|
|
|
|
|
VI. INVESTMENT BANK ABUSES:
CASE STUDY OF GOLDMAN SACHS AND DEUTSCHE BANKC. Failing to Manage Conflicts of Interest: Case Study of Goldman Sachs
(4) How Goldman Shorted the Subprime Mortgage Market
Having provided an overview of Goldman's shorting activities and CDO activities in the years leading up to the financial crisis, this next section of the Report provides detailed information about how Goldman shorted the subprime mortgage market.
By mid-2006, Goldman's Mortgage Department had a predominantly pessimistic view of the U.S. subprime mortgage market. According to Michael Swenson, head of the Mortgage Department's Structured Products Group: "[D]uring the early summer of 2006 it was clear that the market fundamentals in subprime and the highly levered nature of CDOs [were] going to have a very unhappy ending." |1608|
$6 Billion Long. In mid-2006, Goldman held billions of dollars in long subprime mortgage related securities, in particular the long side of CDS contracts referencing the ABX Index. In September 2006, Mortgage Department head Daniel Sparks and his superior, Jonathan Sobel, initiated a series of meetings with Mr. Swenson, head of the Structured Products Group (SPG), and Mr. Birnbaum, the Mortgage Department's top trader in ABX assets, to discuss the Department's long holdings. |1609| In those meetings, they discussed whether the Asset Backed Security (ABS) Trading Desk within SPG should get out of its existing positions or "doubledown." After the first meeting, Mr. Birnbaum emailed Mr. Swenson:
"Sobel and Sparks want to know if we should exit or double down. We double down if we have a structured place to go with the risk. ... [W]e are going to sit down with the CDO guys and talk about a deal." |1610|
If the Department's existing long positions could be transferred off SPG's books by finding a "structured place to go with the risk," the ABS Trading Desk would then be free to "double down" by taking on new positions and risk.
That same month, September 2006, the ABS and CDO Desks reached agreement on constructing a new CDO to provide the ABS Desk with a "structured exit" from some of its existing investments. The result was Hudson Mezzanine 2007-1, a CDO designed by Goldman to transfer to Hudson investors the risk associated with $1.2 billion in net long ABX assets then in Goldman's inventory. The Hudson CDO was also designed to allow Goldman to short $800 million in RMBS securities to offset a portion of its long ABX assets. |1611|
In December 2006, even after the $2 billion Hudson CDO was constructed, the Mortgage Department calculated that it still had a $6 billion net long position in subprime mortgage related assets. |1612| Goldman's ABX holdings continued to be a major source of its long assets.
Goldman's Long ABX Assets. In January 2006, Goldman, Deutsche Bank, and several other Wall Street firms launched the ABX Index which, for the first time, allowed investors to use standardized CDS contracts to invest in baskets of subprime RMBS securities. The ABX Index measured the aggregate performance of a selected basket of 20 RMBS securitizations, producing a single value that rose or fell over time in line with the performance of the underlying RMBS securities. |1613| Investors could enter into CDS contracts that used a particular ABX Index as the "reference obligation," without physically purchasing or holding any of the RMBS securities in the underlying basket. Because the ABX Index itself was synthetic, and did not depend upon the acquisition of large blocks of RMBS securities, it enabled an unlimited number of investors to make unlimited bets on the performance of a group of subprime RMBS securities, using standardized contracts that could be bought and sold. The ABX Index also made it economical for investors to short subprime RMBS securities in bulk. |1614|
In internal documents, Goldman described itself as "the leader and principal driver in the creation of" the ABX Index. |1615| In July 2006, Joshua Birnbaum, Rajiv Kamilla, David Lehman, and Michael Swenson from the Mortgage Department nominated Goldman's role in the creation of both the ABX and CMBX – a similar index based on Commercial Mortgage Backed Securities – for an internal Goldman award, called the "Mike Mortara Award for Innovation." |1616| That award "recognize[d] the creative, forward-looking, and entrepreneurial contributions of an individual or team" within the equities or fixed income divisions. |1617| The Mortgage Department personnel wrote that the new indices "enable[d] market participants to trade risk without ownership of the underlying SP [structured product] security - thereby permitting market participants to efficiently go short the risk of these securities." |1618| They also wrote that "Goldman Dominates Client Trading Volume" with "an estimated 40% market share, and also "dominates the inter-dealer market." |1619| In 2007, Rajiv Kamilla, the ABS trader who spearheaded Goldman's efforts to launch the ABX Index, wrote that he "[c]ontinued to enhance our trading dominance in ... ABX indices." |1620|
While Mr. Kamilla led Goldman's efforts to develop the ABX Index, the firm's day-to-day ABX trading was conducted primarily by Joshua Birnbaum on the Mortgage Department's Structured Products Group (SPG) Trading Desk. |1621| Mr. Birnbaum had a negative view of the subprime mortgage market, and favored the firm's building a net short position. |1622| However, during 2006, Goldman's overall ABX position was net long, not net short.
Goldman was net long because, as a market maker that helped launch the ABX Index in 2006, it facilitated ABX trades for a number of clients, and many of those clients – primarily hedge funds – went almost exclusively short, requiring Goldman to take the opposing long side of the CDS contracts referencing the ABX indices. |1623| These transactions enabled Goldman to amass a 30-40% market share in ABX trading during its first year of existence. But by mid-2006, they had also contributed to the Mortgage Department's net long position in subprime mortgage related assets. When the mortgage market began showing signs of strain in the second half of 2006, the risks associated with the firm's net long ABX position became more of a concern. |1624| Senior Goldman executives expressed the view that the subprime mortgage related market was likely to get much worse, and the firm should prepare for it. |1625|
In December 2006, Goldman used the Hudson CDO to transfer the risk associated with $1.2 billion of its ABX long holdings to Hudson investors. But even after this transfer, Goldman still had billions of dollars in long ABX holdings on its books.
Goldman's Long Mortgage Holdings. In addition to its long ABX holdings, the Mortgage Department's $6 billion net long position in December 2006 was due to a large inventory of RMBS, CDO, and other mortgage related assets in Goldman's investment and sale inventories and in its CDO warehouses. In 2006, the Mortgage Department conducted numerous RMBS and CDO securitizations that required it to acquire and repackage whole loans, RMBS and CDO securities, and other mortgage related assets. When assembling CDOs, Goldman often worked with third party partners. These strategic partners bought a portion of the equity and bore some of the risk of loss in the CDO. The partners were generally smaller financial firms, such as hedge funds or asset managers with expertise in CDOs or a particular asset class. For a fee, the partners also sometimes served as a CDO's collateral manager, helping to select the assets. |1626|
Peter Ostrem, who was head of the CDO Origination Desk from 2006 until May 2007, was aware of substantial problems in the subprime mortgage market, but believed that the market distress was temporary and the market would stabilize. |1627| Mr. Ostrem wanted to continue to increase the CDO Desk's business by producing as many marketable CDOs as possible. |1628| Darryl Herrick, who worked for Mr. Ostrem on the CDO Origination Desk expressed the view that hedge funds were shorting only the worst CDOs: "[CDO] shelves people are shorting are enhanced garbage." |1629|
The CDO Origination Desk was a primary contributor to the Mortgage Department's net long position, as Goldman often had to hold or "warehouse" subprime assets until they were packaged into a CDO. |1630| Each CDO was designed to include or reference hundreds of millions or billions of dollars in assets, which the CDO Origination Desk and its partners had to locate and acquire, a process called "ramping" that averaged six to nine months per CDO. |1631| Goldman and its partners acquired these assets from other large Wall Street broker-dealers, often called "the Street," or took them from their own inventory of assets.
When assembling a CDO, Goldman generally opened an internal "warehouse account" for the CDO in which it stored the acquired assets until a target amount was achieved, and the CDO was brought to market. While the assets were in the warehouse account, they were included in Goldman's warehouse balance sheet and contributed to its long or short positions. When the bulk of the target assets were acquired for a particular CDO, perhaps 75% to 95% of the total, in some cases Goldman priced the CDO securities and began selling them to clients who were told what the remaining assets would likely be. |1632| When a CDO transaction "closed" and its securities were issued, Goldman transferred the relevant assets from its warehouse account to the corporation or trust established for the CDO. |1633| The CDO entity then housed the long assets that had been on Goldman's warehouse books, and Goldman was left with a corresponding short position which it could keep or sell to the CDO's short parties.
In 2006 and early 2007, since it was often acquiring assets for several CDOs at once, the CDO Desk generally had a substantial net long position in subprime assets in its CDO warehouse accounts. |1634| For example, as of March 16, 2007, Goldman calculated that its CDO warehouses contained $4.7 billion in mortgage related assets. |1635| After deducting potential liabilities assumed by Goldman's partners and making other adjustments, Goldman calculated that it had $2.3 billion in net long warehouse risk. |1636| In early 2007, Goldman executives began to express concern about the risks posed by the subprime mortgage related assets in the CDO warehouse accounts. |1637|
On December 7, 2006, Daniel Sparks, the Mortgage Department head, exchanged emails with Goldman senior executive Thomas Montag about why Goldman was not doing more to reduce the firm's risk associated with its net long positions. |1638| On the same day, Mr. Montag complained to CFO David Viniar about the Mortgage Department's lack of aggressiveness in trying to reduce its net long ABX position:
"[O]n ABX having numerous conversations–I don't think we should panic out but we certainly didn't do a good job of keeping pressure on ... makes me mad because they should have kept doing it ugh." |1639|
The next week, Mr. Viniar called a meeting with the Mortgage Department to discuss its holdings.
CFO David Viniar told the Subcommittee that, in early December 2006, he received reports showing that the Mortgage Department had lost money on ten successive days. |1640|
Viniar Meeting. On December 14, 2006, Mr. Viniar convened a meeting in the conference room next to his office on the 30th floor, in which he and other senior Goldman executives met for several hours with Mortgage Department managers, as well as representatives from Market Risk Management & Analysis and from the Controllers group. |1641| At the meeting, Mr. Viniar and other Goldman executives conducted an in-depth review of the Mortgage Department's holdings. Mr. Viniar concluded the Mortgage Department's position in subprime mortgage related assets was too long, and its risk exposure was too great. |1642|
Mr. Viniar and others told the Subcommittee that Mr. Viniar's basic message to the Mortgage Department at the December meeting was not necessarily to go short, but instead to "get closer to home." |1643| In trading parlance, "home" means a net neutral trading position – a position that is neither significantly short nor long. |1644| Mr. Viniar told the Subcommittee that, by telling the Mortgage Department to "get closer to home," he meant that it should assume a more neutral risk position. |1645| One way to "get closer to home" was for the Department to sell its long assets. Another way to achieve a more neutral risk position was for the Department to take new short positions to offset its existing long positions. |1646|
Internal documents indicate that the directions given to the Mortgage Department in the December meeting were more detailed than the general instruction to "get closer to home." In an email sent on the same day by Mr. Sparks to Goldman executives Messrs. Montag and Ruzika entitled, "Subprime risk meeting with Viniar/McMahon Summary," Mr. Sparks wrote:
"Followups:
1. Reduce exposure, sell more ABX index outright, basis trade of index vs. CDS too large.
2. Distribute as much as possible on bonds created from new loan securitizations and clean previous positions.
3. Sell some more resid[ual]s
4. Mark [the value of assets in] the CDO warehouse more regularly ...
5. Stay focused on the credit of the originators we buy loans from and lend to
6. Stay focused and aggressive on MLN [Mortgage Lending Network] (warehouse customer and originator we have EPDs [early payment defaults] to that is likely to fail)
7. Be ready for the good opportunities that are coming (keep powder dry and look around the market hard)." |1647|The next day, December 15, 2006, Mr. Montag forwarded Mr. Sparks' email to Mr. Viniar asking: "is this a fair summary?" |1648| Mr. Viniar replied: "Yes." Mr. Viniar noted:
"On ABX, the position is reasonably sensible but is just too big. Might have to spend a little to size it appropriately. On everything else my basic message was let's be aggressive distributing things 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." |1649|
In response to the Viniar meeting, the Mortgage Department took immediate action. It began selling its long ABX positions outright when possible and entering into large single name CDS shorts to offset its remaining long assets. Goldman personnel developed a chart depicting the long positions the Mortgage Department had taken on BBB and BBB- rated ABX assets. |1650| This chart also showed how quickly the Mortgage Department moved after the Viniar meeting to offset those long positions by amassing single name RMBS and CDS short positions.
[SEE CHART NEXT PAGE: Notionals (ABX convention), prepared by Goldman Sachs, reformatted by the Permanent Subcommittee on Investigations to be readable in black and white print, GS MBS-E- 010214410.]
Within about a month, in January 2007, the Mortgage Department had largely eliminated or offset its long subprime mortgage assets, but it didn't stop there. In January and February, the Mortgage Department began building a multi-billion-dollar short position as part of a plan by the SPG Trading Desk to profit from the subprime RMBS and CDO securities starting to lose value. The plan was discussed with Mr. Sparks and Mr. Ruzika before it was set in motion. By the end of February 2007, the Department had swung from a $6 billion net long position to a $10 billion net short position, a $16 billion reversal in the span of two months.
Selling Assets Outright. On December 14, 2006, the same day as the Viniar meeting, Kevin Gasvoda, head of the Residential Whole Loan Trading group, instructed his staff to begin selling the RMBS securities in Goldman's inventory, focusing on RMBS securities issued from Goldman-originated securitizations. He urged them to "move stuff out" even at a loss:
"[P]ls refocus on retained new issue bond positions and move them out. ... [W]e don't want to be hamstrung based on old inventory. Refocus efforts and move stuff out even if you have to take a small loss." |1651|
In February 2007, to further encourage sales, Mr. Gasvoda issued a sales directive or "axe" to the Goldman sales force to sell the remaining RMBS securities from Goldman-originated RMBS securitizations. On February 9, 2007, the sales force reported a substantial number of sales, and Mr. Gasvoda replied: "Great job syndicate and sales, appreciate the focus." |1652|
In February 2007, Goldman CEO Lloyd Blankfein personally reviewed the Mortgage Department's efforts to reduce its subprime RMBS whole loan, securities, and residual equity positions, asking Mr. Montag: "[W]hat is the short summary of our risk and the further writedowns that are likely[?]" |1653| After a short report from Mr. Montag, Mr. Blankfein replied:
"[Y]ou refer to losses stemming from residual positions in old deals. Could/should we have cleaned up these books before and are we doing enough right now to sell off cats and dogs in other books throughout the division?" |1654|
At the end of February, Goldman's controllers prepared a summary of the changes in Goldman's RMBS and whole loan inventory since December 2006, and reported:
"Residential Credit Loans: The overall loans inventory decreased from $11bn to $7bn. ... subprime loans decreased from $6.3bn to $1.5bn, Second Liens decreased from $1.5bn to $0.7bn and S&D [scratch and dent] Loans remained unchanged at $0.8bn." |1655|
This analysis indicates that, in less than three months, Goldman had reduced its subprime loan inventory by over two-thirds, and its second lien inventory by half.
The Mortgage Department reduced its inventory, not only by selling assets outright, but also by reducing its purchase of whole loans and securitization efforts. In March 2007, Goldman informed its Board of Directors and the SEC that it had stopped purchasing subprime loans and RMBS securities through, in its words, the use of "conservative bids." |1656| While those presentations did not explain the phrase "conservative bids," an email to Goldman's Chief Credit Officer, Craig Broderick, discussing a March 2007 presentation to Goldman's Audit Committee about the subprime mortgage business, was much more explicit: "Just fyi not for the memo, my understanding is that the desk is no longer buying subprime. (We are low balling on bids)." |1657| Still another method to reduce its loan inventory was an ongoing effort by the Mortgage Department to return defaulted or fraudulent loans to the lenders from which it had purchased them.
On April 23, 2007, Mr. Gasvoda reported to Messrs. Montag and Sparks a dramatic reduction in Goldman's inventory of subprime loans and RMBS securities:
"[W]e have $180mm in loans (unsecuritized) and $255mm of residuals off old deals. The $180mm of loans is the smallest we've been since we started the business in 2002. We had been running at an average loan position balance in subprime of around $4B . ... The $255mm we have retained is from deals dating back to 2002 and while we've developed some buying partners, it is not a deep market. These have been intentional principal retained positions." |1658|
The subprime loan balance of $180 million was just over one-tenth of the $1.5 billion total Goldman had held at the end of February 2007, reflecting a reduction in its subprime inventory over a two-month span by nearly 90%. Overall, the $180 million loan balance was down from an average subprime loan position balance of $4 billion, which was a 95% reduction in overall subprime loan inventory levels.
Building the First Short Position. At the same time the Residential Whole Loan Trading Desk was selling loans and RMBS securities, the Structured Product Group (SPG) Trading Desk was working to sell its inventory of long CDS contracts linked to the ABX indices. |1659| At first, in December and January, because so many market participants were going short, the SPG's ABX Trading Desk found its long ABX positions difficult to sell. |1660| The ABS Desk then decided to offset the long ABX assets in part by purchasing the short side of single name CDS contracts on certain RMBS and CDO securities. |1661| Within about six weeks, by February 2007, the ABS Desk had acquired a huge net short position in single name CDS contracts referencing RMBS and CDO securities that totaled more than $5 billion. By then, the ABX market had stabilized somewhat, and the ABS Desk was able to sell outright more of its long ABX positions. Rather than slow down once its $6 billion long position was offset, however, the ABS Desk used CDS contracts to short RMBS and CDO securities "at every opportunity," in the words of one trader, going increasingly net short. |1662|
On February 12, 2007, Mr. Sparks reported to senior management on the Mortgage Department's progress and the substantial profits that its new net short position was already showing:
"(1) +20mm [million] P&L [profit and loss] today.
Secondary trading desk is net short risk in the form of single names and structured index vs index longs (some index shorts also). Large move down again today ....(2) Possible significant upside in book.
