines are companies that do this, too. They buy lots of fuel, so they purchase calls and puts on future oil investments, so that if the price rises or falls they can mitigate the risk that rise or fall in fuel prices causes in their business model. Guess what, if the oil rises, and Southwest Airlines calls its short position, some guy has to sell Southwest fuel at less than he paid for it. If this guy flies Southwest, would you accuse them of robbing their customers? No, because he is an investor who made an investment and understood the risk of the investment that he made.

Just like Goldman Sachs institutional clients understood the risk of the investments that they made.

I feel sorry for any congressional district that elected a representative as intellectually honest of just plain stupid as Car Levin.

It is big business. It is complex. But, it isn't crooked.

[RA1]

But, the Congress has to point fingers; after all, they were complicit in the housing market bubble and collapse, weren't they?

Best regards,

RA1

[caeron]

Define 'complicit' in this context.

Goldman sold people what they wanted to buy at the prices that they were willing to pay. That they didn't think the market was rational and bet against it to cover themselves doesn't mean they did anything wrong by selling people what they wanted. It means that they were smarter than the people they were selling to. They had no obligation to act in their customers best interest. They were selling to investors who should have been sophisticated enough to understand and analyze the instrument they were buying. If they weren't that sophisticated, they shouldn't have bought.

The greedy sheep were all chasing the yields of these instruments and then complained when the slaughter began. You can't legislate away stupidity and greed which were the real drivers behind all this.

[RA1]

I agree that you cannot legislate greed and stupidity aka morality, but, that does not keep the Congress and others from trying to do so. There is no doubt in my mind that they will fail but, in the meantime, it is costly to everyone, taxpayers and "others".

Greedy sheep and sophisicated investors are contradictatory. I realize that some are both and some are neither. That is a fact of life as I see it.

Best regards,

RA1

[Guest BeachBoy]

In Other News: Dog Bites Man.

[Guest Conway]

Define 'complicit' in this context.

Goldman sold people what they wanted to buy at the prices that they were willing to pay. That they didn't think the market was rational and bet against it to cover themselves doesn't mean they did anything wrong by selling people what they wanted. It means that they were smarter than the people they were selling to. They had no obligation to act in their customers best interest. They were selling to investors who should have been sophisticated enough to understand and analyze the instrument they were buying. If they weren't that sophisticated, they shouldn't have bought.

The greedy sheep were all chasing the yields of these instruments and then complained when the slaughter began. You can't legislate away stupidity and greed which were the real drivers behind all this.

Holy Cow! We are in agreement. This may be a first!

Congress wants to paint a picture of Goldman's "customers" as some mom and pop entity. They're not. Goldman's customers are some of the most savvy financial firms in the world.

Greed drove this entire crisis. From the homeowner who bought a house that he couldn't afford, to the mortgage company that wrote the loan for the house that the homeowner couldn't afford, to the investment bank that securitized the pool of loans to homeowners that couldn't afford their homes, to the analysts that graded the pools of loans to people who couldn't afford the houses they bought as investment grade, to the pension funds that bought tranches of the securitized pools of homes to people who couldn't afford them as safe investments for the retirements of their investors, to the mom and pop investor who wanted a double digit return on their retirement funds every year.

I do think that Congress and politicians of both parties were complicit in that they funded Fannie and Freddie to underwrite these very types of loans. Fannie and Freddie were the first to make subprime fashionable. The private market followed suit in order to compete.

Today's lesson is that the average politician is too dumb to legislate any issue of any substance.

[Guest hitoallusa]

Yes I agree and you are right. They have no obligation. I believe it is a serious fraud if they act and persuade others they do, however. The SEC should have pressed harder and gotten more than 550 millions from GS. Unfortunately you can't do that your future employer so I understand their position too.

They had no obligation to act in their customers best interest.

[Guest zipperzone]

Define 'complicit' in this context.

They had no obligation to act in their customers best interest.

Might I suggest you look up the meaning of "Fiduciary Duty"

[BiBottomBoy]

It's still amazing to me that this whole subprime mortgage thing was the biggest swindle in US history and not one person has been charged with a crime.

[Guest Conway]

It's still amazing to me that this whole subprime mortgage thing was the biggest swindle in US history and not one person has been charged with a crime.

Many people have been charged with mortgage fraud since this crisis broke four years ago. From the guy who headed up Countrywide to thousands of disreputable mortgage brokers and appraisers.