How Goldman Execs Screwed Their Clients and Lied to Congress

On April 13, 2011, the Senate Subcommittee on Investigations, chaired by Democrat Carl Levin of Michigan, alongside Republican Tom Coburn of Oklahoma, released a 650-page bipartisan report titled Wall Street and the Financial Crisis: Anatomy of a Financial Collapse. As Taibbi notes, although Goldman wasn't target of the report per se, the document compiles "a mountain of evidence" against the firm – evidence of "gross, baldfaced fraud delivered up in such quantities as to almost serve as a kind of sarcastic challenge to the curiously impassive Justice Department."

Read the full story: The People vs. Goldman Sachs: A Senate committee has laid out the evidence. Now the Justice Department should bring criminal charges by Matt Taibbi

Taibbi writes that to date, there has been only one successful prosecution of a financial big fish from the mortgage bubble: Lee Farkas, a Florida lender convicted on a variety of fraud charges and now faces life in prison. But Farkas, writes Taibbi, is just an exception proving the rule: "Like Bernie Madoff, his comically excessive crime spree (which involved such lunacies as kiting checks to his own bank and selling loans that didn't exist) was almost completely unconnected to the systematic corruption that led to the crisis."

Read the full story: The People vs. Goldman Sachs: A Senate committee has laid out the evidence. Now the Justice Department should bring criminal charges by Matt Taibbi

Many of the earlier criminals implicated in the financial crisis, like Washington Mutual and subprime lender Countrywide, went under. "But Goldman," writes Taibbi "remains an ascendant company precisely because it used its canny perception of an upcoming disaster (one which it helped create, incidentally) as an opportunity to enrich itself, not only at the expense of clients but ultimately, through the bailouts and the collateral damage of the wrecked economy, at the expense of society."

Read the full story: The People vs. Goldman Sachs: A Senate committee has laid out the evidence. Now the Justice Department should bring criminal charges by Matt Taibbi

Taibbi: "In late 2006 … the top dogs at Goldman … started to fear they were sitting on a time bomb of billions in toxic assets. Yet instead of sounding the alarm, the very first thing Goldman did was tell no one. And the second thing it did was figure out a way to make money on its knowledge by screwing its own clients."

As the Levin report details, on December 14th, the Goldman's chief financial officer David Viniar (pictured) met with mortgage chief Daniel Sparks and other executives, and stressed the need to get 'closer to home' – i.e., to reduce the bank's giant bet on mortgages.

Read the full story: The People vs. Goldman Sachs: A Senate committee has laid out the evidence. Now the Justice Department should bring criminal charges by Matt Taibbi

Daniel Sparks (pictured) followed up his meeting with Viniar with a seven-point memo laying out how to dump the bank's mortgages. Entry No. 2: "Distribute as much as possible on bonds created from new loan securitizations and clean previous positions."

Taibbi: "The day he received the Sparks memo, Viniar seconded the plan in a gleeful cheerleading e-mail. 'Let's be aggressive distributing things,' he wrote, 'because there will be very good opportunities as the markets [go] into what is likely to be even greater distress, and we want to be in a position to take advantage of them.' Translation: Let's find as many suckers as we can as fast as we can, because we'll only make more money as more and more shit hits the fan."

Read the full story: The People vs. Goldman Sachs: A Senate committee has laid out the evidence. Now the Justice Department should bring criminal charges by Matt Taibbi

By February 2007, two months after the Sparks memo, Goldman had gone from betting $6 billion on mortgages to betting $10 billion against them — a shift of $16 billion. Even CEO Lloyd Blankfein wondered aloud about the bank's progress in "cleaning" its crap. "Could/should we have cleaned up these books before," Blankfein wrote in one e-mail, "and are we doing enough right now to sell off cats and dogs in other books throughout the division?"

Taibbi: "How did Goldman sell off its 'cats and dogs'? Easy: It assembled new batches of risky mortgage bonds and dumped them on their clients, who took Goldman's word that they were buying a product the bank believed in. The names of the deals Goldman used to clean its books – chief among them Hudson and Timberwolf – are now notorious on Wall Street."

Goldman specifically designed the Hudson deal to reduce its exposure to the very types of mortgages it was selling. One of its creators, trading chief Michael Swenson (pictured), later bragged about the "extraordinary profits" he made shorting the housing market. Goldman dumped $1.2 billion of its own "cats and dogs" into the deal – and then told clients that the assets had come not from its own inventory, but had been "sourced from the Street."

Hudson quickly lost a ton of money. Goldman's biggest client, Morgan Stanley, alone lost nearly $960 million on the Hudson deal, which the bank turned around and dumped on taxpayers, who within a year were spending $10 billion bailing out the bank through the TARP program.

