Goldman Sachs e-mails boast as subprime bubble bursts

WASHINGTON — Goldman Sachs executives bragged to each other in internal e-mails in 2007 that they were making "some serious money" as the real-estate bubble burst, according to documents released Saturday by a Senate subcommittee.

The e-mails released by the subcommittee contradict previous statements that the Wall Street investment bank did not aggressively bet against the housing market, the chairman of the panel, said Sen. Carl Levin, D-Mich.

"Of course we didn't dodge the mortgage mess. We lost money, then made more than we lost because of shorts," Chief Executive Lloyd Blankfein wrote in a Nov. 18, 2007, e-mail to Goldman executives, referring to the practice of "shorting," or betting against an investment. "Also, it's not over, so who knows how it will turn out ultimately."

The e-mail exchange was one of four released by the Senate Permanent Subcommittee on Investigations, which has been probing the role of Goldman and other investment banks in the financial crisis. The subcommittee is expected to release many more internal Goldman documents Monday, one day before a congressional hearing at which Blankfein and several other top company executives are scheduled to testify.

Also this week, the full Senate will take up a proposed overhaul of financial regulation intended to toughen oversight of Wall Street and make the financial system more transparent. Republican leaders oppose the measure.

Goldman has become a useful symbol for Democrats in the escalating debate over the financial overhaul. Indeed, Republicans charged that Democrats in the Senate and on the Securities and Exchange Commission (SEC) — which filed a civil suit against the investment bank earlier this month — are using the public's anger toward Goldman to build support for their plan.

The SEC's inspector general confirmed Friday he will look into the timing of the charges and possible leaks by the commission.

The e-mails go to the heart of recent fraud accusations that Goldman sold to investors mortgage-backed securities the company knew would fail. Goldman has denied the accusations and repeated Saturday that it did not make money by betting the mortgage market would collapse.

Levin said the panel's 18-month investigation into the causes of the financial crisis has found that Goldman and other investment banks helped trigger the mortgage meltdown and then profited from it.

"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. "They bundled toxic mortgages into complex financial instruments, got the credit-rating agencies to label them as AAA securities, and sold them to investors, magnifying and spreading risk throughout the financial system, and all too often betting against the instruments they sold and profiting at the expense of their clients."

Goldman on Saturday denied the accusations. As part of its defense, it released a 12-page memo it prepared in advance of Tuesday's hearing that said the company had total net losses of more than $1.2 billion in residential mortgage-related products in 2007 and 2008.

Goldman also released several internal e-mails it said showed losses the company incurred on mortgage-related investments. In one e-mail from Dec. 5, 2006, Dan Sparks, head of the company's mortgage department at the time, wrote "subprime market getting hit hard ... at this point we are down $20mm (million) today."

Chief company spokesman Lucas van Praag said Saturday, "In its statement, the U.S. Senate subcommittee has cherry-picked just four e-mails from the 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."

Among those scheduled to testify Tuesday will be Fabrice Tourre, the Goldman vice president at the center of the SEC civil suit filed alleging fraud in how the company sold tainted mortgage investments.

The suit alleges Tourre and the company created securities based on subprime mortgages that would likely default.

The investments were secretly chosen for Goldman by hedge fund Paulson & Co., which was betting the investments would fail. Goldman has said the allegations were "completely unfounded" and that it had lost money on the security, known as a collateralized debt obligation, or CDO.

Goldman Sachs said in its 2009 annual report that it "did not generate enormous net revenues by betting against residential related products."

But Levin said the documents his committee has uncovered showed it did.

"These e-mails show that, in fact, Goldman made a lot of money by betting against the mortgage market," he said.

One of the e-mail exchanges featured Michael Swenson, managing director of Goldman's structured products trading group, commenting on news that a credit-rating agency downgrade of $32 billion in mortgage-related securities would cause losses for many investors.

But Goldman had bet against those securities, the subcommittee said.

"Sounds like we will make some serious money," Swenson wrote on Oct. 11, 2007, to a colleague, Donald Mullen, who e-mailed back, "Yes we are well positioned."

Another e-mail exchange involved Goldman Chief Financial Officer David Viniar, who was responding to a report the company netted more than $50 million in one day by shorting mortgage investments.

"Tells you what might be happening to people who don't have the big short," Viniar wrote.

The final e-mail exchange showed Goldman employees talking in May 2007 about the "wipeout" of one mortgage-backed security and the imminent collapse of another written by Long Beach Mortgage, the subprime arm of Washington Mutual, which became the largest U.S. bank failure when it collapsed in 2008.

Under "bad news," one employee noted Goldman lost $2.5 million from the soured investments. But under "good news," the employee said Goldman had bet against the securities, which the Senate panel said the company had assembled and sold to investors, and would make $5 million.

Material from The Associated Press is included in this report.