Embattled Wall Street investment giant Goldman Sachs hit back on Sunday at claims that it used the US sub-prime mortgage crisis to make millions of dollars in profit.
The financial giant, already facing fraud charges, found itself in the middle of a new firestorm on Saturday after e-mails released by a US Senate panel suggested Goldman executives made huge profits out of the 2007 crisis.
Goldman fired back on Sunday, accusing the Senate Permanent Subcommittee on Investigations of having “cherry-picked just four e-mails from the 20 million pages of documents and e-mails provided to it.”
“It is concerning that the subcommittee seems to have reached its conclusion even before holding a hearing,” Goldman Sachs spokesman Lucas van Praag said.
The e-mails made public on Saturday come at a bad time for Goldman Sachs.
Earlier this month, the US Securities and Exchange Commission announced it was charging the company with fraud, accusing it of “defrauding investors by misstating and omitting key facts” about a product based on subprime, or higher-risk, mortgage-backed securities.
On Saturday, subcommittee chairman Democratic Senator Carl Levin said Goldman Sachs and other investment banks had acted as “self-interested promoters of risky and complicated financial schemes that helped trigger the crisis.”
He said the bank had bundled toxic mortgages into complex financial instruments, got credit rating agencies to label them as AAA securities, and then sold them to investors, magnifying and spreading risk throughout the financial system.
In addition, Levin said, the bank often bet against the instruments it sold and profited as a result.
Van Praag said on Sunday the company had net losses of more than US$1.2 billion in residential mortgage-related products in 2007 and 2008.
“This demonstrates conclusively that we did not make a significant amount of money in the mortgage market,” he said.
The four e-mails released by the subcommittee suggest that the company was able to make massive profits by shorting products, including residential mortgage-backed securities and collateralized debt obligations.
In one e-mail, Goldman Sachs chairman and chief executive Lloyd Blankfein appeared to gloat about the strategy in an exchange with other top Goldman executives.
“Of course, we didn’t dodge the mortgage mess. We lost money, then made more than we lost because of shorts,” the message said.
In another, a Goldman Sachs manager noted that the firm had bet against US$32 billion in mortgage-related securities that had been downgraded by credit rating agencies, causing losses for many investors.
“Sounds like we will make some serious money,” the manager wrote.
“Yes, we are well positioned,” his colleague responded.
In a third e-mail, Goldman employees discussed securities that were underwritten and sold by the company and tied to mortgages issued by Washington Mutual Bank’s subprime lender, Long Beach Mortgage.
One employee reported the “wipeout” of one Long Beach security and the “imminent” collapse of another as “bad news” that would cost the firm US$2.5 million.
The “good news,” the employee wrote, was that Goldman had bet against the very securities it had assembled and sold, meaning the failure would net the company US$5 million.
Blankfein and other current and former company personnel are scheduled to testify before the subcommittee today.
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