The desk has been moving [marking down] single names about 1/3 of what they feel the correct correlation [to ABX Index] is (around 70%). . . . As the market has moved so much one way, there is the potential for the book to currently have significant upside embedded in it. |1663|(3) Loan & resid[ual] books flat [i.e., already hedged]." |1664|
On February 14, 2007, Mr. Sparks again reported to senior management on the Department's progress, describing how it was neutralizing its net long position:
"[O]ur risk reduction program consisted of: (1) selling index outright (2) buying single name protection and (3) buying protection on super-senior portions of the BBB/BBBindex. ... That is good for us position-wise, bad for accounts who wrote that protection .... but could hurt our CDO pipeline position as CDOs will be harder to do." |1665|
"Overall," Mr. Sparks wrote, "as a business we are selling our longs and covering our shorts." |1666|
With respect to market conditions, Mr. Sparks reported:
"Subprime environment – bad and getting worse. Everyday is a major fight for some aspect of the business (think whack-a-mole). Trading position has basically squared ... plan to play from short side. Loan business is long by nature and goal is to mitigate. Credit issues are worsening on deals and pain is broad (including investors in certain GS-issued deals). Distressed opportunities will be real, but we aren't close to that time yet." |1667|
In order to "play from the short side," the Mortgage Department continued building a net short position, employing aggressive strategies. |1668| Mr. Birnbaum, Goldman's ABX trader, later wrote: "I concluded that we should not only get flat, but get VERY short." |1669| He wrote that he then "socialized," or discussed, his proposal with others in the Mortgage Department, and "we all agreed the plan made sense." |1670| The ABS Desk began implementing the plan by taking a very large short position in single name CDS contracts referencing RMBS and CDO securities to offset the Department's remaining ABX long position:
"After socializing the plan with [Daniel] Sparks and ultimately [Richard] Ruzika, we implemented the plan by hitting on almost [every] single name CDO protection buying opportunity in a 2-month period. Much of the plan began working by February when the market dropped 25 points and our profitable year was underway." |1671|
By clearing the plan with Mr. Sparks and Mr. Ruzika first, SPG Trading Desk informed senior management of its intent to use the firm's capital to build the net short position. Mr. Birnbaum also wrote:
"When we were socializing our plan to get short in the beginning of the year, I put together a tool . . . quantifying our position risk and the p&l [profit and loss] under various market level scenarios. I believe this was key for senior management to gain confidence that we were taking controlled and quantifiable risk that was well understood." |1672|
The Mortgage Department's lead trader in single name CDS contracts referencing RMBS securities, Deeb Salem, also described the plan in his 2007 performance self-evaluation:
"Mike [Swenson], Josh [Birnbaum] and I were able to learn from our bad long position at the end of 2006 and layout the game plan to put on an enormous directional short. The results of that are obvious." |1673|
In an interview, Mr. Salem told the Subcommittee that the "obvious" results he was referring to were the desk's resulting profits. |1674|
The ABS Desk within the Structured Product Group (SPG) used CDS contracts to short RMBS and CDO securities as well as the ABX Index. The Correlation Desk within SPG used a different technique, obtaining approval to use a Goldman-designed CDO platform, Abacus, "to short structured product CDOs in bulk. The ABACUS transactions are currently one of the unique formats available to . . . [short] in large size on this type of structured product risk." |1675|
From January to late February, the Mortgage Department continued to pile on short positions in the subprime mortgage market. |1676| By the end of the first quarter in 2007, it had built a $10 billion net short position. In a later performance self-evaluation, Mr. Salem described the aggregate $10 billion net short position as "HUGE" and "enormous." |1677| A Goldman senior executive, Thomas Montag, later referred to a net short position of $3 billion in subprime mortgage backed securities as "huge and outsized." |1678| Goldman's net short position in February 2007 was more than three times that size.
Profiting from the First Net Short. In February 2007, Goldman's senior management decided that the $10 billion net short position had become too risky, and ordered the Mortgage Department to cover a portion of the short. Covering some of the short not only reduced the risk, but also locked in some of the profit associated with the position.
In late February 2007, the Mortgage Department's net short position, coupled with added volatility in the subprime mortgage market, caused a sharp increase in the Department's risk profile, as measured by Value at Risk or "VAR." Goldman had assigned a VAR limit of $35 million to the Mortgage Department. |1679| In November 2006, the Department's reported VAR was $13 million, well below its limit. |1680| By late February 2007, however, its VAR had reached $85 million – an increase of over 550%. |1681|
Goldman senior management closely monitored the Department's increasing VAR. On February 23, 2007, Goldman risk controllers told senior executives that the Mortgage Department's increasing VAR was "primarily driven by a combination of increased volatility in ABX market and the [SPG] desk increasing their net short risk in RMBS subprime sector." |1682| On February 14, 2007, Justin Gmelich, a managing director asked to help Mr. Sparks with the Mortgage Department on a short term basis, sent an email to Mr. Montag expressing unease with the Department's increasing risk profile:
"Abx risk should be working to get closer to home. My opinion, singles v. short index is too big (no news here). Abx correlation trade is good. I think we should be covering a bit of our short. There is a lot to do." |1683|
Mr. Montag forwarded Mr. Gmelich's email to Goldman's Co-Presidents, Gary Cohn and Jon Winkelried, as well as to Mr. Ruzika, commenting: "clearly need to opportunistically take position down." |1684|
On February 21, 2007, senior management told Mr. Sparks to reduce the size of the Mortgage Department's $10 billion net short position by covering $3 billion. |1685| Mr. Sparks communicated the decision to personnel on the SPG Desk:
"We need to buy back $1 billion single names and $2 billion of the stuff below [CDO securities] – today. I know that sounds huge, but you can do it – spend bid/offer, pay through the market, whatever to get it done.
It is a great time to do it – bad news on HPA [housing price appreciation], originators pulling out, recent upticks in unemployment, originator pain. . . .
This is a time to just do it, show respect for risk, and show the ability to listen and execute firm directives.
You called the trade right, now monetize a lot of it.
You guys are doing very well." |1686|
Although some SPG traders disagreed with the decision, |1687| the Mortgage Department took immediate action in response to the order. By the end of the day, February 21, 2007, Mr. Sparks reported to senior management that the ABS Desk had covered $400 million in single name CDS contracts, but had not been able to reach the $3 billion goal:
"Market sold off significantly (BBB and BBB- indices over 100 bps wider) We covered over $400mm single names – still significant work to do. ...
"We are net short, but mostly in single name CDS and some tranched index vs the some [sic] index longs. We are working to cover more, but liquidity makes it tough. Volatility is causing our VAR numbers to grow dramatically." |1688|
Mr. Ruzika sent an email to Mr. Montag and Mr. Sparks commenting on the covering efforts:
"I think Dan's guys are being practical. I know Bill [McMahon] was upset but covering the single name bbb and bbb- is prudent as it cuts vol and var the most. ... Guys didn't give up bid ask but they also didn't stand on the bid." |1689|
The Mortgage Department found that its single name CDS contracts were difficult to cover, in part because many of the referenced RMBS and CDO securities had already been acquired by securitizers for inclusion in CDOs and so were not for sale. |1690| That meant the SPG Trading Desk could not cover its single name short positions simply by buying the offsetting long asset – the RMBS and CDO securities were no longer available for purchase. |1691| Instead, the SPG Desk had to use offsetting CDS contracts, ones which referenced the same RMBS or CDO securities, but in which Goldman took the long side. |1692| The problem with those contracts, however, was that many market participants had already acquired short positions on RMBS and CDO securities and weren't in the market to buy more. In addition, their purchases had driven up the price of short contracts. Between market saturation and high price levels, Goldman found few buyers when it wanted to cover its shorts. |1693| The Mortgage Department's inability to cover its single name shorts concerned Messrs. Montag and Ruzika, who continued to press for quick progress.
On February 25, 2007, Mr. Sparks reported to Messrs. Montag and Ruzika on the Mortgage Department's progress after a week of effort:
"Cover[ed] around [$]1.55 billion single name subprime BBB- CDS and about $700mm single name subprime BBB CDS. The desk also net sold over $400mm BBB- ABX index. Desk is net short, but less than before. Shorts are in senior tranches of indexes sold and in single names. Plan is to continue to trade from short side, cover more single names and sell BBB- index outright." |1694|
On February 27, 2007, Mr. Ruzika sent an email to Messrs. Montag, Gmelich and Sparks indicating that the Mortgage Department needed to reduce its net short position by covering even more than $3 billion in shorts: "There are two issues – first is the size of the short – I want to see us getting the short down to 4.5 bil[lion] net. ... Second – the basis in the book needs to be reduced as well." |1695| Less than an hour later, Mr. Ruzika sent Mr. Sparks another email at the conclusion of a meeting of Goldman's Operating Committee (OpCom), comprised of Goldman's senior executives. In an email entitled, "OpCom Directive," Mr. Ruzika wrote:
"Dan. Directly from the opcom we have to pick up the pace of buying back single names even if it costs us some money. I know your guys are trying but we can pay away some if it helps to get size done." |1696|
In response, Mr. Sparks immediately sent an email to Mr. Swenson, Mr. Lehman, and Mr. Birnbaum regarding the "Opcom directive." He wrote: "Buyback single names in size today." |1697| He also sent the SPG and CDO Desk managers a set of "Goals":
"Reduce risk. That means:
(1) get m[o]re super-seniors done on CDOs or take other steps to reduce CDO pipeline risk;
(2) cover more single name shorts BBB- and BBB
(3) reduce the basis trade between BBB- index and BBB- single names
(4) reduce the index/index trades in A and AAA." |1698|Mr. Sparks' list of goals showed that he was closely tracking the SPG Desk's activities and directed them to reduce rather than eliminate its basis and index trades.
At the end of February, the Mortgage Department's efforts got a substantial boost when a new hedge fund client, Harbinger, purchased the short side of $4 billion in single name CDS contracts referencing RMBS securities. |1699| By taking the long side in those contracts, the Mortgage Department was able to cover its shorts by the same amount.
On February 28, 2007, Mr. Sparks reported at a Firmwide Risk Committee meeting on the Mortgage Department's progress in reducing its VAR. |1700| The committee minutes reflect that Mr. Sparks' report stated the following:
"–VaR up due to vols. Business working to reduce exposures; a lot of shorts already covered.
–ABX widened 500bp on the week. Business covered $4BN in single names.
–Noted a lot of negative news in the subprime market with rumors on everyone.
–CDS on CDOs started to widen significantly over the week . ...
–Business continuing to clear out loans." |1701|Five days later, on March 5, 2007, Mr. Montag requested another update: "Do we think the business is net short, long or flat right now?" Mr. Sparks responded: "We think the overall business is net short." Mr. Gmelich added: "I think we have a very modest short across all the businesses at current market levels. I concur with Dan." |1702|
The Mortgage Department's efforts to cover its $10 billion net short position reduced its VAR; it also allowed the Department to lock in and record large profits from its net shorts. In March 2007, in connection with Goldman's quarterly earnings call with analysts, "Mortgage Talking Points" prepared for Mr. Viniar stated that the Department's revenues were primarily the result of its short positions:
"The Mortgage business' revenues were primarily driven by synthetic short positions concentrated in BBB/BBB- sub prime exposure and single A CDO exposure which benefitted from spread widening." |1703|
At the end of the first quarter of 2007, the Mortgage Department reported total net revenues of $368 million. |1704|
The Mortgage Department continued its efforts to cover the rest of its short position. On March 14, 2007, Mr. Sparks reported to Messrs. Cohn and Montag that a Goldman salesperson "did a fantastic job for the desk by bringing in $1.2BB [billion] in A-rated single names today." |1705| Mr. Montag in turn reported to Goldman CEO Lloyd Blankfein: "Covered another 1.2 billion in shorts in mortgages–almost flat–now need to reduce risk." |1706|
That same day, March 14, 2007, in response to his request, the Mortgage Department sent Mr. Ruzika a detailed breakdown of its subprime mortgage holdings. |1707| It disclosed that, despite offsetting short and long positions in a number of areas, the SPG Desk still held three sizeable net short positions involving about $2.6 billion in ABX assets, $2.2 billion in single name CDS contracts, and $2 billion in mezzanine CDOs. |1708|
Goldman personnel prepared the following chart tracking the SPG Trading Desk's efforts to cover its BBB and BBB- net short position from February through mid-May 2007. |1709|
[SEE CHART NEXT PAGE: Notionals (ABX convention), prepared by Goldman Sachs, reformatted by the Permanent Subcommittee on Investigations to be readable in black and white print, GS MBS-E- 012890600.]
AAA Disaster Insurance. Despite all the attention paid to the Mortgage Department's subprime mortgage holdings beginning in December 2006, one large short position seemed to have escaped the directives of senior management in the first quarter of 2007 to cover the Department's shorts. It consisted of a massive $9 billion net short position made up of CDS contracts referencing an ABX index that tracked a basket of 20 AAA rated subprime RMBS securities. |1710| Goldman representatives could not recall when that short position was acquired, who acquired it, or whether proprietary funds were used, |1711| but the CDS contracts appear to have been held at a relatively constant level of $9 billion from some time in 2006 until July 2007. |1712| Mr. Sparks told the Subcommittee that the net short position served as a form of low cost "disaster insurance" that would pay off only in a "worst case" scenario – when even the top tier AAA rated RMBS securities, among the safest of all subprime mortgage investments, lost value. |1713|
The most comprehensive description of the AAA ABX short position located by the Subcommittee was a chart prepared by a Mortgage Department analyst in August 2007. The analyst sent the chart to Mr. Birnbaum at his request, to show the Mortgage Department's overall position in synthetic products, including CDS contracts referencing ABX, RMBS, and CDO assets. |1714| The chart includes the AAA ABX short position as a long, nearly flat line showing an approximately $9 billion net short until early July 2007, when the value turned sharply upward. |1715| The analyst wrote in an August email, after much of the AAA ABX net short position had been covered: "M[ortgage] department is short ABX AAA [$]8.7b[illion], splitting among ABS/Alt A/prime/conduit in the beginning of fiscal year 2007, and is now long [$]410m[illion]." While this chart and the covering email do not reveal the origin of the AAA short, they indicate that, by early 2007, it was split between the ABS Trading Desk in the Structured Product Group and three desks in Mr. Gasvoda's Residential Whole Loan Trading area – the Alt A Trading Desk under Genevieve Nestor, the Prime Trading Desk under Clay DeJacinto, and the Conduit for conducting subprime loan pool securitizations under Matt Nichols.
Goldman emails provide additional information about the AAA ABX short. One series of emails, from March 2007, indicates that about $8 billion of the $9 billion AAA short was then held by the three desks in Mr. Gasvoda's Residential Whole Loan Trading area, and that he favored maintaining the short, because it provided billions of dollars in coverage and cost only $5 million per quarter in premiums to maintain. On March 4, 2007, Mr. Gasvoda emailed Mr. Sparks with "Quick Thoughts on ABX AAA risk":
"I talked to [Matt] Nichols and Clay [DeJacinto] about the AAA ABX short. Think it offers a good amount downside protection w/ relatively light pain if we're wrong. Below is a $8B ABX AAA short #s. It costs us $5mm/quarter to carry. On the downside, if the market rallies to par ... we drop $50mm. Taking it to 0 spread we lose $80mm.
"On the upside front, we get good jump risk. If AAA's widen to current AA levels ... we gain $70mm and if spreads move up to super senior risk pricing in CDOs ... we're up $190mm.
"Net, think this is a good position to have on given downside protection and relatively light upside pain. If we get an opportunity to buy some back next week, think we should but I'm thinking buy back $1-2B, not $8B." |1716|
Mr. Sparks replied to Mr. Gasvoda: "Good trading response and thought process. We need to consider daily." |1717|
The next day, March 5, 2007, the Residential Whole Loan Trading Desk under Mr. Gasvoda and the CDO Origination Desk under Peter Ostrem exchanged information about the "ABX hedges" that each business was carrying to reduce the risk associated with its respective long assets. |1718| The Residential Whole Loan Trading Desk reported: "[b]elow are all our ABX hedges across our Resi Credit + Prime books," which included approximately $7 billion in AAA ABX holdings. |1719| The CDO Origination Desk, in turn, reported holding another $2.25 billion in AAA ABX "hedges." |1720| A few days earlier, with respect to the CDO Origination Desk's holdings, Mr. Egol had remarked: "Love that huge AAA abx short." |1721|
Although the $7 billion figure reported by Mr. Gasvoda's group on March 5 was $1 billion less than the $8 billion reported the day before, |1722| and the $2.25 billion reported by the CDO Origination Desk was larger than the $1 billion that the August 2007 email later ascribed to the Structured Product Group, all of the evidence indicates that Goldman had a massive AAA ABX short position in 2007. A few days later, on March 8, 2007, in an email to senior management entitled, "Mortgage Risk," Mr. Sparks described the AAA ABX short as a hedge against long positions in the Department's loan books and CDO warehouse accounts:
"[O]verall the department has significant shorts against loan books and the CDO warehouse. The bulk of these shorts ($9BB) are on the AAA index, so the downside is limited as the index trades at 99." |1723|
In this email to senior executives, Mr. Sparks put the size of the AAA ABX short at $9 billion, which seems to have been the amount most commonly cited for the short. |1724|
When asked about the Gasvoda email which described the AAA ABX short as an inexpensive "jump risk," |1725| Mr. Sparks told the Subcommittee that the email was referring to acquiring "jump insurance" against a sudden, huge loss arising from the total default of an asset. |1726| In this context, the short was acquired as insurance against the unlikely event that a significant portion of the AAA rated RMBS securities identified in the ABX Index defaulted simultaneously. |1727| Since AAA rated RMBS securities were typically the safest of the RMBS securities offered for sale, it was widely believed in 2006 and 2007, that they would remain untouched even if defaulting mortgages harmed riskier RMBS securities. By shorting AAA rated RMBS securities, Goldman was insuring against a "tail risk" – the risk of an event that appeared to have a very small probability of ever actually occurring, but which was likely to cause catastrophic losses if it did occur. Mr. Sparks also explained that, since the subprime mortgage industry considered losses in AAA rated RMBS securities to be exceedingly unlikely, the price of acquiring and holding such a short position was relatively inexpensive. |1728|
From the time the $9 billion AAA ABX short was acquired in 2006 until July 2007, it was not included in Goldman senior management's directives to cover shorts, and it does not appear to have been part of the Mortgage Department's efforts to get "closer to home," build a net short position in early 2007, or cover that net short in February and March. |1729| The $9 billion AAA ABX short may have been left out of management's directives on the first net short, because it was serving as a hedge for long subprime mortgage assets held by several Mortgage Department desks. |1730| As those long assets were sold or written down, however, no apparent steps were taken to unwind or remove the $9 billion AAA ABX hedge. |1731| By June 2007, it remained almost entirely intact as a net short. The value, cost, and risk associated with the AAA ABX short had been monitored, but not acted upon, until the short suddenly began approaching profitability and began contributing to high VAR levels for the Mortgage Department. It then drew the attention of Goldman senior management which included the AAA ABX short in its directive to cover the firm's second big net short. Covering the AAA ABX net short contributed to the multi-billiondollar profits realized by Goldman in the third and fourth quarters of 2007.
