Testimony, Goldman-Style; A Tour Through the Levin Report

There is one small section of the People vs. Goldman Sachs article that I wanted to elaborate upon online, as it simply is too hard to convey the full humor/balls of the situation without putting all the documents in their entirety on display.

Exhibit #1 is a presentation made in October of 2007 by Josh Birnbaum,

one of the head traders on Goldman’s Structured Products Group. Even completely divorced of any relation to Goldman’s future legal difficulties, this is a very amusing document; what Birnbaum is essentially doing in this presentation is telling his bosses that the people in his division should get paid way more for all the great work they did shorting the housing market in 2007. The early pages all document the great successes of the division that year, showing that Goldman made more money on residential mortgages than anyone else:

Birnbaum wanted his SPG division to get paid more for this great performance. As the Levin report describes it, this was a “proposal that SPG traders be compensated in a manner similar to hedge fund managers.”

In that regard, Birnbaum sets up his campaign for increased compensation by way of a sort of “responses to questions” mode, wherein he first lays out the potential objections to giving the SPG unit a massive raise,

then proceeds to rhetorically demolish each of those objections one-by-one.

In that regard the notations under the headline, “Potential Qualifications” are very interesting. The very first potential “qualification” reads as follows:

"2007 was a unique event, desk made money primarily from a single short trade,
Results not likely to be repeatable."

This is interesting because Goldman executives, Lloyd Blankfein included, repeatedly testified that the whole notion of a “Big Short” was misguided, that it was a Sasquatch-like mythical animal, never actually seen in the wild – and yet when you actually look in the thousands of pages of documents in the Levin report, you find repeated references to a single giant short trade that made everyone a boatload of money. This notation by Birnbaum is one of many such Sasquatch sightings in the text. Interestingly, Birnbaum refutes this “qualification” about the “big short” being the sole source of his department’s income not by saying that there wasn’t a “big short,” but by saying that wasn’t the only way his division made money that year, that revenues were “diversified across many strategies.”

But the key notation was Birnbaum’s second potential “qualification,” which reads:

"2. SPG trading would not have been permitted to be as short, if management was not attempting to offset risk in retained longs in other parts of department."

Here Birnbaum is attempting to anticipate how his bosses, i.e. the Blankfeins and Viniars of the world, might argue that his department was not worthy of a big payout. He is clearly anticipating that Goldman would make the same argument about the “big short” that it would later make before congress – that this was not a giant directional bet against the market, but rather a hedge against other long positions, simply a way to manage risk.

Birnbaum’s answer to this potential “qualification” is hilarious. He basically says, “If you’re going to say the big short was a hedge, don’t bother because we all know that’s bullshit.” Here’s his actual response [emphasis mine]:

"* FALSE. This statement is inconsistent with how the position evolved. By June, all retained CDO and RMBS positions were identified already hedged. As Graph#1 indicates, SPG trading reinitiated shorts post BSAM unwind on an outright basis with no accompanying CDO or RMBS retained position longs. In other words, the shorts were not a hedge."

Birnbaum is saying that by June of 2007, Goldman was already fully hedged against its long positions, and that “post-BSAM” – in other words, after Bear Stearns blew up – the trades Birnbaum’s SPG unit made were not hedges but outright short bets. This directly belies the testimony of Blankfein et al, which is interesting – but not as interesting as Birnbaum’s own words on this matter, when asked about this subject later on by Senate investigators.

Which brings us to exhibit #2: Josh Birnbaum’s responses to Senate questions.

Here we have a series of questions sent to Birnbaum by the Levin/Coburn committee on May 24, 2010, not long after his testimony of April 27, 2010:

The committee, unbeknownst to Birnbaum, had copies of Birnbaum’s “this is not a hedge” presentation. With that document in mind, the investigators asked a series of questions. Including question #4:

"Is it or was it your understanding or belief that the shorts referenced in Question 3, above, were not a hedge?"

To which Birnbaum replied, in writing:

"I do not know whether 'the shorts referenced in Question 3' were a hedge because I do not recall the extent of those positions or the other long investments Goldman held at that time …."

To recap: in October of 2007, Birnbaum was pounding the table for a raise for his great work making a big short bet that year, going so far as to send a written presentation to management pointing out that what he did wasn’t simply a financial precautionary measure, not a hedge, but a balls-out bet. Imagine how sure you’d have to feel about a subject in order to send a memo like that to your company’s top executives.

Now, a few years later, he says he doesn’t know. Which was apparently where it ended – until Birnbaum and his lawyer, Peter White of Schulte Roth and Zabel, apparently figured out that the committee had the “this is not a hedge document.” Once this light bulb went off, Birnbaum/White sent the following indignant letter to the committee:

The choice passage is right in the middle there. In it, White/Birnbaum express dismay that the committee did not inform Birnbaum that it actually had the evidence in hand when it asked him those questions previously. How could Birnbaum have known how to answer correctly, minus that important context? The emphasis in the text here is mine:

"Unfortunately, Mr. Birnbaum did not have a copy of that document at the time he responded to the May 24 questions and, therefore, could not use it to refresh his recollection of events that occurred several years ago. Curiously, nothing in the questions indicated that your staff had incorporated quotations from a document, unlike the many other questions posed where they [sic] your staff clearly indicated that it was quoting from documents that had been provided to Mr. Birnbaum. We cannot understand what legitimate reason the staff would have for neither providing the document nor even disclosing that it was quoting a particular document in posing these questions. Without the benefit of that document, Mr. Birnbaum was notable to answer all of the questions in his written responses. In fact, his response to the questions at issue specifically noted that he did not have the documents necessary to refresh his recollection.

"Having now reviewed the document quoted in the questions posed, Mr. Birnbaum's recollection is refreshed regarding certain events that occurred during 2006 and 2007 …."

What is so funny here are the bolded passages where Birnbaum’s lawyer whines that in some of the questions posed to Birnbaum, investigators made it clear they were quoting from a document. But in other questions, they didn’t! That, he complains, is tricky!

(When I first saw this series of documents, I joked with my editors that it reminded me of the famous interrogation of Dennis Rader, the notorious “BTK” serial killer, who was captured after sending a letter to police on a floppy disk. Rader had previously asked police if floppy disks were traceable, and whether it was safe for him to send them one. They told him it was safe. He sent the disk. They traced it – Rader’s name was in the properties on the disk. In police interrogation, Rader indignantly asked arresting detective Ken Landwehr why he’d lied to him. “I was trying to catch you,” Landwehr answered incredulously. Not that Josh Birnbaum is anywhere near BTK, but the lunatic indignation is similar).

In any case, Birnbaum, as you can see here,

eventually includes his “supplemental” answer to the committee’s questions. Having now refreshed his memory with “the document the staff did not previously supply me” – his own words! – he recalls that at one point, he believed that the shorts described were not a hedge.  

This series of documents is very useful to look at because it shows what the thinking was like, internally, at Goldman in 2007. You’ll see Birnbaum in his presentation bragging that his desk made the most money on mortgage-backed securities on Wall Street that year, “by a wide margin,” and that

the “results out of DB [Deutsche Bank], Citi, UBS, Bear, Lehman, etc. all bear evidence that we were far ahead of our competition in marking down positions and moving CDO risk before the market cratered.”

In other words, the disasters at all of these other banks proves we were the smartest of all, when it came to unloading our crap on other people before the economy hit the proverbial iceberg. Very interesting stuff, all of it, and funny, if you can leave the catastrophic-consequences part of it aside for a moment.