The 'Big Short' and Goldman's New Story

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Lloyd Blankfein, chairman and CEO of The Goldman Sachs Group, testifies before the Senate Homeland Security and Governmental Affairs Investigations Subcommittee on Capitol Hill on April 27, 2010 in Washington, DC.

One more thing I wanted to point about about Andrew Ross Sorkin’s story defending Goldman Sachs and Lloyd Blankfein the other day, in which it was posited that Goldman did not, in fact, have a “Big Short” in 2007. Sorkin says that according to Goldman, the firm’s net short position that summer may have been as low as $5 billion, and not $16 billion as claimed, therefore Lloyd Blankfein was not lying when he told the Senate, “We did not have a massive short bet.”

Given that Sorkin was apparently given access to a large trove of documents allowing him to make the case that Goldman didn’t have that “Big Short” on, I thought it would be instructive for readers to see what kind of answers the Senate got when it asked Goldman executives the same questions about the size of the banks’ short bet. They gave Sorkin the whole store, but Levin’s committee basically got name, rank, serial number, and a big legalese "eat me."

See if you can notice some consistencies in the following statements.

The committee, for instance, asked David Viniar, the bank’s Chief Financial Officer, to explain what he meant in an email exchange between himself and bank president Gary Cohn in the summer of 2007, when Cohn told Viniar that the bank’s Structured Products Group (where most of the dicey deals covered in the Levin report were made) made $373 million, while the CDO-CLO desk lost $230 million and the residential credit desk lost $92 million.

“Tells you what might be happening to people who don’t have the big short,” Viniar replies.

Asked to explain what he meant by a “big short,” Viniar sends this in his written response to the Senate. The emphasis is mine.

Although I was aware that Goldman, Sachs & Co. ("Goldman Sachs") had obtained a significant short position in order to counterbalance its significant long mortgage related inventory positions, which reduced the Firm's overall exposure to the mortgage market, I was not personally involved in the transactions. I also have no memory of any particular transactions or the overall notional value of this position at any point in-time.

Then, when asked to tell the committee the five dates on which Goldman had its largest short positions between December 2006 and December 2007, Viniar answers:

I do not know the information requested in this Question. I would not, in the ordinary course of business, have requested aggregate net short data on a notional basis.

It is difficult to convey the full absurdity of Goldman’s Chief Financial Officer testifying that he was “not personally involved” in these short transactions, that he had “no memory of any particular transactions,” and moreover that he wouldn’t have requested net short data “in the ordinary course of business.”

The Levin report is literally crammed full of Viniar emails showing intimate involvement in the planning and execution of the mortgage shorts. In December of 2006, Viniar held a meeting in which he outlined a very specific strategy for reducing the bank’s mortgage exposure. Another Goldman exec came out of that Viniar meeting with a notes outlining a seven-step plan to get out from under mortgages, with entries like, “Reduce exposure, sell more ABX outright… Distribute as much as possible on bonds created from new loan securitizations and clean previous positions… sell some more residuals…”

When asked later if these notes fairly summarized Viniar’s points, Viniar in writing says, “Yes.”

But he wasn’t personally involved, according to him, and he doesn’t remember any of it. And, according to him, he wasn’t keeping track of net short data as part of the “ordinary course of business.”

But all it takes is one look at the emails and you see that probably isn’t true. On July 24, 2007, for instance, the mortgage desk posted a profit of $83 million for the day, when the firm’s net revenue overall was only $74 million. Just a few days before, president Cohn had told Blankfein, "There is a net short." Viniar on that day, in an email entitled, “Daily Estimate 07-24-07 – Net Revenues $74 M,” wrote to Blankfein, “Mergers, overnight asia and especially short mortgages [emphasis mine] saved the day.”

But Viniar wasn’t keeping track of this stuff on a daily basis, according to him.

Of course, Viniar wasn’t the only Goldman executive doing the “I don’t know nothin' about nothin'” routine. The bank’s Chief Risk Officer, Craig Broderick, also suddenly forgot a lot when the Senate sat him down. The committee had copies of a presentation Broderick made to Goldman’s tax department in October of 2007, which read like this:

So what happened to us…? Starting early in '07 our mortgage trading desk started putting on big short positions, mostly using the ABX Index, which is a family of indices designed to replicate cash bonds. And did so in enough quantity that we were net short, and made money (substantial $$ in the 3rd quarter) as the subprime market weakened. (This remains our position today.)

If Broderick’s narrative sounds familiar, that’s because it’s basically exactly how the Levin report summed up the bank’s activities from that year. Hell, if I had written this same passage – “Goldman put on big shorts and made money (big $$!)” – I would have been slammed for oversimplifying a narrative too complex for ordinary mortals to understand. But it seems one can summarize this material succinctly, if one is so motivated. Anyway, when asked about this document by the Levin investigators, here’s what Broderick said:

I was aware that the Goldman, Sachs & Co. ("Goldman Sachs") had acquired a substantial short position in order to counter balance its long mortgage-related inventory positions and reduce its overall exposure to the mortgage market. I was not personally involved in the transactions through which that short position was acquired or covered, and have no recollection of any specific transactions or the overall notional value of this position at any time during this period…

Sound familiar? It’s a wonder that Goldman could have functioned at all, given that, apparently, neither its Chief Financial Officer nor its Chief Risk Officer knew anything about the firm’s business transactions.

Even funnier, though, was Broderick’s explanation of his “net short” comment:

 My statement in the presentation that we were net short was based largely on hindsight given the fact that the firm had earned modest profits during a period of time during which the mortgage market declined.

Broderick went so far as to add the written embellishment “substantial $$” in an internal presentation, and yet when presented with the same language by Senate investigators, he turns around and describes those same profits as “modest.”

What does any of this have to do with Sorkin? Not much, except to show that this latest story of Goldman’s about not having a “big short,” an argument they’re making with a slew of new numbers, is just that – a completely new story.

When the government of the United States officially asked for those numbers last year, the two executives who were in the best position to give those answers basically said they didn’t know anything about anything. They apparently wouldn’t have been able to tell Carl Levin the time, if he’d asked.

But all of a sudden, over a year later, when the bank is in deep shit both on the stock market and in the arena of public opinion, and multiple subpoenas are sizzling on their doorstep, suddenly the bank starts coming out of its amnesiac fog and coughing up numbers – to Andrew Ross Sorkin. As the Russians would say, I leave this without commentary.

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