Report To Board. On March 26, 2007, Mr. Sparks and Goldman senior executives gave a presentation to Goldman's Board of Directors regarding the firm's subprime mortgage business. |1732| The presentation recapped for the Board the various steps the Mortgage Department had taken since December 2006, in response to the deterioration of the subprime mortgage market. |1733| The presentation noted, among other measures, the following steps:
"– GS reduces CDO activity
– Residual assets marked down to reflect market deterioration
– GS reverses long market position through purchases of single name CDS and reductions of ABX
– GS effectively halts new purchases of sub-prime loan pools through conservative bids
– Warehouse lending business reduced
– EPD [early payment default] claims continue to increase as market environment continues to soften." |1734|
By the time this presentation was given to the Board of Directors, Goldman's Mortgage Department had swung from a $6 billion net long position in December 2006, to a $10 billion net short position in February 2007, and then acted to cover much of that net short. Despite having to sell billions of dollars in RMBS and CDO securities and whole loans at low prices, and enter into billions of dollars of offsetting long CDS contracts, Goldman's mortgage business managed to book net revenues for the first quarter totaling $368 million. |1735|
In a section entitled, "Lessons Learned," the presentation stated: "Capital markets and financial innovation spread and increase risk," |1736| an acknowledgment by Goldman that "financial innovation," which in this context included ABX, CDO, and CDS instruments, had magnified the risk in the U.S. mortgage market.
In May 2007, Goldman's Structured Product Group (SPG) continued to work to cover the Mortgage Department's short position by offering to take the long side of CDS contracts referencing RMBS and CDO securities, but found few buyers. Many market participants had already shorted subprime mortgage assets, driving the price relatively high, and few wanted to buy additional short positions at the prevailing price. In order to turn the situation to its benefit, SPG's traders attempted to carry out a "short squeeze" of the subprime CDS market in May 2007. |1737|
The ABS Desk's traders were already offering single name CDS contracts in which Goldman would take the long position, in order to cover the Mortgage Department's short position. |1738| To effectuate a short squeeze, they appear to have decided to offer the short positions on those contracts at lower and lower prices, in order to drive down the market price of subprime CDS shorts to artificially low levels. Once prices fell below what the existing CDS holders had paid for their short positions, the CDS holders would have to record a loss on their holdings and might have to post additional cash collateral with their opposing long parties. Goldman hoped the CDS holders would react by selling their short positions at the lower market price. When the sell off was large enough and the price low enough, Goldman planned to move in and buy more shorts for itself at the artificially low price.
This short-squeeze strategy was later laid out in a 2007 performance self-evaluation by one of the traders on Goldman's ABS Desk who participated in the activity, Deeb Salem. In the selfevaluation he provided to senior management, Mr. Salem wrote:
"In May, while we were remain[ing] as negative as ever on the fundamentals in sub-prime, the market was trading VERY SHORT, and susceptible to a squeeze. We began to encourage this squeeze, with plans of getting very short again, after the short squeezed [sic] cause[d] capitulation of these shorts. This strategy seemed do-able and brilliant, but once the negative fundamental news kept coming in at a tremendous rate, we stopped waiting for the shorts to capitulate, and instead just reinitiated shorts ourselves immediately." |1739|
When interviewed by the Subcommittee, Mr. Salem denied that the ABS Desk ever intended to squeeze the market, and claimed that he had wrongly worded his self-evaluation. |1740| He said that reading his self-evaluation as a description of an intended short squeeze put too much emphasis on "words." |1741|
Mr. Salem's description of an attempted short squeeze by Goldman's Structured Product Group (SPG) is supported by other evidence. In May 2007, Michael Swenson, the head of both SPG and ABS Desks and Mr. Salem's supervisor, wrote emails that appear to confirm the attempted short squeeze. In the first email, dated May 25, 2007, Mr. Swenson wrote:
"We should be offering sn [single name] protection down on the offer side to the street on tier one stuff to cause maximum pain." |1742|
Four days later, on May 29, 2007, Mr. Swenson followed up with another email:
"We should start killing the sn [single name] shorts in the street – let's pick some high quality stuff that guys are hoping is wider today and offer protection tight – this will have people totally demoralized." |1743|
When asked about these emails, Mr. Swenson also denied that Goldman had attempted to squeeze the CDS short market. He claimed that the cost of single name CDS shorts had gone too high, and the purpose behind Goldman's actions was to restore balance to the market. |1744| Mr. Swenson could not explain, however, why in an effort to restore balance to the market, he used the phrases "cause maximum pain," and "this will have people totally demoralized."
Goldman documents show there was a plan and an attempt to conduct a short squeeze, despite the harm that might be caused to Goldman's clients. Contemporaneous emails further show that clients were complaining about a sudden markdown by Goldman in the value of their short positions, especially compared to prevailing market prices and the worsening of the subprime market itself. |1745|
On May 18, 2007, a Friday, the ABS Desk marked down the value of many of its clients' CDS short positions. On Monday, May 21, Mr. Salem sent an email to Mr. Swenson and Edwin Chin entitled, "A few things . . . pain-related." |1746|
"Guys r gonna complain about their marks [hedge fund] already emailed me. I would talk about the recent flow of OWICS [offers] and the levels ... they have been trading as the reason we moved marks on Friday. ... [Another customer] lost 6 pct based on fridays moves." |1747|
That same day, a Goldman sales representative sent Mr. Chin a complaint from a hedge fund customer named Stanfield Capital regarding the lower values assigned to its CDS short positions. The sales representative wrote:
"Stanfield feels we are marking them tighter than other dealers with whom they have similar protection. ...
"In addition, 14 of the 25 names below were marked over 100 bps [basis points] tighter week-on-week. That is a massive move and is creating major stress at the clients, as we can't see a similar move in the broader market. ...
"Finally, be aware that Stanfield may look for you to offer protection very close to your mark. ... I'm hoping your attention to the marks below will defuse a situation in which they think we're messing with them via our marks on their protection." |1748|
Mr. Chin forwarded the email to Mr. Swenson and Mr. Salem. Mr. Swenson replied: "We are ok with that they do not have much more gun powder." |1749| Mr. Swenson's response suggested that Goldman did not have to be concerned about Stanfield's threat to buy CDS shorts at the same low price Goldman had applied to his CDS holdings, since Stanfield did not have the financial resources – the "gun powder" – to make a large purchase.
On May 24, 2007, the Stanfield trader wrote to Goldman that he had thought the purchase of the CDS contract signaled the beginning of a partnership between Stanfield and Goldman, but he had lost credibility with his company because of the CDS contracts and expressed concern that he may have been "naive to trust the pitch" from Goldman:
"When we put on the Single A protection trade the underlying names were suppose[d] to have a large similarity to the index. ... The indexes are up only a couple of points since we did the trade. Looking at the mid's on our Single A trades we have tightened roughly 33%. ... I'm just trying to figure out how we can reverse some of the losses we have incurred.
Also, from where our BBB trade was marked last Friday ...[t]his trade is tighter by 35% as well. ...
I had always thought that these trades were meant to be the start of a partnership building of future business between Stanfield and Goldman Sachs. I know we are big boys and we did the trade there is no doubt of that. What I am attempting to do is either cut our losses and get out or determine what I can say to keep this trade on .... I've lost a lot of credi[b]ility on the desk with this trade. Maybe I was naive to trust the pitch on the trade. It has cost me a lot." |1750|
A week later, on May 31, 2007, Stark Investments indicated interest in buying a short on certain RMBS securities backed by home equity loans. The Goldman sales representative trying to close the sale emailed SPG personnel that the client was hesitating due to Goldman's valuations which were "drastically different" from other dealers:
"Stark has an interest in looking at this trade; but there is an obstacle we need to address: They feel Goldman is very inconsistent in the single name HEL [Home Equity Loan] CDS marks that we provide them. We are drastically different in marking positions versus other dealers. It is an annoyance that would potentially limit their interest in putting on incremental CDS trades. I can name specific examples if you would like. Please advise." |1751|
Mr. Salem replied: "you couldn't be more wrong," while Mr. Swenson replied:
"Frankly, we believe we are best in class and have numerous data from controllers, collateral posting and markit (the company, not market) that reflect upon this. This process is thoroughly reviewed by all levels of senior management at GS. ...
"Unlike other dealers we stand by our marks and are willing to transact in the context of our marks. ...
We also don't mark our book wide if we are long protection and tight if we are short. we mark to market." |1752|
When the salesman replied: "I am trying to work with you guys," Mr. Swenson chided him: "You need to manage their opinions on marks – that has been fully vetted over here." |1753|
On June 7, 2007, Mortgage Department personnel learned that two Bear Stearns hedge funds specializing in subprime mortgage assets were in financial distress. |1754| In response, the ABS Desk immediately decided to buy more shorts at the prevailing market price to take advantage of the possible collapse of the Bear Stearns hedge funds, which would send subprime mortgage prices still lower. To do so meant the ABS Desk had to sacrifice its "short squeeze" play. On June 7, 2007, Mr. Salem emailed Messrs. Swenson and Chin:
"We need to go to magnetar [a hedge fund] and see if we can buy a bunch of the cdo protection. ... Can tell them we have a protection buyer, who is looking to get into this trade now that spreads have tightened back in." |1755|
Raising no concerns about the proposed deception, Mr. Swenson replied "Great idea." |1756| Mr. Salem continued:
"Should we also send an email to select sales people in the mtg [mortgage] sales force saying that we r looking to buy a block of single name protection vs a cdo OUT OF COMP [in a private, off-market transaction]? It's a no lose situation . . . either we get some sn [single name] protection that we want or we gave these guys a chance and nobody can say we aren't working with them." |1757|
Mr. Swenson responded: "We need to be careful." Mr. Chin wrote that he knew of another CDO collateral manager that might also be willing to sell some shorts: "I mentioned there was a hedge fund on the side and he was very axed to do something." |1758|
Having decided to start buying shorts outright, the ABS Desk also stopped offering to sell CDS short positions to Goldman customers, effectively abandoning the attempted short squeeze. On June 8, 2007, Mr. Swenson told his traders: "[w]ant to slow down on protection offers." |1759| On June 10, 2007, in response to a customer inquiry about a CDS short, Mr. Salem wrote: "Not sure if we have any to offer any more." |1760| Mr. Swenson was less equivocal: "Really don't want to offer any." |1761| On June 13, 2007, a Goldman salesman emailed SPG personnel: "[Customer] is looking to buy protection on cdos." |1762| Mr. Salem replied: "too late!"
Once it began buying CDS shorts, the SPG Desk immediately changed its CDS short valuations and began increasing their value. Clients with long positions began to complain that the marks were too high, and internal Goldman business units also raised questions. For example, on June 11, 2007, a Goldman valuation specialist sent an email to Mr. Swenson, with copies to Compliance and the Controller's Office noting that "Client challenging marks," followed by "Trading has agreed to change ... marks." |1763| The next day, June 12, 2007, a Goldman representative from the Controller's Office sent an email to Mr. Salem, asking: "Given recent gyrations in the ABX and CDS markets, when can I come by to discuss how you are marking the book tonight?" |1764| The following week, on June 19, 2007, the Controller's office sent an email to Mr. Swenson raising questions about values assigned to certain CDS contracts: "These levels look quite wide. Do you have any specific market color that points this direction?" |1765|
The May 2007 attempted short squeeze described in Mr. Salem's performance selfevaluation did not succeed in compelling existing CDS holders to sell their short positions. In Subcommittee interviews, Mr. Salem and Mr. Swenson denied that an attempted short squeeze even took place. Any attempt that did take place was apparently abandoned in June 2007, when Goldman stopped offering to sell CDS short positions. Trading with the intent to manipulate market prices, even if unsuccessful, is a violation of the federal securities laws. |1766| Given the novelty of credit default swaps and their use in the mortgage field, however, the Subcommittee is unaware of any enforcement action or case applying an anti-manipulate prohibition to the CDS market. Because Goldman is a registered broker-dealer subject to the supervision of the Financial Industry Regulatory Authority (FINRA), the conduct of its ABS traders raises questions about their compliance with FINRA's Rule 2010, which provides: "A member, in the conduct of his or her business, must observe high standards of commercial honor and just and equitable principles of trade."
In the months of June and July 2007, Goldman's Mortgage Department went short again. This time, it built an even larger net short position than earlier in the year, reaching a peak of $13.9 billion in late June, |1767| which Mr. Viniar later referred to as "the big short." |1768| This net short position included the $9 billion AAA ABX short which had suddenly begun gaining value as the subprime market worsened. In June, two Bear Stearns hedge funds specializing in subprime mortgage assets collapsed. In July 2007, the credit rating agencies began downgrading ratings for hundreds and then thousands of RMBS and CDO securities. Soon after, the subprime mortgage backed securities market froze and then collapsed. Each of these events increased the value of Goldman's net short position.
Bear Stearns Hedge Fund Collapse. The collapse of the Bear Stearns hedge funds in mid-June triggered Goldman's effort to rebuild its net short position. On June 7, 2007, the Mortgage Department learned that the Bear Stearns hedge funds were seeking quietly to sell some of their subprime portfolio to meet client redemption requests, which Goldman interpreted as a signal of serious financial distress. |1769| After reviewing the hedge funds' assets, one Goldman employee remarked:
"In total these two portfolios add up to roughly $17bil in total exposure after leverage. It goes without saying that if this portfolio were to be released into the market the implications would be pretty severe." |1770|
On June 8, 2007, Mr. Sparks received an urgent early morning email from Goldman's Japan office regarding "unprecedented overnight [rates] market volatility," suggesting that he call in the ABX traders early. |1771| "Given the recent correlation of risk assume this is not a good sign for RMBS/ABS spreads." |1772| Later that day, when another trader complained about "getting crushed" in the ABX market, Mr. Birnbaum replied: "Patience, patience. The CDO unwind has only begun." |1773|
Around June 12, 2007, public news accounts indicated that the two Bear Stearns funds were unable to meet collateral calls on their subprime mortgage backed securities holdings. |1774| The funds also devalued their Net Asset Valuations (NAVs) to significantly lower levels, which effectively triggered the funds' total collapse. |1775|
The failure of the Bear Stearns hedge funds triggered another decline in the value of subprime mortgage related assets. The ABX Index, which was already falling, began a steep, sharp decline. The collapse had further negative effects when the hedge funds' massive subprime holdings were suddenly dumped on the market for sale, further depressing prices of subprime RMBS and CDO assets.
The creditors of the Bear Stearns hedge funds met with Bear Stearns management in an attempt to organize a "workout" solution to stabilize the funds. |1776| While those efforts were underway, Goldman and Bear Stearns agreed to an unwind in which Goldman bought back $300 million of two AAA CDO tranches of Goldman's Timberwolf CDO, which the hedge funds had purchased two months earlier in April 2007. Goldman paid Bear Stearns 96 and 90 cents on the dollar, respectively, for the two Timberwolf tranches. |1777| Goldman also bought a few other RMBS and CDO assets, which it immediately sold. |1778| The attempt to organize a workout solution for the funds was ultimately unsuccessful. Large blocks of subprime assets from the Bear Stearns hedge funds' inventory began flooding the market, further depressing subprime asset values. |1779|
Goldman's Structured Product Group (SPG) took the collapse of the Bear Stearns hedge funds as the signal to begin rebuilding its net short position. As Joshua Birnbaum, the head ABX trader on the SPG Desk, later wrote:
"[T]he Bear Stearns Asset Management (BSAM) situation changed everything. I felt that this mark-to-market event for CDO risk would begin a further unraveling in mortgage credit. Again, when the prevailing opinion in the department was to remain close to home, I pushed everyone on the [SPG] desk to sell risk aggressively and quickly. We sold billions of index and single name risk." |1780|
In a later internal presentation for Goldman senior executives which Mr. Birnbaum drafted for another purpose, |1781| Mr. Birnbaum wrote that, after the Bear Stearns funds collapsed, SPG's Trading Desks went net short outright and that the shorts were not a hedge for long positions:
"By June, all retained CDO and RMBS positions were identified already hedged. ... SPG trading reinitiated shorts post BSAM [Bear Stearns Asset Management] unwind on an outright basis with no accompanying CDO or RMBS retained position longs. In other words, the shorts were not a hedge." |1782|
On June 29, 2007, the ABX Index and the value of single name CDS contracts referencing RMBS and CDO securities plummeted in value and continued dropping until mid-July. Mr. Swenson, head of the SPG Trading Desk, exchanged emails with Mr. Lehman and other Goldman executives about that day's trading: "There is absolutely no support at the lower levels from the street. CDOs are wider by 50 bps or more." Mr. Lehman responded: "[W]e r in the middle of a mkt meltdown." |1783|
On July 10, 2007, the two primary ratings agencies, Standard & Poor's and Moody's, began the first of many mass ratings downgrades for subprime RMBS and CDO securities. |1784| The downgrades sent another negative shockwave through the subprime mortgage market as investors scrambled to assess the impact of the downgrades on their RMBS and CDO holdings. |1785| On July 12, 2007, when still more RMBS and CDO ratings downgrades were announced, Mr. Birnbaum wrote to his colleagues: "Seen massive flows recently. Many accounts ‘throwing in the towel'. Anybody who tried to call the bottom left in bodybags." |1786|
On July 27, 2007, a Goldman senior sales executive summarized the state of the market:
"Whether you remember ‘94, ‘98, or ‘03, the general themes/patterns are consistent. An initial dislocation to the market (in this instance a credit deterioration in sub prime mortgages) acts as a tipping point and leads to spread widening in other sectors. This in turn quickly becomes a liquidity crunch/crisis. It appears this is where the structured product market is now – searching for liquidity. This has produced numerous capitulation/liquidation situations and forced customers to trade. . . . The impact of this week leaves the account base in three camps: The Paralyzed . . . The Wounded (some fatally) . . . The Opportunistic." |1787|
Although the July subprime market meltdown was a disaster for many investors, the value of Goldman's net short positions climbed rapidly. Senior management at all levels were aware of the Mortgage Department's net short and the profits it was generating. On July 20, 2007, CEO Lloyd Blankfein and COO Gary Cohn received a profit and loss report showing that the Mortgage Department was up $72.7 million for the day, across almost every mortgage trading desk. Mr. Cohn wrote to Mr. Blankfein: "There is a net short." |1788| On July 24, 2007, the Mortgage Department posted a profit of $83 million for the day, while the firm's overall net revenue for the day was only $74 million. |1789| Mr. Viniar forwarded the report to Mr. Blankfein with a note saying: "Mergers, overnight asia and especially short mortgages saved the day." On July 29, 2007, Mr. Sparks reported to Messrs. Montag and Mullen:
"Department-wide P&L [Profit & Loss] for the week was $375mm (this is after adjusting for the $100mm [error] discussed today). Correlation P&L on the week was $234mm, with CMBS, CDOs, and RMBS/ABX shorts all contributing." |1790|
Mr. Birnbaum later recapped the SPG Trading Desk's profits during this period: "[W]hen the [ABX] index dropped 25 pts in July, we had a blow-out p&l month, making over $1Bln that month." |1791|
Covering the Big Short to Lock in Profits. Starting in July and throughout August 2007, Goldman undertook an intensive effort to cover its $13.9 billion net short and lock in its profits. To do so, the Mortgage Department bought long assets, offered CDS contracts in which it took the long side, and even sold some short positions.
