How banking giant Goldman Sachs survived the recession and came out on top of Wall Street. This year the bank is on course to surpass $50 billion in revenue and give out more than $20 billion in bonuses.
A five-month investigation by McClatchy Newspapers reveals that Goldman Sachs made secret bets against the housing market while simultaneously selling off billions in soon-to-be worthless securities.
In 2006 and 2007, the bank reportedly peddled more than [$40 billion] in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in US housing prices would send the value of those securities plummeting. It was only later that investors discovered what Goldman had promoted as triple-A investments were closer to junk.
This double dealing allowed Goldman to foist most of its potential losses onto other investors before a flood of mortgage defaults brought down the US and global economies. But Goldman’s failure to disclose that it made secret bets on an imminent housing crash may have violated securities laws.
The investigation also reveals Goldman Sachs used offshore tax havens to shuffle its mortgage-backed securities to institutions around the world, often in secret deals run through the Cayman Islands.
Greg Gordon talking:
What we really wanted to know is how did Goldman Sachs get out when nobody else did? And so, we looked and tried to reconstruct what happened in 2006 and 2007, looking at the SEC filings that Goldman made, which is a trick in itself, because when these Wall Street firms bought mortgages from subprime lenders, they put them into trust accounts, but you can’t really find the trust accounts in the SEC files unless you know what the name of the trust accounts are, or you get very lucky kind of rummaging through the files. So, at any rate, we tried to reconstruct what happened.
And what we discovered is that Goldman sold $39 billion in securitized subprime mortgages and other risky mortgages that it had purchased itself, and it turned them into bonds and sold them off to pension funds and insurance companies and foreign banks. And the question was that how did Goldman get out so safely?
And, of course, we all know that when the government bailed out the American International Group, the giant insurer, a year ago in September and then in the ensuing months, that there was a sort of a payoff to all of the firms that had pending insurance-like contracts known as credit default swaps. And these are sophisticated and complex bets that Wall Street firms and others have secretly made in a dark market for at least well over a decade, but certainly in escalating fashion in recent years.
So Goldman, in 2005 and 2006, began to place these swap bets that would, make money for Goldman or hedge its risks if the housing market turned down. At the same time, Goldman was selling off these bonds to pension funds and others, and it did not disclose that it was betting the other way, not on the very same securities, but on very similar securities. Certainly, if its secret bets, paid off, that meant that the value of these bonds was going to go down.
The big question here is, is this material information for an investor? If a big pension fund was looking at these bonds, and it knew that Goldman was betting the other way, would it buy the bonds? And this will be a question we’re wondering whether anybody is going to investigate to find out what Goldman knew at the time in 2006 and 2007, because in 2006, the default rates on home mortgages, particularly on subprime mortgages, were beginning to rise. And, of course, this led to downgrades of the bonds.
Goldman was selling most of the bonds, 80 percent or so, as triple-A securities, that being the highest grade that you could get. These were gold-plated investments. Yet it was betting the other way. I asked Goldman Sachs if they could give me another example of a security that they sold that was rated triple-A, but they were hedging at the same time. And I didn’t get a specific example. I was told, “Yes, of course. We hedge in all of our markets.” But it would be interesting to know if there is another example that Goldman could provide.
Goldman Sachs was not the biggest player in the subprime market by any stretch, but neither were they small. And the reason we looked at Goldman Sachs is, one, they got out; two, they are the most prestigious investment bank in the world, and they got themselves into this subprime stuff, which has really backfired and turned out to be not the most upstanding side of the business that Goldman was engaging in. And then they had all these connections in Washington, and then they got a bailout from Uncle Sam, even though they only lost a billion-and-a-half dollars, which is far less than a lot of the firms that went up in flames last year.
Now Goldman is in the muck. They’ve gotten into bankruptcy courts across the country, because as their subprime and other risky mortgages got into trouble, the mortgages that were the underlying assets for the bonds they sold, it was incumbent upon Goldman to go and recover what assets it could. And now it’s stuck, along with other Wall Street firms, chasing around people who are in bankruptcy or in financial trouble because of these loans with the escalating interest rates.
The Cayman Islands are a sort of a conduit by which Wall Street has been able to sell unregistered versions of these securities in more complex forms, so complex that we could use the rest of your show to try to explain them.
They’re selling them off to foreign investors and sophisticated US investors. And they didn’t have to disclose as much information, because they were outside the United States. And these securities contain some of the worst stuff, some of the riskiest subprime loans that were very low-grade in the pools sold in the United States. When they were sold in the Caymans, suddenly they were rated triple-A or investment-grade.
Discussion with Greg Gordon.
Greg Gordon, Investigative journalist with McClatchy Newspapers. He just published a multi-part investigation of Goldman Sachs and how it secretly bet against the housing market.
– from democracynow.org