Journalism in the Public Interest

Misdirection in Goldman Sachs’s Housing Short

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Goldman Sachs appears to be trying to clear its name.

The compelling Permanent Subcommittee on Investigations report on the financial crisis is wrong, the bank says. Goldman Sachs didn’t have a Big Short against the housing market.

But the size of Goldman’s short is irrelevant.

No one disputes that, by 2007, the firm had pivoted to reduce its exposure from mortgages and mortgage securities and had begun shorting the market on some scale. There’s nothing wrong with that. Don’t we want banks to reduce their risk when they see trouble ahead, as Goldman did in the mortgage markets?

Nor should shorting itself be seen as a bad thing. Putting money behind a bet that a stock (or bond or commodity or derivative) is overpriced is necessary for the efficient functioning of capital markets. Short-sellers can keep prices from getting out of whack and help deflate bubbles.

The problem isn’t that Goldman went short and reduced risk — it’s how.

To establish many of its short positions, the Senate report says, Goldman created new securities, backed them with its good name, and then strung together misleading statements to its customers about what it was actually doing. By shorting the way it did, the bank perverted the market instead of correcting it.

Take Hudson Mezzanine, a $2 billion collateralized debt obligation created by Goldman in 2006. In marketing material, the firm wrote that “Goldman Sachs has aligned incentives with the Hudson program.”

I suppose that was technically true: Goldman had made a small investment in the C.D.O. and therefore had an aligned incentive with the other investors. But the material failed to mention the firm’s much larger bet against the C.D.O. — a huge adverse incentive to its customers’ interests.

Goldman told investors that the Hudson assets had been “sourced from the Street,” which most investors would understand to mean that Goldman had purchased the assets from other broker-dealers. In fact, all the assets had come from Goldman’s own balance sheet, the Senate report found.

In his April 2010 testimony to the Senate, Goldman’s chief executive, Lloyd C. Blankfein, argued that Goldman was merely making a market in these securities and derivatives, matching willing and sophisticated buyers and sellers. But Goldman was acting like an underwriter, not a market maker.

As the underwriter, Goldman threw its marketing muscle behind Hudson Mezzanine and other C.D.O.’s. When the bank’s salespeople ran into trouble selling the securities, they begged for help from the executives who created them. One requested material to give to clients about “how great” the sector was. One needed the aid to get a client to invest, to be “THERE AND IN SIZE,” according to e-mails cited in the report.

Sometimes, Goldman took advantage of the opaque markets. According to the Senate report, Goldman executives had extensive concerns about the prices of its 2007 Timberwolf C.D.O. Goldman sold the C.D.O. securities anyway, often at higher prices than it had them recorded on its books. In summer 2007, Goldman marked some Timberwolf assets at 55 cents on the dollar, but sold similar securities to an Israeli bank at 78.25 cents at the same time, according to the report. Oh, well, tough luck!

For decades, Goldman’s famous mantra was to be “long-term greedy” and a central element of that was putting customers first. In these C.D.O.’s, the bank’s customers were “only first in the same way that on Thanksgiving, the turkey is first,” a former C.D.O. professional told me.

Goldman declined to address these specific disclosures from the report. A spokesman maintained the firm fulfilled its obligations to buyers of these kinds of C.D.O.’s, which were made up of derivatives. The customers were large and sophisticated investors who knew that one side had to be long while the other was short. And they knew, or should have known, that Goldman might be on the other side.

“It was fully disclosed and well known to investors that banks that arranged synthetic C.D.O.’s took the initial short position,” a spokesman wrote in an e-mail.

True, but few thought that the bank that had created and hawked the C.D.O.’s expected them to fail.

Goldman’s techniques harmed the capital markets. Goldman brought something into the world that didn’t exist before. Instead of selling something — thereby decreasing the price or supply of it — and giving the market a signal that it was less desirable, Goldman did the opposite. The firm created more mortgage investments and gave the world the signal that there was more demand, for C.D.O.’s and for the mortgages that backed them.

By shorting C.D.O.’s, Goldman also distorted the pricing of the underlying assets. The bank could have taken the securities it owned and sold them en masse in a fairly negotiated sale, though it likely would have gotten less for them than it was able to make by shorting the C.D.O.’s it created.

Because of Goldman’s actions, the financial system took greater losses than there otherwise would have been. Goldman’s form of shorting prolonged the boom and made the crisis that followed much worse.