The Mortgage Department was particularly focused on purchasing long AAA assets to cover Goldman's $9 billion AAA ABX short, to lock in the unexpected profits on that position. In August 2007, Mr. Lehman, co-head of the SPG Desk, wrote: "[A]s swenny/deeb/josh have done an awesome job sourcing risk, the CDO transition book AAA ABX short decreased from 1.55bb to 250m over the past two weeks – we love covering that trade." |1792| On August 23, 2007, Mr. Montag reported to Messrs. Cohn and Viniar: "We ... bought back almost 9 billion of aaa abx over last two weeks." |1793|
From mid-July through the end of August, the Mortgage Department also covered a range of other shorts. |1794| On August 5, 2007, Mr. Swenson reported a "phenomenal week":
"In summary, a phenomenal week for covering our Index shorts on the week. The ABS Desk bought $3.3bb of ABX Index across various vintages and ratings over the past week. $1.5 billion was retained by the ABS desk to cover shorts in ABX ($900mm in ABX 06-1 As being the most significant) and $1.0 billion was sold to internal desks across the mortgage department ($925mm in triple-As)." |1795|
Mr. Swenson also reported that the Mortgage Department was still $8.3 billion net short across all subprime asset classes, including $4 billion of AAA ABX assets. <|1796|
On August 8, the market rallied for a short period, and the Mortgage Department's net short position suffered a $100 million loss. Mr. Swenson explained: "Market rallied especially at the top end of the capital structure – AAA (up 2 pts), AA (up 3 pts), and A (up 2 pt.)." He reported that the Department still held a $3.1 billion net short in AAA rated subprime mortgage assets. |1797| Mr. Montag replied: "now on to the 3 billion short." |1798| The next day, August 9, 2007, Mr. Montag reported to his colleagues: "mortgages bought back 1 billion of 3 billion short in AAA indices at ½ to 1 point better than yesterday." |1799|
On August 11, 2007, reports of firms having to sell CDO securities in Asia prompted Mr. Mullen to ask: "Did we cover to[o] soon? Looks like more selling at the higher end of cap stack" |1800| Mr. Lehman replied: "Don't th[in]k so – we haven't covered any CDO risk (we have gone the other way by 1.44bb since June 1st ) and that is where the market still has bad longs – th[in]k AAA rmbs is a very different trade." |1801|
On August 20, 2007, Mr. Sparks reported on the Mortgage Department's progress in covering its net short, telling Mr. Montag: "[L]oan books had been heavily net short (still are some – especially ... in alt a) and I have been forcing them to cover over the past 2 weeks." Mr. Montag responded: "[H]eavily isn't the half of it – we have bought back 4 - 5 billion and still short." |1802|
Buying More AAA RMBS Securities. In August 2007, the Mortgage Department proposed buying $10 billion in AAA rated RMBS securities, but did not receive permission to initiate the investment.
By August 2007, AAA rated RMBS and CDO securities were available from many financial firms at a very low price. On August 14, 2007, in summarizing the prior week's trading Mr. Swenson wrote: "Top of the capital structure is where all the action is. AAAs are extremely cheap .... [W]ant to scale into a large long." |1803| Mr. Sparks agreed: "[T]he AAA ABX index is a great opportunity and we continue to like it." |1804| On August 19, 2007, Mr. Lehman reported that the Mortgage Department had purchased $1.6 billion of the long side of CDS contracts referencing the ABX Index for AAA RMBS securities, and that its value had increased 1.5 percent over the prior week. Given Goldman's dominant market share and recent large purchases, however, Mr. Montag was skeptical: "How much of the aaa outperforming was us buying?" |1805| Mr. Birnbaum responded: "On the AAA outperformance question, I think AAAs would have performed similarly without our adding." |1806| He also wrote that the "likelihood of loss on ‘real' RMBS AAAs (i.e., not AAA CDOs)," was "remote." |1807|
According to Mr. Birnbaum, a key reason for buying the AAA rated assets was that Mr. Birnbaum and others in the Mortgage Department wanted to maintain a large short position in ABX assets referencing BBB and BBB- rated RMBS securities, because they believed the ABX Index for those securities would fall even further. |1808| Mr. Birnbaum told the Subcommittee that covering the BBB/BBB- net short position in August would have amounted to leaving money on the table. |1809| He explained that the Mortgage Department thought that buying a proportionate amount of AAA ABX long positions could be used to offset the risks of continuing to hold the BBB/BBB- short until the ABX Index bottomed out. |1810|
On August 14, 2007, Mr. Sparks updated Goldman senior executives on the success of the Mortgage Department's efforts to cover its shorts and added that the Department was interested in increasing its purchase of AAA rated RMBS securities: "we will likely come to you soon and say we'd like to get long billions[.]" |1811| Senior executives reacted with skepticism. |1812| Mr. Sparks responded: "We're continuing to cover some shorts and we may cover some BBB with AAA, but I got the message clearly that we shouldn't get long without Gary [Cohn]/Tom [Montag]/Don [Mullen] all saying OK." |1813|
On August 20, 2007, Mr. Sparks pitched the idea again to Mr. Montag and other senior executives in an email entitled, "Big Opportunity":
"We are seeing large liquidations - we bought $350mm AAA subprime RMBS from ... SIV unwinds today. ... We think it is now time to start using balance sheet and it is a unique opportunity with real upside - specifically for AAA RMBS. We've sold over $100mm of what we bought today – most up 1-2 points.
That's a great trade – buy and flip up 1-2 points, however, we're not always going to be able to do that - and there's the opportunity for us to make 5-10 points if we have a longer term hold." |1814|
On August 21, 2007, Mr. Birnbaum presented the Mortgage Department's plan to buy up to $10 billion in AAA rated RMBS securities. |1815| The plan had dual objectives, to profit from the intrinsic financial value of the proposed assets and to use those assets to preserve, rather than cover, the Department's existing $3.5 billion BBB/BBB- net short:
"– The mortgage department thinks there is currently an extraordinary opportunity for those with dry powder to add AAA subprime risk in either cash or synthetic form.
– We would like to be opportunistic buyers of up to $10Bln subprime AAAs in either cash or synthetic (ABX) form and run that long against our $3.5Bln in mezzanine subprime shorts.
– Mortgage dept VAR would be reduced by $75mm and Firmwide VAR would be reduced by $25mm.
– At current dollar prices, the implied losses at the AAA level are 2.5x higher than the implied losses at the BBB level where we have our shorts (the ratio is even cheaper for cash due to technicals). If AAAs were priced consistent with BBB implied loss levels, they would be trading 5-10pts higher in synthetics and 10-15 points higher in cash. ...
– On the demand side, we plan to share this trade quietly with selected risk partners. We began doing so yesterday when we sold 1/3 of the AAAs purchased off the [seller] list to [customer] and 100% of the AAAs from [seller] to [customer] and [customer]." |1816|
Mr. Montag responded that he wanted to discuss the concept further. |1817| Mr. McMahon wrote: "What are we holding against the 3.5b mezz shorts right now? Why don't we just cover the shorts?" |1818| Co-President Gary Cohn emailed Messrs. Mullen, Winkelried, and Montag: "I do like the idea but you[r] call." |1819| Before any further discussion took place, however, events overtook the debate.
Despite direction from senior management to cover its $13.9 billion net short position, the Mortgage Department continued to maintain several large net shorts, including at least $3 billion in single name CDS contracts referencing BBB and BBB- rated RMBS securities that it expected to gain in profits. In August 2007, Co-President Gary Cohn finally issued an order to "get down now." |1820|
Excessive VAR. By late August, a combination of the large net short and volatility in the subprime mortgage market had driven the Mortgage Department's VAR to an all-time high. When the AAA ABX short position was far out-of-the-money, it entailed little market risk, as it was not actively traded and had little likelihood of ever paying off. Once the AAA ABX short became profitable, however, the $9 billion position was so large that it had a major impact on the firm's risk measurements. Even a small percentage change in $9 billion can cause substantial changes in a profit and loss statement. As Mr. Sparks explained: "The combination of our large AAA ABX index shorts and the relatively new volatility in the AAA part of the index will result in much larger daily swings in P&L [profit and loss] both ways." |1821|
As predicted, due to the $9 billion short, the Mortgage Department's daily profit and loss reports began to show much larger swings. |1822| For example, while the Mortgage Department showed a profit of $71 million on July 21, |1823| it showed a loss of $100 million on August 8. |1824| Upon hearing of that loss, Mr. Montag asked "so who lost the hundy?" |1825| Mr. Birnbaum wrote to a colleague: "I'm sure the AAA ABX is being blamed as the reason the dept was down 100 yest[erday]." |1826| While some in the Mortgage Department disagreed with the use of VAR as a measure of risk, |1827| the gyrations in daily profit and loss figures demonstrated that the $9 billion net short posed real risk to Goldman.
VAR depends primarily on the aggregate size of net asset positions and the volatility of the relevant market. Goldman was holding several large net short positions, the subprime market had become extremely volatile, and the Department's efforts to cover its shorts further complicated matters. Although Goldman's covering of its $9 billion net short AAA position would ordinarily be expected to reduce risk, the massive size of the position, combined with unprecedented levels of volatility in the market, the speed of Goldman's covering, and the size of the trades involved, resulted in steep increases in the Department's VAR.
The Mortgage Department's VAR had increased from around $13 million in mid-2006, well under the Department's permanent limit of $35 million, to $85 million in February 2007, to a high of around $113 million in August 2007. |1828| The $113 million figure exceeded the Department's $35 million permanent VAR limit by more than 350%. Moreover, the Mortgage Department, which had never contributed more than about 2% of firmwide net revenue prior to 2007, was generating some 54% of all the risk incurred by the firm in August 2007. The Mortgage Department's risk level, however profitable, was of increasing concern from a firmwide perspective. |1829|
In an effort to maximize the profit potential from its net short positions, SPG personnel in the Mortgage Department argued against indiscriminately covering all of the Department's shorts. |1830| But the Mortgage Department's VAR level proved to be both intractable and highly unpredictable. |1831| It also contributed to record high levels of firmwide VAR, a figure carefully monitored by the firm's most senior management. The Mortgage Department and its risk controllers tried unsuccessfully to reduce the Department's VAR, and were discussing new alternatives, |1832| when Goldman's Co-President Gary Cohn intervened. On August 15, 2007, the same day that Goldman's firmwide VAR hit a then-record high of $165 million, Mr. Cohn emailed the Mortgage Department's senior managers, risk analysts and controllers: "There is no room for debate – we must get down now." |1833|
The Mortgage Department took immediate action. To reduce its VAR, the Department had to sell at least some of its BBB/BBB- net short position. |1834| On August 23, 2007, Mr. Swenson reported that Harbinger had bought a large block of single name CDS contracts shorting BBB/BBB- rated RMBS securities which allowed Goldman to take the long side: "We just printed $400mm of Singles with Harbinger. 130mm of BBB and 270mm BBB-." Mr. Montag passed the message on to Messrs. Cohn and Viniar: "Finally actuall[y] covering singles." Mr. Cohn responded: "Great." |1835|
But even after that $400 million sale, Mr. Sparks reported to Mr. Montag: "[W]e are short ... about $3BB single names." |1836| Mr. Montag responded that the $3 billion net short position was "huge and outsized" and $800 million had to be sold: "[I]f I make you sell a whopping 800 [million] out of 3 billion which is less than 30% how can anyone complain–the position is huge and outsized." |1837| At the end of the trading day on August 23, Mr. Montag asked Mr. Sparks: "How much did we cover–shooting for $1 billion." Mr. Sparks responded: "Not much more today - trying." |1838|
Although the Mortgage Department did not cover its shorts as quickly as Mr. Montag wanted, within days of Mr. Cohn's August 15 order to "get down," Goldman's firmwide trading VAR had dropped by $40 million and the Mortgage Department's VAR had dropped below $100 million. |1839| On August 23, 2007, Mr. Cohn forwarded a VAR report to CEO Lloyd Blankfein: "The message got through." Mr. Blankfein responded: "Good job." Mr. Cohn wrote: "Down 40 in 2 days." |1840|
Although the Mortgage Department's VAR measure fell substantially, it remained well above its permanent risk limit of $35 million throughout the rest of 2007. |1841| In addition, although Goldman senior executives rejected the Mortgage Department's plan to buy $10 billion in AAA rated RMBS securities, |1842| the Department ultimately purchased over $2.2 billion in AAA rated RMBS securities |1843| and continued to hold and strategically sell off its BBB and other short positions through the end of 2007. |1844|
Goldman's short positions continued to produce profits for the firm, as mortgage related assets continued to lose value. In September 2007, one of the key traders in the Mortgage Department, Deeb Salem, summarized four key short-side trading strategies that enabled the Mortgage Department to profit from the collapse of the subprime mortgage market: |1845|
(a) a "dispersion trade," in which Goldman took advantage of "mispriced" single name CDS contracts that referenced very poorly performing RMBS securities, but were not priced much lower than better performing RMBS securities, resulting in profits of $750 million "so far";
(b) a massive purchase of single name CDS contracts referencing a variety of RMBS securities, taking advantage of Goldman's estimated 33% "dominant" market share in single name CDS to make a "HUGE directional bet" against the subprime mortgage market, resulting in profits of $1.7 billion; |1846|
(c) the purchase "at a discount" of single name CDS contracts referencing Alt A and A rated RMBS securities, which "others don't want/know where to price," resulting in profits of $400 million "so far"; and
(d) the purchase of single name CDS contracts on A, AA and AAA rated CDO securities "in size," amassing an "enormous" market share whose profits had "exceeded all of our high expectations" at $900 million "so far." |1847|
In October 2007, after the credit rating agencies downgraded hundreds of CDO securities, |1848| Mr. Swenson wrote to Mr. Mullen that the downgrades would eventually cause defaults in many CDO securities that Goldman had shorted, meaning that Goldman's "CDS protection premiums paid out will go to zero," |1849| and Goldman would receive substantial CDS payments on those CDOs from the long parties. Mr. Mullen responded: "Looks like we're going to make some serious money." Mr. Swenson replied: "Yes, we are well-positioned." |1850|
Indeed, the Mortgage Department made $110 million the very next day. |1851| Mr. Swenson explained: "65mm was from yesterday's downgrades which lead to the selloff." Mr. Mullen replied: "Great day!" |1852| By the end of 2007, the Mortgage Department had brought in approximately $3.7 billion in net revenues from its SPG Trading Desk. |1853|
In addition to contemporaneous emails, presentations, and reports, Goldman's large net short position is reflected in its own financial records, including its Mortgage Department Top Sheets. |1854| Goldman's Mortgage Department kept records of its overall net short positions across various subprime asset classes on a daily basis throughout most of 2007. |1855| Those records indicate that the Mortgage Department had large net short positions in the subprime mortgage market throughout most of 2007. Goldman's documents reveal that it had a $10 billion net short position at the end of February 2007, and a $13.9 billion net short position in mid-June 2007. |1856|
Daniel Sparks told the Subcommittee that, in 2006 and earlier, he was frustrated because he felt Goldman had inadequate systems to track and aggregate the daily positions of the various desks in the Mortgage Department. |1857| At the end of each trading day, he had to review up to a dozen separate reports from the desks to develop a composite mental picture of the Mortgage Department's overall positions. To remedy this shortcoming, in February 2007, Mr. Sparks and the Department's strategic analysts, sometimes called "strats," developed a single-page report called the Mortgage Department Top Sheet. |1858|
The Mortgage Department Top Sheet became the primary report through which the Mortgage Department tracked its daily positions in various classes of mortgage related assets. It provided a comprehensive listing of the Mortgage Department's long and short positions in different asset classes across all desks at the end of each trading day. The Top Sheet drew data from up to a dozen separate reports generated by Goldman's electronic systems. Mr. Sparks told the Subcommittee that the Top Sheet evolved over time to become a good tool that provided a comprehensive record of the Department's positions. |1859| The Goldman Controller's office told the Subcommittee that Goldman did not maintain any other type of comprehensive daily report regarding the Mortgage Department's net positions in various asset classes. |1860|
The Top Sheet was literally the top sheet, or cover page, to a comprehensive report distributed daily to Mr. Sparks and other Mortgage Department managers. |1861| The top line of the Top Sheet listed the aggregate total amounts held by the Mortgage Department in various asset classes, including AAA, AA, BBB, and BBB- rated assets. |1862| During most of 2007, the Top Sheet also provided an overall net short or long figure that summed across the top line totals for each of the respective asset classes, providing an overall figure by which the Mortgage Department was net long or net short across all asset classes each day. By plotting this overall net figure for each daily Top Sheet, the Subcommittee developed a graph of the Mortgage Department's net position during 2007, as indicated on the chart on the following page. |1863|
[SEE CHART NEXT PAGE: Goldman Sachs Mortgage Department Total Net Short Position, prepared by the Permanent Subcommittee on Investigations.]
The Subcommittee's net short chart is generally consistent with a Goldman chart that Mr. Birnbaum asked one of the Mortgage Department's analysts to prepare for him in August 2007, which can be seen on the following page.
[SEE CHART NEXT PAGE: RMBS Subprime Notional History, prepared by Goldman Sachs.] |1864|
The "zero" line in the middle of the chart represents a neutral trading position that is neither net long nor net short. To use Mr. Viniar's description, the zero line represents "home." The area below the zero line represents net short positions; the area above the line represents net long positions. The chart shows that the Goldman Mortgage Department was net short throughout 2007, with a total net short position that reached $13.9 billion in July.
Some Goldman representatives told the Subcommittee that they objected to both the Subcommittee's net short chart, and Goldman's own similar chart, on the grounds that the charts are too simplistic and fail to account for the relative "weight" or value of short positions in differing asset classes. |1865| For example, in a 2010 interview with the Subcommittee, Mr. Birnbaum said that because of their differing "weights" or values relative to one another, the notional amounts in each asset class could not simply be summed up together. For example, he said the notional amount of AAA assets cannot be added to the notional amount of BBB assets, because the market assigns each of those positions different weights or values relative to each other. |1866| He said that these relative weights or values are often expressed as specific "hedge ratios" which Goldman traders can call up on their computer screens in real time to tell them, for example, the amount of AAA assets they should buy long to hedge a given net short position in BBB assets. |1867| Each class also poses a different level of risk than the others. For example, short positions in AAA assets were relatively inexpensive, as the risk of loss in that tier was considered relatively low, while short positions in BBB assets would have higher prices, because the risk of loss was considered high. Mr. Birnbaum said the only chart of Goldman's net short position that he would accept as fairly representative would be one that was "Beta-adjusted" to account for differences in the relative weights, but he admitted that he was unaware of any such charts or reports created by Goldman during 2007. |1868| Without considering these relative weights (which continually change based on market price movements in various asset tiers), Mr. Birnbaum said it would be impossible to say that Goldman was ever "net short" at all or in what amount. |1869|
Goldman's own documents provide a different picture, however. The Top Sheet was the primary comprehensive record used by the Mortgage Department to track all net positions across the Mortgage Department. Goldman did not keep any other records that identified the Mortgage Department's net positions in various asset classes, |1870| and did not keep any records that used the "Beta-adjustment" method advocated by Mr. Birnbaum. By early March 2007, the Top Sheet generally expressed the market values of positions in different asset classes, rather than the notional amount of the positions. |1871| By using the market values of positions in each asset class on a given day, the Mortgage Department did, in fact, create a reasonable method for summing across all asset classes in a single common denominator – the amount of cash the assets would bring in the market that day. Since the Subcommittee's net short chart relies on the Department's daily Top Sheet figures as expressed in market values rather than notional amounts, it does not suffer from the incompatibility defect pointed out by Mr. Birnbaum.