Read the full story: The People vs. Goldman Sachs: A Senate committee has laid out the evidence. Now the Justice Department should bring criminal charges by Matt Taibbi

Goldman clients who bought into the deal had no idea they were being sold the "cats and dogs" that the bank was "cleaning" off its books. An Australian hedge fund called Basis Capital sank $100 million into the Timberwolf deal on June 18th, 2007, writes Taibbi, "and almost immediately found itself in a full-blown death spiral."

In February 2007, Goldman mortgage chief Daniel Sparks and senior executive Thomas Montag (pictured) exchanged e-mails about Timberwolf.

MONTAG: "CDO-squared – how big and how dangerous?"
SPARKS: "Roughly $2 billion, and they are the deals to worry about."

 In a conference call on May 20th that included Viniar, Sparks oversaw a PowerPoint presentation spelling out Goldman's concern about Timberwolf. In a later e-mail, he wrote: "There is real market-meltdown potential."

Four days after Goldman sold $100 million of Timberwolf to Basis. "Boy," Montag wrote, "that timeberwof [sic] was one shitty deal."

Read the full story: The People vs. Goldman Sachs: A Senate committee has laid out the evidence. Now the Justice Department should bring criminal charges by Matt Taibbi

In the spring of 2010, about a year in to his investigation, Sen. Levin hauled Goldman execs to Washington, made them take oaths, and demanded that they explain themselves.

Goldman execs lied under oath

• David Viniar insisted that Goldman's massive bet against mortgages was "not a large short." At work, he'd written an email in which he called Goldman's bet "the big short."

• Daniel Sparks claimed that Goldman expected deadly mortgage deals like Timberwolf "to perform." At work, he'd approved an internal document warning that Goldman expected such deals "to underperform."

• Michael Swenson said Goldman had forfeited profits by refusing to bet against mortgages: "We left money on the table." At work, he had bragged about the "extraordinary profits" he made while betting against mortgages.

Read the full story: The People vs. Goldman Sachs: A Senate committee has laid out the evidence. Now the Justice Department should bring criminal charges by Matt Taibbi

"Before the hearing, even some of Levin's allies worried privately about his taking on Goldman and other powerful interests. The job, they said, was best left to professional prosecutors, people with experience building cases. … But in the case of this particular senator, that concern turned out to be misplaced. A Harvard-educated lawyer, Levin has a long record of using his subcommittee to spend a year or more carefully building cases that lead to criminal prosecutions."

"[The] questioning of the bank's executives was not one of those for-the-cameras-only events where congressmen wing ad-libbed questions in search of sound bites. In the weeks leading up to the hearing, Levin's team carefully rehearsed the moment with committee members. They knew the possible answers that Goldman might give, and they were ready with specific counterquestions. What ensued looked more like a good old-fashioned courtroom grilling than a photo-op for grinning congressmen."

Read the full story: The People vs. Goldman Sachs: A Senate committee has laid out the evidence. Now the Justice Department should bring criminal charges by Matt Taibbi

"When it came time for Goldman CEO Lloyd Blankfein to testify, the banker hedged and stammered like a brain-addled boxer who couldn't quite follow the questions. … But Blankfein also testified unequivocally to the following: 'Much has been said about the supposedly massive short Goldman Sachs had on the U.S. housing market. The fact is, we were not consistently or significantly net-short the market in residential mortgage-related products in 2007 and 2008. We didn't have a massive short against the housing market, and we certainly did not bet against our clients.'

"Levin couldn't believe what he was hearing. 'Heck, yes, I was offended,' he says. 'Goldman's CEO claimed the firm didn't have a massive short, when the opposite was true.' First of all, in Goldman's own internal memoranda, the bank calls its giant, $13 billion bet against mortgages "the big short."
Second, by the time Sparks and Co. were unloading the Timberwolves of the world on [unsuspecting clients] in the summer of 2007, Goldman's mortgage department accounted for 54 percent of the bank's risk. That means more than half of all the bank's risk was wrapped up in its bet against the mortgage market – a 'massive short' by any definition."

Read the full story: The People vs. Goldman Sachs: A Senate committee has laid out the evidence. Now the Justice Department should bring criminal charges by Matt Taibbi

Eliot Spitzer tangled with Goldman during his years as New York's attorney general. Taibbi asks him what he'd do if he were still A.G. and he saw the Levin report. "Once the steam stopped coming out of my ears, I'd be dropping so many subpoenas," he says." And I would parse every potential inconsistency between the testimony they gave to Congress and the facts as we now understand them."

Read the full story: The People vs. Goldman Sachs: A Senate committee has laid out the evidence. Now the Justice Department should bring criminal charges by Matt Taibbi

This month, after releasing his report, Levin sent all of this material to the Justice Department. His conclusion was simple. "In my judgment," he declared, "Goldman clearly misled their clients, and they misled the Congress."

Read the full story: The People vs. Goldman Sachs: A Senate committee has laid out the evidence. Now the Justice Department should bring criminal charges by Matt Taibbi