Goldman executives surely hope to change the subject from the firm’s specific actions to a more general discussion of how much and when it shorted. We shouldn’t let them.

So no real difference between what Goldman did and the Magnetar trade

Well, what Goldman did was worse because Goldman was marketing and the offerings of the CDO vehicle to its customers.  Magnetar didn’t actually have any customers.  Magnetar set the thing up as a lie and knew Goldman & other dealers were lying about the asset selection and the big short.  But Goldman and the others were the ones perpetrating the lies on the foreign banks and other suckers who bet on the CDO’s bonds.

Yeah, gambling in a state-regulated casino is wiser than investing on Wall Street if you’re not like GS, the brokerages, the hedge funds, the other big banks, the HNWIs, the CEOs…

That is, if you’re not “the house”.

Too bad for the American people that “the house” bought sufficient influence in Congress to change tax laws while simultaneously eliminating pensions and so forced the American middle class into 401Ks and IRAs…into the casino of Wall Street.

I.e., into the role of “the suckers”...there only to be fleeced…to have their wealth periodically harvested.

lolllll…I think that I like that analogy:  The American people - who live in a country that is being deliberately turned more agrarian through the deliberate destruction of its industrial infrastructure - as only another crop.

What are the institutions doing that bought these toxic CDO’s?  Are there lawsuits?

great article. Thanks.  Two action steps can and should be taken in light of the “new” norm of lying being the standard industry practice by many these days.

One is to educate yourself and inform others. is one attempt up here in Canada to do this.

Two is to start worldwide discussions (real people, not politicians) about how to hold people accountable for their abuses and damages to the public interest. is again a Canadian effort to start a process, all are welcome and we could use some fascinating speakers from the good old US.

I’m honestly shocked you were allowed to publish this column, given Goldman’s moneyed influence in the Dealbooks section. Good work though, very Taibbi-esque!

Interesting article!  Important for everyone:  TAKE THE TIME to read the 600+ page report of the Senate subcommittee.

@Mary2:  You mean if only to learn the loopholes and unethical-if-not-downright-illegal business practices the Republicans will be fighting to protect or expand?

These are all on going criminal operations that have been gone way past any form of accountability for the crimes they committed & are still doing. This could have been avoided, but the only ones that are held to face the courts are the common folks. Here is what the common folks can look forward to, please read, The die has been set & it will be those at the top of the crime ring that will walk away free while the rest of the nation suffers for many,many years, unless we chose to rid our nation of these crooks for good & we know who they are, since 1913 they have run this nation from the top down into the ground.

Sorry but I think this article is focusing on something other than the main point, which is that the only way Goldman was able to find buyers for the synthetic CDO was to lie about the selection process for the reference mortgages and the firm’s overall net short or long position.  The statement

“Goldman brought something into the world that didn’t exist before. Instead of selling something — thereby decreasing the price or supply of it — and giving the market a signal that it was less desirable, Goldman did the opposite. The firm created more mortgage investments and gave the world the signal that there was more demand, for C.D.O.’s and for the mortgages that backed them” 

is not very coherent.  Goldman’s short lowered the price in the short term and raised the price at the time when they had to cover the short, which presumably was after the crash, if ever.  However, there is nothing inherently illegal or unethical about that—the crime Goldman committed was lying to investors about how the mortgages were selected and what Goldman’s overall net short or long position was.

I have just completed reading The Big Short and Griftopia in quick succession. As South Africans, we see crony capitalism and corruption as lead stories across our media on an almost daily basis. A regular gripe here is that there are no consequences for the perpetrators even when they are outed. There is a tendency here to hold up first world countries like the USA as examples of solid democracies where there are consequences for those who flout the law. If Matt Taibbi’s assertions are correct, then Jesse Eisinger has been kind and understated about GS.  I was shocked by Goldman’s greed but even more so by the fact that apart from a few miserable fines, they have been allowed to get away with it. I am left deeply cynical about how America has allowed a few to profit at the expense of the greater good.