Mr. Birnbaum's position that the notional amounts of each asset class cannot be summed up together is also inconsistent with what Goldman's Mortgage Department did on a day-to-day basis in 2007. Mr. Sparks, the Mortgage Department head who helped design the Top Sheet, used it to measure the Department's daily position. Mortgage Department personnel and other Goldman executives also discussed the Department's being "net short"– either overall or in specific asset classes – on a daily basis. |1872|
Indeed, the phrase "net short" appears more than 3,400 times in the documents produced to the Subcommittee by Goldman. |1873| Since Mr. Birnbaum claimed that one could never really say whether Goldman was truly "net short," the Subcommittee asked him why the phrase "net short" appeared so many times in Goldman's documents. Mr. Birnbaum said that the use of the phrase "net short" was a "shorthand" that was used internally in the Mortgage Department. |1874| In fact, neither Mr. Birnbaum, Goldman, nor the Subcommittee could identify any specific document or instance from 2007 in which the weighting exercise advocated by Mr. Birnbaum in his September 2010 interview was ever used or suggested.
Aside from the Top Sheet that summed up totals across different asset classes to obtain an aggregate total, there are also many documents in which Goldman personnel described the total amounts by which Goldman was net short in respective asset classes. For example, Mr. Swenson, and later Mr. Lehman, compiled an email summary each week that described each Mortgage Department desk's net position in different asset classes. A typical format was as follows:
"Current [SPG Trading] Desk Position Summary:
- RMBS Single-As - net short 900mm 100% in single-name CDS
- RMBS BBB/BBB- - net short 3,000mm (80% in single-name CDS - 50% 2005 vintage
- Correlation Desk - net short $400mm of ABX 06-1 BBB and BBB-
- Mortgage Department short approx $4bb AAA ABX" |1875|
Mr. Swenson's email summaries were forwarded to Mr. Montag and other senior executives to keep them apprised of the Department's positions. |1876| While these documents did not provide an aggregate overall net short position for the Mortgage Department, they did establish net short positions in each of the various specific asset classes described, and they were apparently acceptable to and relied upon by various Goldman executives. Throughout most of 2007, these weekly reports clearly show very large net short positions in mortgage related assets. |1877|
Email correspondence among Goldman's senior executives also routinely referred to the Mortgage Department's net short positions in "billions." |1878| CFO David Viniar told the Subcommittee that a loss (or gain) in the amount of even $25 million was considered "large" and would immediately be brought to his attention. |1879| By that standard, net revenues of $2 billion from the Mortgage Department's net short positions in the third quarter of 2007 would have been considered significant and monitored by senior management, as indeed they were.
In testimony before the Subcommittee and other public statements, Goldman attempted to minimize the size of its net short position by suggesting to the Subcommittee that the short positions held by the Mortgage Department were hedges for other, unidentified long assets. |1880| Mr. Blankfein even made that argument to his colleagues in September 2007: "The short position wasn't a bet. It was a hedge." |1881| But Mr. Birnbaum contradicted that position just a few days later. On October 4, 2007, Mr. Birnbaum prepared on behalf of the SPG Trading Desk a presentation entitled, "SPG Trading – 2007," in which he advocated that SPG Trading Desk personnel should be compensated like hedge fund managers and not as ordinary participants in Goldman's traditional bonus pool system. |1882| The presentation, which Mr. Birnbaum prepared to anticipate and refute counter-arguments that might be made by Goldman senior executives, explicitly addressed and rejected the contention that the profitable net short positions managed by the SPG Trading Desk were hedges for long assets held by other desks. Mr. Birnbaum, one of the chief architects of Goldman's big short, stated:
"By June [2007], all retained CDO and RMBS positions were identified as already hedged. ... SPG trading re-initiated shorts post BSAM [Bear Stearns Asset Management] unwind on an outright basis with no accompanying CDO or RMBS retained position longs. In other words, the shorts were not a hedge." |1883| (Emphasis in original).
In response to Questions for the Record from the Subcommittee, Mr. Birnbaum once again stated that SPG Trading initiated the "shorts on an outright basis with no accompanying CDO or RMBS retained position longs following the Bear Stearns Asset Management unwind in 2007, and that these positions were not a hedge." |1884|
Mr. Birnbaum's statement that "all retained CDO and RMBS positions were identified as already hedged" by June 2007 is also supported by other documents provided by Goldman's Mortgage Department. On February 28, 2007, for example, David Rosenblum, Co-Head of the CDO/CLO Origination Desk, initiated a project to ensure that all of the CDO Origination Desk's warehouse accounts were "fully hedged." |1885| As a result, the CDO Origination Desk initiated new hedges and specifically allocated others to cover all the desk's warehouse risk. Learning of these actions, Mr. Rosenblum responded: "Great. Getting pretty nailed down." |1886| In addition, in a February 12, 2007 email, Mr. Sparks reported to senior management: "Loan and residual books flat," and indicated that the Department's long positions were fully hedged with the short ABX positions. |1887| In a third example, after conclusion of the CDO valuation project, all of the remaining CDO assets were transferred from the CDO Origination Desk to the SPG Trading Desk in May 2007. Even after the transfer of those long assets, the SPG Trading Desk remained short, suggesting again that the CDO assets may have already been hedged. |1888| These Goldman documents all support Mr. Birnbaum's statement that all retained CDO and RMBS positions were identified as already hedged when the SPG desk started rebuilding its net short position in June 2007.
The Mortgage Department's large net short positions were also demonstrated by the periodic risk reports that recorded Goldman's key risk measure, "Value at Risk" or "VAR," throughout 2007. At a 95% confidence level, VAR represents the dollar amount a business unit, here the Mortgage Department, could expect to make or lose once every 20 trading days – or about once a month. |1889|
The Mortgage Department's VAR skyrocketed during 2007, climbing far beyond the Mortgage Department's permanent VAR limit of $35 million and hitting a record high of $113 million in mid-August 2007. |1890| In 2007, with notable exceptions discussed below, whenever the Mortgage Department's trading exceeded its risk limits, Goldman's risk managers simply assigned the department a new, higher "temporary" risk limit to accommodate the Department's trading. |1891|
At the same time, the higher VAR did signal the presence of a large net short position and functioned to limit the size of that position. Twice during 2007, in late February and again in late August, Goldman's senior executives ordered the Mortgage Department to reduce its large short positions in order to bring the firm's overall VAR measure down. |1892| The senior executives were aware of the Mortgage Department's large net short positions, in part, because those positions had contributed to increases in Goldman's firmwide or trading VAR.
The firm tolerated the exceptionally high levels of VAR generated by the Mortgage Department, despite the risks reflected in those high VAR levels. |1893| On the few days when the market rallied, the Mortgage Department incurred huge losses from its net short position that were immediately reported up the chain to senior management. For example, upon hearing of a $100 million loss in a single day, Mr. Montag asked: "Okay, who lost the hundy?" |1894| Mr. Viniar told the Subcommittee that he was notified of even a $25 million loss in a single day. |1895| Allowing the Mortgage Department to maintain high VAR levels meant that Goldman's large net short positions left the firm exposed to large losses, which in some instances did occur, though not as often as its VAR predicted they might. |1896|
Risk Management at Goldman. Every business unit and trading desk at Goldman had a counterpart in the firm's risk management area. |1897| Risk managers were assigned to "shadow" the relevant business unit and trading desk operations to ensure that their respective trading activities did not exceed pre-determined risk limits. |1898| Separate VAR limits were set for the firm as a whole and for each division. The division then allocated its VAR limit among each department or business area within a division. Some trading desks within a department also had assigned risk limits.
At the end of a typical trading day, Goldman's Risk Department prepared risk reports containing some or all of the risk measures used for the Mortgage Department. The Risk Department prepared daily, weekly, and quarterly risk reports, as well as reports for the Board of Directors and various management committees. |1899| Goldman's Firmwide Risk Committee ("FWRC") was co-chaired by David Viniar and its weekly meetings were often attended by Co- President Gary Cohn and CEO Lloyd Blankfein. |1900| In preparation for a meeting with regulators, Goldman senior executives noted that the Mortgage Department was discussed at every meeting of the FWRC throughout 2007. |1901| Goldman also noted that risk "[l]imits are set by the FWRC. Decisions regarding, e.g., short positions in mortgages taken by business units but with full knowledge of the 30th floor." |1902|
Goldman executives told the Subcommittee that, in general, risk limits were firm and compliance was mandatory. |1903| At the end of each day, department and divisional personnel, their respective risk managers, and other executives were provided with risk reports from which they could readily see whether a trading desk had breached its limits. In the event of a violation, the desk would be directed to curtail its activities or to take whatever steps were necessary to bring its trading within the applicable limits. Once a desk was notified of its breach of a limit, it was generally required to act immediately to comply with the existing limits. |1904|
At times, the Mortgage Department proposed various modifications or alternatives to its existing risk measures. Some of these proposals were adopted and some were not. |1905| But from the perspective of the firm's most senior executives, VAR appeared to have been the predominant risk measure by which the Department's activities were judged. |1906|
VAR Levels Show Net Short. The primary factors that influence VAR are: (1) the relative size and correlation of positions, and (2) the volatility of trading. |1907| While VAR is computed by applying a complex algorithm to trading data, the VAR measure directly reflects position size and correlation, and volatility – or a combination of both factors. |1908| Changes in VAR levels over time can also provide information about the general magnitude and direction of trading positions.
In the fourth quarter of 2006, the Mortgage Department's permanent VAR limit was $20 million, of which it consumed only $13 million. |1909| Early the next year, on February 5, 2007, the Mortgage Department exceeded its limit with a VAR of $20.5 million. |1910| On February 8, 2007, a senior risk manager recommended that the Mortgage Department's permanent VAR limit be increased to $30 million to accommodate anticipated increased price volatility in the mortgage markets that year. |1911| A senior manager concurred and increased the Mortgage Department's permanent VAR limit to $35 million, which remained the Mortgage Department's "permanent" limit throughout 2007. |1912|
Almost immediately, however, the Mortgage Department breached its new limit, and its VAR continued to climb. Over the course a single quarter, the Mortgage Department's VAR jumped from $13 million at the end of 2006, to $85 million in the first quarter of 2007 – a 550% increase. Goldman's Chief Risk Officer, Craig Broderick, told the Subcommittee that he would be concerned about any breach of a VAR limit, and would certainly investigate the doubling of a business unit's VAR, but he admittedly took no action when the Mortgage Department's VAR more than quintupled over the course of a single quarter. Mr. Broderick attributed the steep rise in VAR almost exclusively to unprecedented market volatility, |1913| although other Goldman officials stated that the VAR levels were being driven by Goldman's large net short positions. |1914|
For the most part, Goldman's risk managers ignored the Mortgage Department's VAR violations and did not demand immediate compliance with the last applicable limit, as would ordinarily be the case. |1915| With notable exceptions in late February and late August 2007, Goldman's risk managers continually assigned the Mortgage Department new "temporary" VAR limits large enough to accommodate whatever risk levels resulted from the Department's trading. Mr. Birnbaum later described this pattern as the risk area's "policy to just keep increasing ou[r] limit." |1916|
The first quarter of 2007 is illustrative of the pattern. During that quarter, the Mortgage Department's trading activities exceeded three new VAR limits in as many weeks. The Mortgage Department received its new permanent VAR limit of $35 million on February 8, 2007. |1917| Four days later, on February 12, the Department's VAR hit $49 million. |1918| On February 14, the Department was assigned a new "temporary" limit of $50 million that would expire on February 20. |1919| By February 20, however, the Department's VAR was $63 million, well in excess of its temporary limit of $50 million. |1920| So the Department was assigned a new temporary limit of $60 million – a level it was already exceeding – until February 27. |1921| Instead of dropping below the new temporary limit of $60 million, the Mortgage Department's VAR continued to rise until it hit a quarter-high level of $85 million on February 23 and February 26. |1922| In response, on February 27, the Department was given yet another temporary limit of $90 million through the end of the month. |1923| But the precipitous rise in VAR apparently alarmed Goldman's Operating Committee, which ordered the Department to reduce the size of its net short position to $4.5 billion. |1924| The Department responded immediately and, by February 28, had reduced its VAR to $81 million. |1925|
The pattern created by the Mortgage Department's increasing VAR levels, and the lagged reaction of Goldman's risk managers in setting new "temporary" limits over the course of 2007 is shown in the chart on the next page.
[SEE CHART NEXT PAGE: Goldman Sachs Mortgage Department Value at Risk (VaR), prepared by Permanent Subcommittee on Investigations.]
The continual increases in the Mortgage Department's VAR also had an impact on VAR for all of Goldman's trading activities, called "Trading VAR" or "Firmwide VAR." Goldman carefully tracked the amount of its trading VAR that was attributable to the activities of each of its trading desks or units. During the first quarter of 2007, its records show that the firm's Trading VAR rose from $119 million in the prior quarter to $154 million. |1926| Goldman has stated that its Mortgage Department's activities have historically resulted in only about 2% of the firm's net revenues. |1927| At the end of 2006, the Mortgage Department's VAR of $14 million contributed only about 3% of the Firmwide Trading VAR of $119 million, which is roughly consistent with or proportionate to the 2% contribution to firmwide net revenues that Goldman has reported. |1928|
At the end of the first quarter in 2007, however, the Mortgage Department's VAR of $85 million was contributing a total of 23% to the Firmwide VAR. |1929| During the rest of 2007, the Mortgage Department's percentage contribution to Firmwide VAR continued to rise until it hit an all-time high of 54% on August 14, 2007, when the Mortgage Department's VAR reached $110 million on a Firmwide VAR of $165 million. |1930|
The 54% contribution rate to firmwide VAR means that the Mortgage Department's trading alone accounted for a 54% of total firmwide risk, while all of Goldman's other trading activities combined – including all equities, commodities, foreign exchange, and interest rate instruments – accounted for the rest. Given the serious financial ramifications of such a large and highly concentrated position, the decision to allow the Mortgage Department to incur such a high level of firmwide risk would have required approval at the highest levels of firm management. Indeed, it was Goldman's Operating Committee and its Co-President, Mr. Cohn, who decided in February and August 2007, respectively, that the Mortgage Department's VAR had risen too high and had to be brought down. |1931|
Because of the net short's impact on the Mortgage Department and firmwide VAR levels, Goldman's senior executives not only knew about the "big short," but made frequent inquiries and exercised frequent control over the Mortgage Department's activities. |1932| On August 16, 2007, for example, Jon Winkelried, who served as Co-President with Mr. Cohn, asked Mr. Sparks: "Do you still feel we are being conservative with our marks .... Good time to make sure we're conservative." Mr. Sparks replied:
"I try, but it is much harder than you think with all the things we are dealing with – completely dislocated markets with little price transparency, systems/tools that are not where they should be, focused controllers (who I think are doing a very good job in a tough market) and many cooks in the kitchen who like to micro-manage. ... But I hear your message."
Mr. Winkelried replied: "I think you should drop the micro manage theme in this environment." |1933|
Mr. Mullen also expressed concern that the Mortgage Department's practice of skirting the normal decisionmaking channels and communicating directly with the Co-Presidents Gary Cohn and Jon Winkelried, among other very senior officers, could create problems. When Mr. Birnbaum drafted the Mortgage Department's proposal to buy $10 billion in AAA RMBS securities, he sent it directly to Mr. Cohn and Mr. Winkelried, as well to his more immediate superiors, Mr. Mullen, Mr. Montag, and Mr. Sparks, among others. Mr. Mullen wrote to Mr. Cohn and Mr. Winkelried, the Co-Presidents of Goldman: "It would help to manage these guys if u would not answer these guys and keep bouncing them back to Tom and I." Mr. Cohn replied: "Got that and am not answering," but then added: "I do like the idea but you[r] call." |1934|
For his part, Mr. Montag was also aware that he and Mr. Mullen were taking a more active role in the management of the Mortgage Department than they normally would. Mr. Montag, for example, was Global Co-Head of Securities for the Americas, which encompassed both the FICC Division and the Equities Division, and was responsible for numerous departments. Nonetheless, he was involved in management decisions regarding the Mortgage Department on a near-daily basis in 2007. In August of that year, Mr. Lehman reported to Mr. Sparks that Mr. Montag had asked:
"how the desk thought about him and mullen being very involved. I told him we understood the scrutiny on the business given the overall pressure on our market, large P+L [profit and loss] and risk swings, etc." |1935|
Given the scrutiny by senior executives, the fact that the Mortgage Department's VAR was permitted to reach over $113 million in mid-August 2007 – more than three times its permanent limit – suggests that senior management knew and approved of the magnitude of the risk the Department incurred. It also suggests that the net short positions the Mortgage Department took were proprietary. |1936| Goldman's senior executives would have no reason to take such large risks if they were seeking only the small spread arbitrage available from market-making activities for customers.
On February 26, 2007, the Mortgage Department's VAR reached a quarterly high of $85.4 million. |1937| On February 22, Mr. Sparks had told Messrs. Swenson, Lehman, and Birnbaum that they would have to cover $2 billion in subprime mortgage related net short positions that same day. |1938| On February 27, 2007, Mr. Ruzika wrote Mr. Sparks and others: "I want to see us getting the short down to 4.5 bil[lion] net." |1939| Later that day, Mr. Ruzika forwarded the "OpCom Directive" to Mr. Sparks: "Dan. Directly from the opcom we need to step up the pace of buying back single names even if it costs us some money." |1940| Mr. Birnbaum told the Subcommittee that the SPG Trading Desk's actions in February were taken to reduce the level of VAR. |1941|
On August 9, 2007, Mr. Birnbaum received a note from the Department's risk managers indicating that the Department's temporary VAR limit might not be extended, which would reverse the prior policy of continually extending temporary limits:
"–Temporary MTG [Mortgage Department] SPG VaR limit of $110mm expired on 8/7/2007[.]
