Over the weekend, a Senate Committee headed by Carl Levin released dozens of 4 private Goldman Sachs e-mails. (UPDATE: Dozens more were voluntarily released by Goldman.) They show the computer chatter among Goldman’s top brass, and top mortgage market players during mid-2007, which is the time the housing market was going from not-so-great to horrible. There are e-mails to and from all the stars here of what is becoming the Goldman credit crunch scandal–CEO Blankfein, COO Gary Cohn, CFO David Viniar, the since-departed Jon Winkelried, head of mortgage trading at the time Daniel Sparks, and of course the Fabulous Fab. There is no smoking gun here, and I agree with Felix Salmon that just because the firm bet against mortgages doesn’t mean it broke the law. (Client’s trust is another matter.)
let’s not demonize Goldman Sachs for shorting mortgages, or for making money doing so, especially since it isn’t true: while the Goldman mortgage desk did make $476 million in 2007, it lost $1.686 billion in 2008. That’s less than its competitors lost, but it’s still a lot of money.
But the e-mails do shed some more light on Goldman and the SEC case against it. Here’s what I learned:
Goldman was not just betting against the housing market, it was betting the house against the housing market. Here’s a section from an e-mail from head of mortgage trading Daniel Sparks from March 2007 to his superiors (Winkelried, Viniar, Cohn):
$4 BB single name subprime split evenly between A, BBB, BBB- and $1.3 BB of A-rated CDOs.
ABX index – overall the department had significant shorts against loan books and the CDO warehouse. The bulk of these shorts ($9 BB) are on the AAA index, so the downside is limited as the index trades at 99.
. . .we are trying to close everything down, but stay on the short side.
So add it all up and Goldman had nearly $15 billion bet that people would not be able to pay those mortgages. And it is again worth noting those are bets against mortgages that at least in part Goldman helped finance. And that was just early 2007. It’s likely Goldman bet even more against the mortgage market as things continued to deteriorate. Notice that Sparks says the firm has significant bets against the firm’s “loan book and the CDO warehouse.” The last bit being a reference to the CDOs Goldman has created but not been able to sell. So Goldman, since it is placing enough bets to cover those losses before they have even occurred, clearly thinks the loans it has made and the CDOs it has underwritten are not very good.
Then there is the Fabulous Fab’s e-mails. The SEC in its case against Goldman Sachs names a 27 28-year old trader Fabrice Tourre (who names himself the Fabulous Fab) as the mastermind behind the deal that Goldman creates with Paulson to allegedly deceive the buyers of a CDO mortgage bond named Abacus. To me, it seems crazy that a 27 28-year-old would have been heading up a $1 billion deal with one of Goldman’s top hedge fund clients, Paulson. My bet was that Fabrice was the line man taking orders. And in this e-mail Tourre sent to an apparent female love interest in January 2007, as Abacus was being structured, he seems anything but a mastermind:
When I think that I had some input into the creation of this product (which by the way is a product of pure intellectual masturbation . . . it’s a little like Frankenstein turning against his own investor;) Anyway I don’t want to bore you with my stories, . . .because I believe that a soft and sensual feminine intervention is necessary for Fab’s survival.
KissesFab (in string, which is rather thin)
Not sure what the last little bit is supposed to mean. But what I get from the rest is that Fab is not the creator, but just someone who has had some input. What’s more, he doesn’t seem to like the deals that much, calling them masturbation and Frankensteins. You would think if they were his sole creation, even an evil one, he would be more proud of the deals, and at least try to make them so they didn’t turn on their creator. Lastly, it seems clear that Tourre knows he is doing something wrong. From another Fab e-mail:
Just made it to the country of your favorite clients [Belgians]!!! I’m managed to sell a few abacus bonds to widows and orphan that I ran into at the airport, apparently these Belgians adore synthetic abs cdo2
The widows and orphans bit is a reference to stock brokers who sell risky investments to people who can’t afford to lose money. At least that’s how I read it.
Goldman has a response of sorts to Levin’s e-mail release with its own 12-page document and some e-mails it also released over the weekend. The biggest takeaway is similar to what Salmon says above. Don’t blame us we lost money on sub-prime mortgages:
Goldman Sachs did not have access to any special information that caused us to know that the U.S. housing market would collapse. In fact, as a result of the spread of the crisis from subprime to all residential mortgages, Goldman Sachs had overall net losses of approximately $1.7 billion with respect to residential mortgage-related products for fiscal year 2008.
This is what Goldman has said a number of times, but I think it misses the point. Just because they lost money doesn’t mean they weren’t breaking the law. And it’s not even clear Goldman lost money overall. Goldman says it lost $1.7 billion in its mortgage operations. But many think that number does not include the trades it won big on. And Goldman hasn’t been clear as to whether that is a net number or just what it lost on one sliver of its business. It seems clear that Goldman found ways to make money on its deals as they went bad. On top of the shorting, Goldman had an active restructuring businesses, picking up work reworking many of its own busted deals. We may never get a full accounting of just how much Goldman was able to profit from its own it shoddy (allegedly on purpose at times) work.
UPDATE: Sen. Levin’s office called to say they had only released 4 e-mails the rest came from Goldman. This is not the type of stuff most companies want out in the public, so the question is why did they do it. Not sure. Clearly the Fabulous Fab stuff makes him look bad, and by comparison makes the Goldman executives look a heck of a lot better. I think they were also hoping with the daily e-mail chatter and the back and forth to turn what goes on at Goldman and what was going on at the time the SEC says the firm was committing fraud into more of the mundane everyday of business. Like what you would see at the office. Not sure they did that. In my office no one is making $15 billion bets on anything. But there you go.