Goldman Sachs Group Inc’s top executive boasted in late 2007 about the money the investment bank was making from betting against risky mortgages, a collection of e-mails released by a US Senate showed on Saturday.
The e-mails 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 (SEC). The e-mails could also help bolster support for financial regulation legislation that is scheduled to come to the floor of the Senate today.
“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 dated 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.
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 e-mails 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 US$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.”
Fabrice Tourre, a bond trader at Goldman and the only individual defendant in the SEC suit, and Daniel Sparks, a former head of the firm’s mortgages department, are among those expected 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.
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