–MTG SPG is over its permanent VaR limit of $35mm." |1942|
Mr. Birnbaum told the Subcommittee that he read the note as an indication that the temporary trading limit would not be renewed, and he was being directed to reduce his net short positions to bring VAR under the permanent limit of $35 million. |1943| On the same day, August 9, Mr. Birnbaum sent an email to the ABS Desk trader, Mr. Salem:
"Are you getting any more heat to cut/cover risk? These VAR numbers are ludicrous, btw. Completely overestimated for SPG trading, underestimated for other mortgage desks." |1944|
Mr. Salem replied that he had "waved in ~120mm in bbb and bbb- protection in the last 2 days," which covered shorts, so he felt no heat about covering. |1945| Mr. Birnbaum said:
"I just asked b/c I saw the note about mortgages dropping back down to a permanent limit of 35mm (which we are way over). This would mark a change of their recent policy to just keep increasing ou[r] limit. Makes me a little nervous that we may be told to do something stupid." |1946|
Mr. Birnbaum continued: "I do think it is a real concern. How quickly can you work with strats to get them to revise our VAR to a more realistic number?" |1947|
Mr. Birnbaum explained to the Subcommittee that by the phrase, "be told to do something stupid," he meant being ordered by senior Goldman leadership to cover all of the desk's lucrative BBB and BBB- short positions immediately. |1948| Mr. Birnbaum and others were reluctant to cover all of SPG Trading's BBB/BBB- shorts, because they believed the ABX Index for BBB and BBBrated RMBS securities would fall further in coming months, so covering the entire short immediately would amount to leaving significant money on the table. |1949| The Department's traders, analysts, and risk managers designed and executed specific transactions over the month of August to lower VAR, but they were unsuccessful. |1950|
For a week between August 14 and August 21, 2007, the Mortgage Department's VAR hovered around $100 million. |1951| The Department's record-high VAR contributed to a record Firmwide VAR of $167 million on August 17, 20, and 21, all of which exceeded the firmwide VAR limit of $150 million. |1952| On August 15, 2007, Goldman's Co-President Gary Cohn issued his order: "[G]et down now." |1953| In response, the Mortgage Department began selling and covering a portion of its BBB/BBB- net short position, and its VAR quickly dropped to $68 million by August 31. The Mortgage Department was allowed to keep a substantial net short in certain assets, and was granted renewed "temporary" VAR limits at levels between $80 and $110 million through the end of Goldman's fiscal year 2007. |1954| The Risk Reports recording these VAR levels throughout 2007 further demonstrate Goldman's net short position. By 2010, the Mortgage Department's permanent VAR limit had increased from $35 million to only $40 million. |1955|
The dates on which Goldman senior executives ordered the Mortgage Department to reduce its VAR – on February 21 and August 21 – were within two weeks before the end of Goldman's fiscal quarters. In each case, the result was an immediate drop in VAR through the end of the quarter. In February 2007, the department's VAR dropped from $92 million to $81 million by the end of the quarter. In August 2007, the department's VAR dropped even more sharply, from a record high of over $110 million to $79.7 million by the end of the quarter. |1956| The lower Firmwide VAR figures that resulted from the Mortgage Department's VAR reductions were publicly reported in Goldman's quarterly financial reports. |1957|
In the third quarter of 2007, Goldman posted financial results showing that it had shorted the subprime mortgage market and profited from its net short position. After posting those third quarter financial results, Goldman continued to trumpet its success, both inside and outside the firm.
Third Quarter Financials. On September 20, 2007, Goldman announced record net revenues of $12.3 billion for its third quarter. |1958| On September 19, 2007, in a conference call with financial analysts on Goldman's third quarter results, Goldman's CFO, David Viniar, highlighted the performance of the Mortgage Department:
"Let me also address Mortgages specifically. The mortgage sector continues to be challenged and there was a broad decline in the value of mortgage inventory during the third quarter. As a result, we took significant markdowns on our long inventory positions during the quarter, as we had in the previous two quarters. However, our risk bias in that market was to be short and that net short position was profitable." |1959|
Goldman also issued a press release about its third quarter earnings that mentioned mortgages:
"Net revenues in mortgages were also significantly higher, despite continued deterioration in the market environment. Significant losses on non-prime loans and securities were more than offset by gains on short mortgage positions." |1960|
Internal Statements. In September 2007, Goldman summarized its third quarter results for its Board of Directors, highlighting the Mortgage Department's record profits: "[W]e were overall net short the mortgage market and thus had very strong results." |1961|
In early October, the Mortgage Department held an internal Global Townhall to discuss its third quarter profits in detail. In a draft of the presentation he prepared for the Townhall, Mortgage Department head Daniel Sparks reported that global mortgages generated aggregate net revenues of $741 million, a 152% increase over the same quarter in the prior year, while benefitting from a "proprietary short." |1962| Under the heading of "Performance Drivers (Net Revenues)," Mr. Sparks wrote:
"SPG Trading: +2.04bn [up] $1.92bn vs. Q3 2006
– The desk benefited from a proprietary short in CDO and RMBS single names
– Additionally, we captured P&L [profit & loss] on spread widening [price declines] in various indices" |1963|
To put the SPG Trading Desk's performance in perspective, it had generated $80 million in the third quarter of 2006, a big year for mortgage related products, but in the third quarter of 2007, an exceptionally poor year for mortgage related products, Goldman's SPG Trading Desk generated $2.04 billion in net revenues – nearly 25 times more. SPG Trading's $2.04 billion in net revenues was offset by other mortgage related losses, including losses from the CDO Origination, Residential Credit, and Residential Prime Desks, but left an aggregate net profit of $741 million for the Mortgage Department as a whole – more than twice the comparable quarter net profit of $294 million in the prior year. |1964| The $2.04 billion in net revenues from the SPG Desk accounted for over 16% of Goldman's overall net revenues of $12.3 billion in the third quarter of 2007. The $741 million in net revenues for the Mortgage Department as a whole contributed about 6% of the firm's total net revenues of $12.3 billion for the third quarter, which was three times the department's historical average contribution of about 2% to net revenue. |1965|
In his draft presentation, Mr. Sparks wrote that the "desk benefited from a proprietary short in CDO and RMBS single names." |1966| In industry parlance, a "proprietary" position is one acquired with the firm's own capital, solely for the benefit of the firm and not related to customer orders or the firm's role as a market maker. In a later version of the presentation, Mr. Sparks revised the line to read that the desk benefitted from "strong results from trading long correlation and net short bias." |1967| When asked why he had originally written that "the desk benefitted from a proprietary short," Mr. Sparks told the Subcommittee that the language was inaccurate. |1968|
Later in October 2007, Goldman's Chief Risk Officer, Craig Broderick, discussed the Mortgage Department's performance before an internal Goldman audience:
"So what happened to us? A quick word on our own market and credit risk performance in this regard. In market risk – you saw in our 2nd and 3rd qtr results that we made money despite our inherently long positions. – because 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 money in the 3rd quarter) as the subprime market weakened. (This remains our position today)." |1969|
Goldman's net short positions were also featured in the internal self-evaluations that Mortgage Department personnel were required to prepare and which they expected to be read by their supervisors. In these self-evaluations, which were completed in September 2007, two months before Goldman's fiscal year end on November 30, 2007, several Mortgage Department traders who were active in its shorting activities described the profits produced by the Department's net shorts. Mr. Birnbaum, the senior ABX trader, wrote:
"As a co-head of ABS and SPG trading, my performance in 2007 has been my best ever by any objective measure: 1. P&L. YTD: ABS synthetics: $2.5Bln, ABS: $2.0Bln, SPG Trading: $3.0Bln, all #1 on the street by a wide margin, #2 in the world trading subprime risk (behind Paulson Partners)." |1970|
His self-evaluation showed that the SPG Trading Desk alone generated profits of $3 billion. |1971|
Mr. Swenson, the head of the SPG and ABS trading desks, wrote:
"It should not be a surprise to anyone that the 2007 year is the one that I am most proud of to date. ... I ... [built] a number one franchise that was able to achieve extraordinary profits (nearly $3bb to date). ... The contributions to the $3bb of SPG Trading profits and $2bb of ABS trading p & l are spread out across various trades and strategies." |1972|
Mr. Salem, one of the ABS traders, wrote:
"Obviously the most important aspect of my 2007 and my contribution to the firm has been the desk's P&L. Mike, Josh, and I were able to learn from our bad long position at the end of 2006 and layout the game plan to put on an enormous directional short. The results of that are obvious." |1973|
Mr. Salem went on to outline estimated profits from four specific trading strategies pursued by the ABS Desk that generated profits totaling $3.75 billion. |1974|
In these three internal documents, key Mortgage Department personnel involved in constructing the Department's net short positions describe the profits generated by those net shorts as "#1 on the street by a wide margin," "extraordinary," and "an enormous directional short" that produced $3.7 billion in profits for the firm.
Statements to Regulators. Goldman also described its short positions and the profits they produced to its regulators. In October 2007, Goldman sent a letter to the Securities and Exchange Commission answering questions about its trading activities and reporting that it had been "net short" during "most of 2007":
"[W]e are active traders of mortgage securities and loans and . . . we may choose to take a directional view of the market . . . . For example, during most of 2007, we maintained a net short sub-prime position and therefore stood to benefit from declining prices in the mortgage market." |1975|
In November 2007, in another letter to the SEC, Goldman explained further:
"During most of 2007, we maintained a net short subprime position with the use of derivatives, including ABX index contracts and single name CDS which hedged [our] long cash exposure." |1976|
Also in November 2007, in talking points prepared for a meeting with the Tri-Lateral Review Group, which included the Federal Reserve Bank, the SEC, and the United Kingdom's Financial Services Authority, Goldman wrote: "[W]e were able to maintain a short throughout the year." |1977| Goldman also wrote:
"The press and others have discussed an anticipated Q4 [2007 fourth quarter] write-down for GS. Our remaining long subprime exposure totals $695 million, inclusive of whole loans and CDO positions. However, we're net short – as we have been throughout 2007. Accordingly, we have nothing to write down." |1978|
Public Statements. Goldman also discussed its net short and related profits in public settings. In November 2007, the Bloomberg news service reported that Goldman's CEO, Lloyd Blankfein, told a public audience at a securities industry conference that Goldman was, and would continue to be, net short the subprime markets:
"[Mr. Blankfein] said the firm is still betting that mortgage-backed assets and collateralized debt obligations will drop. ... ‘Given that point of view, we continue to be net short in these markets.'" |1979|
In reaction to another November 2007 news report on how Goldman "dodged the mortgage mess," |1980| Mr. Blankfein sent an email to his colleagues stating: "Of course we didn't dodge the mortgage mess. We lost money, then made more than we lost because of shorts." |1981|
Goldman also prepared for public use a corporate statement entitled, "How Did GS Avoid the Mortgage Crisis? Our Response." |1982| The statement was prepared for Mr. Viniar's use in responding to questions about the Mortgage Department's performance in a fourth quarter conference call with analysts. Goldman's public statement outlined the steps it took to reduce its subprime mortgage inventory and related subprime risks in late 2006 and early 2007, characterizing these "proactive" steps as part of its ordinary risk management efforts. Goldman went on to state: "[O]ne should not be led to believe that we went through this period unscathed and somehow significantly profited from a ‘bet' on the downturn in mortgage markets." |1983| After noting that significant writedowns in the value of its long mortgage inventory had resulted in a "weak" second quarter for mortgages, Goldman wrote:
"[D]uring the third quarter we were able to make money on mortgages as a result of our net short position. As a consequence, we believe that we are well-positioned to opportunistically participate in the inevitable restructuring of the mortgage market." |1984|
Despite denying earlier in its statement that it significantly profited from a "bet" against a downturn in mortgage markets, Goldman wrote that, in the third quarter of 2007, it had profited from a "net short position" on mortgages. A "net short position" is, in essence, a bet on a downturn in the relevant market, and Goldman's bet was "able to make money."
2007 Year-End Results. The SPG Trading Desk's net revenues for the full fiscal year 2007 were approximately $3.7 billion. |1985| In fiscal year 2007, Goldman's total net revenues were approximately $46 billion, and its net earnings (after tax) were approximately $11.6 billion. |1986|
At the Subcommittee hearing, Goldman's Chief Financial Officer, David Viniar, stated that the Mortgage Department's net revenue for 2007 was "less than $500 million, approximately 1 percent of Goldman Sachs's overall net revenues." |1987| He insisted that its 2007 net short position in the mortgage market "was not a large short," |1988| and was largely offset by its long positions, omitting that, in 2007, the Mortgage Department's SPG Trading Desk generated a record $3.7 billion in net revenues for the Department as a whole from its net shorts. |1989| Those profits sustained the Mortgage Department and Goldman through the harsh financial environment of the subprime mortgage market meltdown and the global credit crisis in 2007. While much of those revenues were offset by other losses, they were a bulwark of profitability in what would otherwise have been a disastrous year for Goldman's mortgage business.
In contrast, other major Wall Street banks reported losses in the third quarter of 2007, primarily due to multi-billion-dollar writedowns in the value of their subprime mortgage related assets. |1990| Goldman had not only profited from its net shorts, but had also sold off the bulk of its subprime mortgage assets earlier and at higher prices than many other banks. After observing the losses and writedowns suffered by other Wall Street banks, Mr. Viniar wrote: "Tells you what might be happening to people without the big short." |1991|
At one point, Mr. Birnbaum also contrasted Goldman's performance with its competitors:
"Results out of DB, 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 and came to a standstill post-BSAM [Bear Stearns Asset Management]." |1992|
All of these explanations point to actions taken by Goldman to transfer the risks of its own subprime mortgage inventory to others, including many of its own customers, before they became fully aware of the risks entailed in the products Goldman was marketing to them.
Goldman Denials. In late 2007, Goldman spoke openly of shorting the subprime mortgage market and that its net short position was profitable. Afterward, as mortgage losses erupted into a full blown financial crisis in the United States and abroad, Goldman began to downplay and even deny the size of its short position, its proprietary nature, and the profits it generated for the firm. |1993|
Goldman had not been the only market participant to profit from a large net short position in mortgage related products. Other investors also aggressively shorted the mortgage market and profited from their short positions. A particularly large short position taken by one hedge fund – Goldman's customer, the Paulson Credit Opportunity Fund of Paulson & Co. Inc. – netted billions of dollars in what was later characterized as "the greatest trade ever." |1994| Mr. Birnbaum, however, had described Goldman's own massive net short position as the "greatest trade ever" as early as July 2007. |1995| Earlier in the year, Mr. Birnbaum had also described Goldman as the market leader in shorting the housing market, but by July 2007, Mr. Birnbaum conceded that Paulson was "definitely the man in this space, up 2-3 bil on this trade. We were giving him a run for his money for a while but now are a definitive #2." |1996| When preparing his case for SPG traders to be paid additional compensation for their 2007 efforts, Mr. Birnbaum again made a comparison to Paulson: "RMBSrelated revenues: #1 on the street by a wide margin. #2 in the world behind Paulson Partners." |1997|
In the aftermath of the financial crisis, however, Goldman no longer claimed credit for its market-leading performance during the subprime meltdown. After many of its customers suffered major losses, and several had declared bankruptcy during the financial crisis, |1998| Goldman began to downplay the size of its short position and the impact on its profits. |1999| In particular, Goldman attempted to dispel the perception that it sold its own customers CDOs it knew were destined to fail, and then profited by betting against them, as discussed in the next section. |2000|
In April 2010, Goldman posted a statement on its website entitled, "Goldman Sachs: Risk Management and the Residential Mortgage Market." |2001| In the statement's Executive Summary, Goldman made the following assertions, among others:
–"Goldman Sachs did not take a large directional ‘bet' against the U.S. housing market, and the firm was not consistently or significantly net ‘short the market' in residential mortgagerelated products in 2007 and 2008, as the performance of our residential mortgage-related products business demonstrates.
– Goldman Sachs did not engage in some type of massive ‘bet' against our clients. The risk management of the firm's exposures and the activities of our clients dictated the firm's overall action, not any view of what might or might not happen to any security or market." |2002|
On April 7, 2010, Goldman CEO Lloyd Blankfein and Co-President Gary Cohn made similar assertions in a letter to shareholders contained in Goldman's Annual Report:
– "The firm did not generate enormous net revenues or profits by betting against residential mortgage-related products, as some have speculated; rather our relatively early risk reduction resulted in our losing less money that we otherwise would have when the residential housing market began to deteriorate rapidly ....
–Although Goldman Sachs held various positions in residential mortgage-related products in 2007, our short positions were not a ‘bet against our clients.' Rather, they served to offset our long positions." |2003|
At the Subcommittee hearing, Mr. Blankfein repeated the same claims. He testified:
"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. Our performance in our residential market-related business confirms this. During the 2 years of the financial crisis, while profitable overall, Goldman Sachs lost approximately $1.2 billion from our activities in the residential housing market. We didn't have a massive short against the housing market and we certainly did not bet against our clients. Rather, we believe that we managed our risk as our shareholders and our regulators would expect." |2004|
Mr. Viniar, Goldman's Chief Financial Officer, testified:
"[A]cross 2007, we were primarily, although not consistently short, and it was not a large short. ... The short positions themselves made a lot of money in 2007, but they offset long positions that lost a lot of money in 2007." |2005|
Goldman's denials of its net short positions in the subprime mortgage market, and the large profits produced by those net short positions, are directly contradicted by its own financial records and internal communications, as well as its own public statements in 2007, and are not credible.