Here is the TRUTH, people…from:  livinglies(.)wordpress(.)com

“So here is the current situation: Many if not not a majority of people who have passing knowledge of the housing crisis and the attendant credit crisis which has brought our economy to a crawl, assume that the mortgages were valid; they assume that somehow, as if my magic, the obligations, notes and mortgages, are owned by pools that never received any documents of transfer, delivery, assignments or evidence of recording the instruments in the title records; they assume that the documents of transfer exist in recordable form when they don’t exist at all. They assume that the problem is fixable and just a paperwork mess when in fact there was NO DEAL, NO VALID NOTE and NO VALID MORTGAGE.
Investors advanced money on the premise that the mortgages already existed when they advanced the money. They were wrong. The investors assumed that the transfer documents existed. They were wrong. And they assumed that the law which requires the transfers be properly made and documented within 90 days would be followed. They were wrong. And most importantly, they assumed that they were buying valid performing loans when in fact the notes and mortgages describe a transaction that never took place and the real transaction went undocumented. Instead, the only documents for transfer are those involving loans that have been declared in default but which are not in default because the servicers are continuing to make payments to cover up the fraud at the inception of the false securitization scheme.
Thus the only thing the pools have are some documentation that was not and could not be accepted. The transfers are contrary to the two basic restrictions that one would expect in any such pooling arrangements: that the mortgages were valid and properly transferred and that they were transferred in a timely manner. By transferring improperly documented and non-performing loans into the pools, the investors were screwed. And still the logical extension of that fact has not been made; if the investors were screwed and their deal was improperly documented and obtained by false pretense, then it follows that the same holds true for the only other real party in interest — the homeowner.
As long as we continue this myth, the economy will drag along the ground, while the people who have capital and wealth—-homeowners who do NOT actually have a mortgage encumbrance, but think they do, or who have been (illegally), evicted from their homes when they still owned those homes — are prevented from spending, capitalizing new businesses and all the other good things that would stimulate the economy and turn the markets around — all of them — in a 180 degree turn from bad to good.”

Check your documents very carefully, people…the exposure of the systemic fraud has just begun…ask yourself: ” Who am I REALLY paying every month on my “loan”?...guess what—-IT’S A SERVICER, NOT A REAL LENDER..and they don’t want you to dig and find that out…but that info is just the tip of the iceberg…

Mr. Eisinger, this is a very impressive, fact-based, logical column.

Why did The New York Times publish your outstanding effort?

Is the Times and, more specifically, Andrew Ross Suckup, Goldie’s personal press agent at The Times, aware that your fine piece completes humiliates Mr. Ross Suckup’s putrid spin document of 6 June?

Son, you have flat out embarrassed Mr. Ross Suckup on the pages of his own newspaper. I do not expect that your journalism career will last much longer. In fact, were I you, I’d consider hiring Seal Team No. 6 for defensive purposes. Lil’ Andy ain’t gonna like this at all.

Thank you for an excellent article.  The real disgrace is that so many of these maneuverings are legal supposedly because they make the market work.  Sounds like so many pea under the shell games to me.  The more I hear about Goldman Sachs the more convinced I become that we should have let them fail, come what may.  Instead average people around the world have been hurt beyond measure.  Oh well, the principals of GS probably have so much money they could start over and do it again, unless we strongly regulate them.  Where’s our favorite trust buster, Teddy Roosevelt, when we need him?

“putting customers first. ..... “only first in the same way that on Thanksgiving, the turkey is first,”

You’ve gotta give credit to the actual person that said this!  Hilarious!  Totally cracked me up!

Nancy emoted Today, 9:38 a.m.:  “The more I hear about Goldman Sachs the more convinced I become that we should have let them fail”

That is the worst part of it all, in my book.  A handful of Americans bought or enacted deregulation…mostly the same handful of Americans then abused the faith and, often, the law of the American people and created a financial crisis…and then many of the exact same people mandated that the American people reimburse those who were participating in the scam for the costs they inflicted upon themselves.

But there was no “We, the People” involved in any of the decisions or the profits…just the cost.


June 17, 2011, 10:42 p.m.

ibsteve2u. In America.  Is not “we the people’ anymore. is We the corporations

Wait, what? How does the Thanksgiving turkey analogy work?
The regulators are the stuffing? The customers are the cranberries? Who is the pie?
I don’t get this….

Seriously,  what is the motivation for individuals to vote fraudulently that are not U.S. citizens? Not only do these illegal immigrants risk prosecution, if caught,  but also deportation.

In the case of the “Hudson Mezzanine” transaction, isn’t this the kind of transaction the Volcker Rule is supposed to prevent?

Jesse Eisinger

About The Trade

In this column, co-published with New York Times' DealBook, I monitor the financial markets to hold companies, executives and government officials accountable for their actions. Tips? Praise? Contact me at .(JavaScript must be enabled to view this email address)