Notes
1608. 9/26/2007 Michael J. Swenson Self-Review, GS-PSI-02396-401 at 398, Hearing E 1608 xhibit 4/27-55b. See also 12/14/2006 email from Daniel Sparks to Messrs. Montag and Ruzika, "Subprime risk meeting with Viniar/McMahon Summary," GS MBS-E-009726498, Hearing Exhibit 4/27-3 ("there will be very good opportunities as the market[] goes into what is likely to be even greater distress"); 7/13/2006 email from Stuart Bernstein copied to Mr. Cohn, GS MBS-E-016209254 ("he believes the REIT market is dead. We agreed . . . that as the market got worse, his ‘distressed' expertise would be more (not less) interesting to investors"). See also Section 5(a)(iii) below regarding Goldman executives' negative views of the market for subprime mortgages and subprime mortgage backed securities. [Back]
1609. 9/19/2006 email chain between Joshua Birnbaum and Daniel Sparks, "ABX," GS MBS-E-012683946. [Back]
1611. Goldman responses to Subcommittee QFRs at PSI_QFR_GS0239. For more information on Hudson, see section C(5)(b)(ii)AA., below. [Back]
1612. 3/10/2007 email to Daniel Sparks, "Mortgage presentation to the Board," GS MBS-E-013323395, Hearing Exhibit 4/27-17 (Mortgage Department was $6 billion net long at start of the quarter). 12/13/2006 Goldman email, "Subprime Mortgage Risk," Hearing Exhibit 4/27-2. [Back]
1613. The ABX Index actually consisted of five separate indices. Each index tracked a different set of RMBS securities pulled from the 20 RMBS securitizations in the ABX basket. The sets varied according to their assigned credit ratings. One index tracked the 20 RMBS securities with AAA ratings, another tracked the 20 RMBS securities with AA ratings, and so on. [Back]
1614. Subcommittee interview of Joshua Birnbaum (10/1/2010); Subcommittee interview of Rajiv Kamilla (10/12/2010). [Back]
1615. 6/20/2006 email from David Lehman, "Mortara Nomination 1615 – ABX/CMBX Indices," GS MBS-E-014038810 (attached file, "2006 Mike Mortara Award for Innovation Nomination Template for ABX & CMBX Indices," GS MBS-E-014038811 at 6 (hereinafter "Mortara Award Submission")). [Back]
1617. 6/20/2006 email from "Equities and FICC Communications" to "All Equities and FICC," Mike Mortara Award for Innovation," GS MBS-E-010879020 [original email]. [Back]
1618. Mortara Award Submission at 2. [Back]
1619. Id. at 3-4. See also 8/30/2006 Fixed Income, Currency and Commodities Individual Review Book for Rajiv K. Kamilla, at 20, GS-PSI-04064 (hereinafter "Kamilla 2006 Review"); 9/6/2007 Fixed Income, Currency and Commodities Individual Review Book for Rajiv K. Kamilla, at 19, GS-PSI-04100 (hereinafter "Kamilla 2007 Review"). [Back]
1620. Kamilla 2007 Review at 19. In 2007, Mr. Kamilla was named a Managing Partner at Goldman. [Back]
1621. Daniel Sparks, the Mortgage Department head, viewed Mr. Birnbaum as a talented trader, writing in October 2006: "Josh for EMD [Extended Managing Director] – he is an extraordinary commercial talent and a key franchise driver. ... He will make us a lot of money." 10/17/2006-10/18/2006 emails from Daniel Sparks, "3 things," GS MBS-E-010917469. Other Goldman senior executives also relied on his trading skills. See, e.g., 2/21/2007 email from David Lehman, "ACA/Paulson Post," GS MBS-E-003813259 (before approving the Abacus CDO, Mr. Lehman asked Mr. Tourre to "[w]alk josh through the $, if that makes sense, let's go"); 6/29/2007 email from David Lehman, "ABS Update," GS MBS-E-011187909 (during exceptionally bad trading day, Mr. Lehman asked Mr. Swenson, "Is Josh in? Mr. Swenson replied "No he is in Spain – don't worry I am fine."). [Back]
1622. Subcommittee interview of Joshua Birnbaum (4/22/2010). 1622 Throughout 2006, Mr. Birnbaum was also working to develop a new product for Goldman, a suite of home price derivatives that would track the Case/Schiller Home Price Indices. Like the ABX Index, a derivative product tracking the Case/Schiller Indices would enable investors to bet on the rise or fall in home prices in various U.S. markets, and provide another vehicle to short the mortgage market. See 12/18/2006 New Product Memorandum, "Launch of US Property Derivatives Trading," GS MBS-E- 013492538. In May 2006, Mr. Swenson forwarded an email to Mr. Birnbaum about another financial firm seeking to develop the same type of home price derivatives as Mr. Birnbaum. A note with the email said: "FYI–The cat is crawling out of the bag," meaning that other firms were thinking about launching similar products. See 5/16/2006 email from Michael Swenson to Joshua Birnbaum, "Housing Futures and Options," GS MBS-E-016087363. Goldman offered the new U.S. property derivatives briefly in 2007, but they did not develop significant trading volumes. Subcommittee interview of Joshua Birnbaum (10/1/2010). [Back]
1623. The ABX Index began trading in January 2006. Goldman's position in the ABX Index was flat when the Index debuted, but became long and grew considerably longer in the fall of 2006. See, e.g., 10/17/2006-10/18/2006 email exchange between Daniel Sparks and Tom Montag, "3 things," GS MBS-E-010917469; 3/1/2007 email from Daniel Sparks, "Dinner," GS MBS-E-002356757, Hearing Exhibit 4/27-143 ("Most of the synthetic flows were hedge funds getting short and CDO vehicles getting long."). Goldman executives also told the Subcommittee that the firm often took the long side of ABX transactions in which hedge funds were going short. Subcommittee interview of Daniel Sparks (4/15/2010); Subcommittee interview of David Viniar (4/13/2010). See also, e.g., 8/10/2006 email from Goldman salesperson, "Paulson bookings," GS MBS-E-012395893 ("GS sold 550mm protection on ABX.HE.A 06- 2 to Paulson"); 12/7/2006 email chain between Daniel Sparks and Tom Montag, "More thorough response," GS MBS-E-010931324 (Goldman had previously handled approximately $9 billion in transactions for Paulson); Subcommittee interview of Michael Swenson (4/16/2010) ("Paulson [hedge fund] was the biggest counterparty on day 1 [of the ABX Index] and throughout 2006"). [Back]
1624. Mr. Birnbaum's acquisition of a large net long position in the ABX was viewed negatively by Goldman senior executives. When Mr. Sparks recommended Mr. Birnbaum for a promotion to managing director in October 2006, Mr. Montag responded: "Josh slipped a bit with the abx position etc. Is that appropriate." Mr. Sparks replied: "Josh ... has had a rough couple of months. But he has handled it very well and is a key person for our franchise. I don't think those 2 months should confuse his value to the firm." 10/17/2006 email exchange between Daniel Sparks and Tom Montag, "3 things," GS MBS-E-010917469. Mr. Birnbaum was named a managing director later that month, but Mr. Montag again raised the issue of his net long ABX position when Mr. Sparks sought to allow Mr. Birnbaum to continue buying equity put options on companies with subprime exposure. Mr. Montag wrote: "Unfortunately trader josh has not demonstrated a track record of controlling his position. ... Instead of these lousy hedges he should just be selling his position." 3/21/2007 email chain between Tom Montag and Daniel Sparks, GS MBS-E-010629379, Hearing Exhibit 4/27-21. See also 2/5/2007 email from Richard Ruzika to Gary Cohn, "Are you living Morgatages [sic]," GS MBS-E-016165784 (Mr. Ruzika: "You know and I know this position was allowed to get too big – for the liquidity in the market, our infrastructure, and the ability of our traders. That statement would be the same even if we had gotten the market direction correct –although the vultures would not be circling."). [Back]
1625. See, e.g., 12/15/2006 email from David Viniar to Tom Montag, "Subprime Risk 1625 Meeting with Viniar/McMahon Summary," GS MBS-E-009726498, Hearing Exhibit 4/27-3 ("there will be very good opportunities as the markets goes into what is likely to be even greater distress"); 2/8/2007 email from Daniel Sparks, "Post," GS MBS-E- 002201668, Hearing Exhibit 4/27-7 ("Subprime environment going from bad to worse (think whack a mole)."); 1/9/2007 Goldman Presentation, "Mortgage Department Update," GS MBS-E-002320968 ("Risks, Challenges and Structural Issues: –Very tough going in Resi Credit world – p&l [profit and loss] will be challenging; –Housing price and loan volume declines; –Investing in business in very difficult environment"); cf. 11/1/2006 Goldman Structured Products Strategist memorandum, "Q3 Mortgage Investor Survey," GS MBS-E-006576068-76 ("Clients expect a downturn in housing in 2007, investors worried about high LTV [loan-to-value], low/no doc loans, pay option ARMs, origination volumes to be down 10% in 2007"). [Back]
1626. Subcommittee interview of Peter Ostrem (10/5/2010); Subcommittee interview of Darryl Herrick (10/13/2010). [Back]
1627. Subcommittee interview of Peter Ostrem (10/5/2010). See also, e.g., 8/10/2006 email from Peter Ostrem to Daniel Sparks, "Leh CDO Fund," GS MBS-E-010898470 (urging Goldman to "do our own fund. SP CDO desk. Big time."). [Back]
1628. Subcommittee interview of Peter Ostrem (10/5/2010). [Back]
1629. 6/8/2006 email from Darryl Herrick to Peter Ostrem, "**GS ABS** RMBS CDS Lineup," GS MBS-E- 016445770. [Back]
1630. Subcommittee interview of Daniel Sparks (4/15/2010); Subcommittee i 1630 nterview of Peter Ostrem (10/5/2010). [Back]
1631. See 5/19/2007 Goldman presentation, "Mortgages CDO Origination – Retained Positions & Warehouse Collateral, May 2007," GS MBS-E-010951926 ("average ramp period 6-9 months"). [Back]
1632. See, e.g. 3/7/2007 and 3/13/2007 internal emails, "Timberwolf I, Ltd. Preliminary Offering Circular," GS MBSE- 001800634 (Collateral manager Greywolf wrote: "We will not be fully ramped and I want to use the remaining bucket strategically. Is it OK if we have 5% ramp post-close?" Goldman responded: "We represented to BSAM [Bear Stearns Asset Management] that deal would be fully ramped upon closing. As long as they're ok (or get veto rights), I don't have any issue."). [Back]
1633. Subcommittee interview of Daniel Sparks (4/15/2010); Subcommittee interview of David Lehman (4/12/2010). [Back]
1634. See, e.g., 3/16/2007 Goldman memorandum from Mitch Resnick and Peter Ostrem to GSI Risk Committee, "GSI Warehousing for Structured Product CDOs," GS MBS-E-001806010; 2/8/2007 email from Daniel Sparks to Messrs. Cohn, Montag, Viniar et al., "Post," GS MBS-E-002201668, Hearing Exhibit 4/27-7 ("Loan business is long by nature and goal is to mitigate."); Subcommittee interview of Peter Ostrem (10/15/2010). [Back]
1635. 3/16/2007 Goldman memorandum from Mitch Resnick and Peter Ostrem to GSI Risk Committee, "GSI Warehousing for Structured Product CDOs," GS MBS-E-001806010. [Back]
1637. 2/28/2007 email from David Rosenblum to Peter Ostrem, "Pete– pls send me cob 2/28 MTM for SP CDO WH's first thing in the morning," GS MBS-E-001800707; 2/28/2007 email from David Rosenblum, "Hedges Status Report," GS MBS-E-002640538 (new ABX hedges added and other hedges allocated to ensure that CDO warehouse risk was fully hedged); 2/22/2007 email from Peter Ostrem to David Rosenblum, "League Tables," GS MBS-E- 001800683 ("FYI Liquidating 3 warehouses tomorrow."); 2/22/2007 email from Daniel Sparks to Tom Montag, GS MBS-E-010989710 ("There are a few deals that look tough now, including a A-rated CDO of CDOs with Greywolf [Timberwolf]"). [Back]
1638. 12/7/2006 email chain between Daniel Sparks and Tom Montag, "More thorough 1638 response," GS MBS-E- 010931324. Mr. Montag also raised the possibility of hiring a trader from the Paulson hedge fund to help Goldman short the mortgage market. In addition, the email exchange indicates that Goldman had previously done $7 billion in transactions with the Paulson hedge fund, but had not done much with the hedge fund recently. Mr. Sparks wrote: "They had asked us to do another tranched protection trade for them, and seem fine with it being pushed to January." Id. The tranched protection trade for Paulson that Mr. Sparks mentioned later became the Abacus 2007-AC1 CDO discussed in this Report. [Back]
1639. 12/7/2006 email chain between Tom Montag and David Viniar, GS MBS-E-009756572. [Back]
1640. Subcommittee interview of David Viniar (4/13/2010). [Back]
1641. 12/14/2006 email from Daniel Sparks, "Subprime risk meeting with Viniar/McMahon Summary," GS MBS-E- 009726498, Hearing Exhibit 4/27-3. [Back]
1642. Id. See also 12/15/2006 email from David Viniar to Tom Montag, GS MBS-E-009726498, Hearing Exhibit 4/27-3. [Back]
1643. Subcommittee interview of David Viniar (4/13/2010), Daniel Sparks (4/15/2010), and David Lehman (4/12/2010). [Back]
1644. Subcommittee interview of David Viniar (4/13/2010). [Back]
1646. Id. In terms of risk reduction, taking on offsetting short positions to reduce long positions does not necessarily offer the same degree of certainty of risk protection as simply selling off the long assets. In many cases, the offsets may not perfectly match, leaving some degree of risk exposure known as "basis risk." See, e.g., 2/12/2007 email from Mr. Sobel to Mr. Cohn, "Post today," GS MBS-E-009763506 ("Risk that concerns me is basis between ABX and single names."); 2/11/2007 email from Tom Montag, GS MBS-E-009688192 (discussing ABX offsets: "There is no est[imated] loss in the basis risk. Big wildcard. They [the traders] think they have correlation right and moves either way should be ok but obviously index assumptions have been wrong starting last may or june when positions were being put on and the gains seduced us to do more."). [Back]
1647. 12/14/2006 email from Daniel Sparks, "Subprime risk meeting with Viniar/McMahon Summary," GS MBS-E- 009726498, Hearing Exhibit 4/27-3. "Residuals" refers to the equity positions that Goldman had retained from the RMBS and CDO securitizations it originated. [Back]
1648. 12/14/2006 email from Tom Montag to David Viniar, GS MBS-E-009726498, Hearing Exhibit 4/27-3. [Back]
1649. 12/15/2006 email from David Viniar to Tom Montag, 1649 GS MBS-E-009726498, Hearing Exhibit 4/27-3. [Back]
1650. See 1/5/2007 "Notionals (ABX Convention)" chart, taken from "Index and Single Name Position History 2006 as of 05Jan07.xls," attachment to 1/8/2007 email from Joshua Birnbaum to Daniel Sparks, "ABX Subprime Risk by vintages," GS MBS-E-010214409. The SPG Desk also periodically updated that chart. See, e.g., chart attachments to 2/6/2007 email from Kevin Kao to Joshua Birnbaum, "Index and Single Name Position History 2006 as of 05Feb07.xls," GS MBS-E-012744553; chart attachments to 2/23/2007 email from Tom Barrett to Kevin Kao, Michael Swenson and Justin Gmelich, "Index and Single Name Position History 2006 As of 22Feb07.xls," GS MBS-E-012411673; chart attachments to 3/2/2007 email from Kevin Kao to Joshua Birnbaum, "Index and Single Name Position History 2006 As of 01Mar07.xls," GS MBS-E-012776557. [Back]
1651. 12/14/2007 email from Mr. Gasvoda, "Retained bonds," GS MBS-E-010935323, H 1651 earing Exhibit 4/27-72. [Back]
1652. 2/9/2007 email exchange between Kevin Gasvoda and sales syndicate, "GS Syndicate RMBS Axes (INTERNAL)," GS MBS-E-010370495, Hearing Exhibit 4/27-73. [Back]
1653. 2/11/2007 email exchange between Lloyd Blankfein and Tom Montag, "Mortgage Risk – Credit residential," GS MBS-E-009686838, Hearing Exhibit 4/27-130. [Back]
1655. 2/23/2007 "Significant Cash Inventory Change (Q1'07 vs. Q4'06)," prepared 1655 by Goldman, GS MBS-E- 010037310, Hearing Exhibit 4/27-12. "Scratch and dent" loans are loans that are not performing. [Back]
1656. 3/26/2007 Goldman presentation to Board of Directors, "Subprime Mortgage Business," GS MBS-E- 005565527, Hearing Exhibit 4/27-22 ; 3/14/2007 Goldman Presentation to SEC, "Subprime Mortgage Business 14- Mar-2007," at 7, GS MBS-E-010022328. [Back]
1657. 3/2/2007 email from Patrick Welch to Craig Broderick, "Audit Committee Package_Feb 21_Draft_Mortgage_Page.ppt," GS MBS-E-009986805, Hearing Exhibit 4/27-63. In the context of assets offered by a customer to the Correlation Desk, it appears that Mr. Egol also may have returned an unappealing bid: "Many of these assets are garbage. I told her should would not like the level [the price bid by Goldman] . . . ." 2/26/2007 email from Jon Egol, "Portfolio for Proposed Transaction 070226 (2).xls," GS MBS-E-002631719. [Back]
1658. 4/22/2007 email from Kevin Gasvoda, "Resi credit QTD/YTD P&L and positions," GS MBS-E-010474983. [Back]
1659. The Mortgage Department also worked to sell assets from its CDO warehouse 1659 accounts, an issue discussed in part below and in part in connection with the Report's section on Goldman's CDO activity. [Back]
1660. Subcommittee interview of Michael Swenson (4/16/2010). [Back]
1661. Id. By adopting the strategy of offsetting the long positions with similar, but not necessarily identical short positions, the SPG Desk was incurring a very large amount of basis risk – the risk of a mismatch between the offsetting assets. Mr. Sparks and other senior Goldman executives wanted to reduce that basis risk by paring the positions down on both sides – selling the long assets and covering the short assets. The SPG Desk was not, however, making the progress Mr. Sparks wanted to see in reducing the basis risk. On January 23, 2007, Mr. Sparks wrote to Messrs. Swenson, Birnbaum, and Lehman: "It does not look like you made any progress on the things we discussed – I want a plan and daily reports on progress. Not to be difficult, but if you 3 are too busy I can add someone who can focus on the issue. My other concern is I want to stay nimble, and not get too wedded to one way positions – getting massively short could be more painful than what we have experienced." 1/23/2007 email from Daniel Sparks, GS MBS-E-010267341. A week later, Mr. Swenson requested a meeting with Mr. Sparks and Mr. Ruzika to discuss the difficulties the traders were encountering in reducing the basis risk. He wrote: "I want to go over the facts of what we are up against." 1/30/2007 email from Michael Swenson to David Lehman, GS MBS-E-011375519. Mr. Swenson and Mr. Birnbaum met with Mr. Ruzika and Mr. Sparks around February 1, 2007. The group apparently discussed the SPG Desk's net short position and the difficulties of reducing the basis risk. On February 5, 2007, Mr. Ruzika wrote to Mr. Cohn about how the short position was "allowed to get too big" and stated: "I don't want to be short – I want to neutralize the risk and shed our basis risk." 2/5/2007 email from Richard Ruzika to Gary Cohn, "Are you living Morgatages [sic]?," GS MBS-E- 016165784. About a week later, when the large net short positions began producing large profits, Mr. Ruzika apparently changed his mind and became supportive of the large net short, though he still wanted to reduce basis risk "whenever possible." 2/13/2007 email from Richard Ruzika to Gary Cohn, "Catch up," GS MBS-E-019794071. [Back]
1662. Salem 2007 Self-Review, GS-PSI-03157 at 71-72. [Back]
1663. The reference to 70% in the email involves correlation assumptions. 1663 Correlation trading depends upon assumptions about the relative values between one asset (such as a CDS contract referencing the ABX Index) and another (such as a CDS contract referencing a single RMBS security). A correlation value of 100% means that the values of both assets move together in the same amounts. With 100% correlation, a 10% decline in the value of one asset implies a 10% decline in the value of the other. The correlation ratios between different assets are a matter of the trading desk's informed judgment. As one Goldman mortgage trader noted: "We should discuss base correlations live . . . there is no market standard for calculating them." 3/26/2007 email from SPG Trading to Goldman London, "ABX – TABX : Request from [customer]," GS MBS-E-021893369. Once a correlation ratio was set, however, the general practice at Goldman was to change correlation ratios only upon a showing of observable market trade prices supporting the change. Traders, thus, engaged in frequent discussions of "observability." A change in correlation ratios could result in an immediate markdown or markup of particular positions, which could effect Goldman's profit and loss calculations, collateral calls, and the value of individual customer positions.
In his February 12 email, Mr. Sparks wrote that the SPG Desk had been marking down the value of single name long CDS contracts by only one-third of the amount that would apply if the desk's true calculation of the correlation between single name and ABX CDS contracts was correct – that the two products were more closely correlated than the market recognized. Mr. Swenson told the Subcommittee that, in late 2006 and early 2007, single name long CDS contracts were trading at higher prices than similar ABX CDS contracts, and the observable market prices of single name CDS contracts were not falling as quickly as market professionals thought they should. Subcommittee interview of Michael Swenson (4/16/2010). Nonetheless, in a steeply declining market, Goldman's Mortgage Department assumed that the single name long CDS contracts would eventually fall to the same low values as the long ABX contracts. If that happened, since the SPG Desk was net short single name CDS contracts, the anticipated drop in value would result in an equivalent amount of profit for the desk's short position – hence, Mr. Sparks' reference to the "upside embedded in" the book.
On February 14, 2007, the Mortgage Department actually captured that upside by changing its correlation assumptions to recognize a higher correlation between single name CDS and ABX CDS contracts. Using the new assumptions, Goldman then marked down the value of its customers' single name CDS contracts to levels closer to the ABX Index assets. As the short party to those same CDS contracts, Goldman also realized a profit of $100 million in a single day. See 2/14/2007 email from Arbind Jha to Michael Swenson, "Mortgages Estimate REVISED," GS MBS-E-012474685. [Back]
1664. 2/12/2007 email from Daniel Sparks, "Post today," GS MBS-E-009763506. [Back]
1665. 2/14/2007 email from Daniel Sparks, "Post," 1665 GS MBS-E-009635410, Hearing Exhibit 4/27-8. [Back]
1666. 3/21/2007 email from Daniel Sparks to Tom Montag, GS MBS-E-010629379, Hearing Exhibit 4/27-21. See also 2/19/2007 email from Mr. Sparks to Mr. Montag, "2 things," GS MBS-E-010378492 ("Please send a short note to Josh Birnbaum, Mike Swenson and David Lehman telling them great week – short singles and short CDOs."); 2/28/2007 email from Michael Sherwood to Messrs. Sparks, Swenson, Birnbaum and Lehman, "ABX/Single name notional/risk history," GS MBS-E-010389296 (Mr. Sherwood, a London managing director and member of the Firmwide Risk Committee, wrote: "Many congrats on last few weeks trading ... keep it up!"). [Back]
1667. 2/8/2007 email from Daniel Sparks, "Post," GS MBS-E-002201668, Hearing Exhibit 4/27-7. [Back]
1668. Id.; see also 3/10/2007 email from Mr. Dinias to Daniel Sparks, "Mortgage Presentation to the board," GS MBS-E-013323395, Hearing Exhibit 4/27-17; 3/11/2007 email from Daniel Sparks, "Risk Changes Over Quarter," GS MBS-E-010400546, Hearing Exhibit 4/27-18; cf. 3/27/2007 Presentation to GS Board of Directors, "Subprime Mortgage Business," GS MBS-E-005565527, Hearing Exhibit 4/27-22. [Back]
1669. 9/26/2007 2007 EMD Reviews, Joshua Birnbaum Self-Review, Hearing Exhibit 4/27-55c. In his self-review, Mr. Birnbaum provided a detailed explanation of his reasons for recommending that the SPG Desk go "VERY short": "(1) Given how much ABX we had purchased through the broker market in 2006, the world would think GS was very long for the foreseeable future. We could use that fear to our advantage if we could flip our risk, (2) After unsuccessfully trying to sell our long to some of [a Goldman salesperson's] accounts, I realized traditional distressed buyers were no more likely to buy ABX at 85, 75, 65, etc. than at 95. The cash flow was just too binary, so there would be little support if negative momentum began, (3) The fundamentals for mortgage credit were undeniably deteriorating, (4) CDO managers were in denial ... [their positive market] sentiments would allow us to amass large amounts of cheap single name protection if we desired, and (5) If the market truly tanked, the already large CDO warehouses would have to liquidate, further exacerbating the move and ultimately allowing us to cover." Id. [Back]
1673. Salem 2007 Self-Review at GS-PSI-03157 at 71-72. [Back]
1674. Subcommittee interview of Deeb Salem (10/6/2010). [Back]
1675. 3/12/2007 Mortgage Capital Committee memo, "ABACUS Transaction to be Lightly-Managed by Lion Capital," at 2, GS MBS-E-002665382, Hearing Exhibit 4/27-150. [Back]
1676. See 3/10/2007 email from Mr. Dinias to Daniel Sparks, "Mortgage Presentation to the board," GS MBS-E- 013323395, Hearing Exhibit 4/27-17; 3/11/2007 email from Daniel Sparks, "Risk Changes Over Quarter," GS MBSE- 010400546, Hearing Exhibit 4/27-18; 3/27/2007 presentation to GS Board of Directors, "Subprime Mortgage Business," at 8, GS MBS-E-005565527, Hearing Exhibit 4/27-22 [footnote omitted]. [Back]
1677. Salem 2007 Self-Evaluation [emphasis in original]. [Back]
1678. 8/23/2007 email from Tom Montag, "Current Outstanding Notional SN ames," GS MBS-E-010621231. [Back]
1679. 2/8/2007 email from Bill McMahon, "VaR limit for Mtg SPG," GS MBS-E-009980807. [Back]
1680. 2/23/2007 Goldman internal document, "Mortgage VaR Change (Q1'07 vs. Q4'06)," GS MBS-E-010037310, Hearing Exhibit 4/27-12; 3/8/2007 email from Jha Arbind, "Risk changes over the quarter," GS MBS-E-010400546, Hearing Exhibit 4/27-18. [Back]
1682. 2/23/2007 Goldman internal document, "Mortgage VaR Change (Q1'07 vs. Q4'06)," GS MBS-E-010037310, Hearing Exhibit 4/27-12. [Back]
1683. 2/14/2007 email from Mr. Gmelich to Tom Montag, GS MBS-E-016165580. [Back]
1685. 2/22/2007 email from Daniel Sparks to Messrs. Birnbaum, Swenson and Lehman, "Block size tranche protection offers for Paulson or others," GS MBS-E-010381411. [Back]
1687. Subcommittee interview of Joshua Birnbaum (4/22/2010) (Mr. Birnbaum wanted to continue to hold the short position, rather than cover it, since he thought it would earn additional profit); see also 2007 Birnbaum Self-Review, Hearing Exhibit 4/27-55c (Mr. Birnbaum wrote that he should have argued more forcefully against covering the shorts in February 2007). [Back]
1688. 2/21/2007 email chain from Daniel Sparks, "Mortgages today," GS MBS-E-010381094, Hearing Exhibit 4/27- 10. In response, Mr. Viniar wrote to Mr. Sparks: "Good start. Keep covering." 2/21/2007 email from David Viniar to Daniel Sparks, "Mortgages today," GS MBS-E-009757841. In another email, Mr. Montag wrote: "How hard are we pushing covering some of singlename. Let's not be bidoffer foolish. The downside isn't worth the upside imo." 2/21/2007 email from Tom Montag to Daniel Sparks, GS MBS-E-017237596. Mr. Sparks replied: "Pushing hard, but need to be realistic with respect to expectation on liquidity. Very hard to force it. Trade has been right, and should continue to run (though there will be bumps). Entire team knows we have to reduce and is focused on it." Id. Mr. Montag responded: "If you sold it in a bad market u ough[t] to be able to buy it." Id. [Back]
1689. 2/22/2007 email from Richard Ruzika to Tom Montag 1689 and Daniel Sparks, GS MBS-E-010381967. [Back]
1690. Subcommittee interview of Michael Swenson (4/16/2010). [Back]
1693. A similar situation existed at the time in the market for commercial mortgage backed securities (CMBS). In a February email to Mr. Lehman, a CMBS trader remarked: "It's amazing that everyone was lifting [accepting bids on] cmbs 1 and 2 [CMBX indices], but NOBODY will bid single names." 2/23/2007 email from [CMBS trader] to David Lehman, "CT CDO w/ [Bank]," GS MBS-E-011270138-39 [emphasis in original]. [Back]
1694. 2/25/2007 email from Daniel Sparks to Tom Montag, "Questions you had asked," GS MBS-E-010987763. [Back]
1695. 2/27/2007 email from Richard Ruzika to Tom Montag, Justin Gmelich, 1695 and Daniel Sparks, GS MBS-E- 002204942. [Back]
1697. 2/27/2007 email from Daniel Sparks, "Opcom Directive," GS MBS-E-017250218. [Back]
1698. 2/27/2007 email from Daniel Sparks, "Goals," GS MBS-E-010387086, Hearing Exhibit 4/27-11. [Back]
1699. See, e.g., 2/22/2007 Goldman internal emails, GS MBS-E-018938493, GS MBS-E-018940734; 2/27/2007 email from Michael Swenson to Bill McMahon, GS MBS-E-012502371 ("Bought 1.5bb of sn baa3 risk from harbinger."); 3/1/2007 email from Daniel Sparks, "SN Protection Offers for Harbinger (50 names)," GS MBS-E-019460848 ("Trade was executed at +725 "); 3/3/2007 email to Michael Swenson and Daniel Sparks, "Harbinger Update," GS MBS-E-010707216. As a result, Harbinger became Goldman's largest hedge fund counterparty credit risk: "Harbinger is our #1 hedge fund exposure globally. We had to explain this to the SEC this month." 4/20/2007 Goldman internal email, "Harbinger didn't add the last piece we had spoke of, but are now thinking of adding ~50mm," GS MBS-E-012523933. Harbinger was also instrumental in Goldman's second round of short covering efforts in August 2007. See, e.g., 7/30/2007 email to Michael Swenson, "Harbinger Single-A Offerings.xls," GS MBS-E-012374026; 8/23/2007 email from Michael Swenson, "Harbinger Post," GS MBS-E-009739009. [Back]
1700. 2/28/2006 Goldman internal memorandum, "Firmwide Risk Committee: February 1700 28th FWR Minutes, "GS MBS-E-009687468, Hearing Exhibit 4/27-13 [sic - correct year is 2007]. [Back]
1701. Id. See also 2007 Swenson Self-Review ("we prudently covered $5bb of single-name shorts at the all time lows at the time back in February"), Hearing Exhibit 4/27-55b. [Back]
1702. 3/5/2007 email from Tom Montag, GS MBS-E-010393092. Goldman COO Gary Cohn expressed concern that a positive move in the markets would cause the Mortgage Department to incur large losses due to its net short: "A big plus would hurt the Mortgage business but Justin [Gmelich] thinks he has a big trade lined up for the morning to get us out of a bunch of our short risk." 3/5/2007 email from Gary Cohn, GS MBS-E-009656525, Hearing Exhibit 4/27- 15. The big trade referred to by Mr. Cohn was one of the Harbinger trades that enabled Goldman to cover $4 billion of its single name CDS short positions. [Back]
1703. 3/9/2007 email to David Viniar, "Mortgage Talking Points for Earnings Call," GS MBS-E-009762678, Hearing Exhibit 4/27-16. [Back]
1704. 9/17/2007 Presentation to GS Board of Directors, Residential Mortgage Business at 5, GS MBS-E-001793840, Hearing Exhibit 4/27-41. [Back]
1705. 3/17/2007 email from Daniel Sparks and Tom Montag, 1705 "Cactus Delivers," GS MBS-E-009632839. [Back]
1706. Id. Mr. Montag's comment suggests that he may have wanted the Mortgage Department to reduce the size of both its longs and shorts to reduce its overall risk, or to reduce its basis risk, the risk that arises when two different types of assets are used to offset one another, and the assets are imperfectly matched. [Back]
1707. 3/14/2007 email from David Lehman, "ABS Trading - Subprime risk," GS MBS-E-010397102. [Back]
1709. See "Notionals (ABX Convention)," chart attached to 5/23/2007 email from Kevin Kao to Joshua Birnbaum, "RMBS Subprime risk history as of 18May07," GS MBS-E-012890599. [Back]
1710. See, e.g., 3/8/2007 email from Mr. Sparks, "Mortgage Risk," GS MBS-E-002206279, Hearing Exhibit 4/27-75 (noting Mortgage Department's $9 billion short position on the AAA ABX index). [Back]
1711. Subcommittee interview of Daniel Sparks (4/15/2010), David Lehman (4/12/2010), Joshua Birnbaum (4/22/2010), and Michael Swenson (4/16/2010). [Back]
1712. See chart entitled "Goldman Sachs Mortgage Department Total Net Short Position, February-December 2007 in $ Billions," prepared by the Subcommittee, April 2010, updated January 2011, derived from Goldman Mortgage Strategies and Mortgage Department Top Sheets. [Back]
1713. Subcommittee interview of Daniel Sparks (10/3/2010). [Back]
1714. 8/17/2007 Goldman internal chart, "RMBS Subprime Notional History 1714 (Mtg Dept.)," GS MBS-E-012928391, Hearing Exhibit 4/27-56a. The analyst's cover email stated: "The attached spreadsheet covers the single name and ABX positions of the entire mortgage department for the fiscal year 2007. I spot checked the numbers with risk reports they tie out well." See also 8/17/2007 email from Joshua Birnbaum, GS MBS-012928388, Hearing Exhibit 4/27-56b. [Back]
1715. When shown the chart during his interview, Mr. Sparks told the Subcommittee he was unfamiliar with it and pointed what he believed to be an anomaly related to its depiction of the Mortgage Department's short position involving BBB rated RMBS securities. He also indicated that he could not confirm its depiction of the AAA ABX short position. Since multiple Goldman email messages confirm the existence of the AAA ABX short position during most of Goldman's fiscal year 2007, however, the chart's depiction of that position as a nearly flat line at about $9 billion short until July 2007 appears consistent with the other evidence. [Back]
1716. 3/4/2007 email from Kevin Gasvoda to Daniel Sparks, "Quick thoughts 1716 on ABX AAA risk," GS MBS-E- 010398072. [Back]
1717. Id. Despite Mr. Gasvoda's suggestion that he might try to cover a portion of the $8 billion net short, the AAA ABX short position in Mr. Gasvoda's area appears to have remained unchanged until around July 2007. 8/17/2007 Goldman internal chart, "RMBS Subprime Notional History (Mtg Dept.)," GS MBS-E-012928391, Hearing Exhibit 4/27-56a. [Back]
1718. Goldman's hedging practice was that each desk was responsible for its own hedges. Accordingly, different desks would not necessarily share information about their respective hedges, even if both were hedging with the same product, such as an ABX short. [Back]
1719. 3/5/2007 email from Cyrus Pouraghabagher, "ABX hedges for Resi businesses," GS MBS-E-012085546. [Back]
1721. 2/28/2007 email from Jonathan Egol to Fabrice Tourre, "Hedges Status Report," GS MBS-E-002628642. [Back]
1722. The report from Mr. Gasvoda's group may have inadvertently omitted a particular loan book that was holding the additional $1 billion in hedges, the figure may be a typographical error, or the group may have chosen not to disclose some of its hedges. The Goldman personnel interviewed by the Subcommittee were unable to explain the discrepancy. [Back]
1723. 3/8/2007 email from Daniel Sparks, "Mortgage Risk," GS MBS-E-002206279, Hearing Exhibit 4/27-75. [Back]
1724. Id.; see also 8/23/2007 email from Tom Montag to Lloyd Blankfein, GS MBS-E 1724 -009585951, Hearing Exhibit 4/27-37 (Mortgage Department "bought back 9 billion of AAA abx index over last two weeks." ); 8/23/2007 email from Tom Montag to Gary Cohn and David Viniar, "Harbinger Post," GS MBS-E-009739009. [Back]
1725. 3/4/2007 email Kevin Gasvoda to Daniel Sparks, "Quick thoughts on ABX AAA risk," GS MBS-E-010398072 (" we get good jump risk . . . Net, think this is a good position to have on given downside protection and relatively light upside pain."). [Back]
1726. Subcommittee interview of Daniel Sparks (4/15/2010). [Back]
1729. See 8/17/2007 Goldman internal chart, "RMBS Subprime Notional History (Mtg Dept.)," GS MBS-E- 012928391, Hearing Exhibit 4/27-56a. [Back]
1730. The AAA ABX short appears to have served as a hedge for long assets in the Whole Loan and CDO Origination areas in March 2007. Many of those assets were sold during the spring and summer of 2007. If a hedged asset is sold, the hedge is ordinarily unwound commensurately. See, e.g., 5/30/2007 email from David Lehman, "ABX hedges – Buy order," GS MBS-E-011106690 (directing the unwinding of certain short ABX hedges held against the CDO Origination Desk when the CDO positions were transferred to another desk). [Back]
1731. See 8/17/2007 Goldman internal chart, "RMBS Subprime Notional History (Mtg Dept.)," GS MBS-E- 012928391, Hearing Exhibit 4/27-56a. [Back]
1732. 3/26/2007 Goldman presentation to Board of Directors, "Subprime Mortgage 1732 Business," GS MBS-E- 005565527, Hearing Exhibit 4/27-22. While the final version of the presentation indicated Goldman had an overall net long position in subprime assets by about $900 million, a near-final draft of the presentation indicated that Goldman had an overall net short position of $2.8 billion. 3/16/2007 draft presentation to Board of Directors by Daniel Sparks, "Subprime Mortgage Business," GS MBS-E-002207710. The primary difference between the two figures appears to be the inclusion in the final version of Goldman's net long holdings of Alt A mortgages, even though Alt A assets are not usually considered to be subprime mortgages. Subcommittee interview of David Viniar (4/13/2010). [Back]
1734. Id. at 8 [footnotes defining CDO and CDS omitted]. [Back]
1735. 9/17/2007 Presentation to Goldman Sachs Board of Directors, Residential Mortgage Business, at 5, GS MBS-E- 001793840, Hearing Exhibit 4/27-41. [Back]
1736. 3/26/2007 Goldman Sachs presentation to Board of Directors, "Subprime Mortgage Business," GS MBS-E- 005565527, Hearing Exhibit 4/27-22. [Back]
1737. See, e.g., Salem 2007 Self-Review. [Back]
1738. See, e.g. 4/5/2007 email from Deeb Salem, "let's sell ~200mm in Baa2 protection . . .," GS MBS-E-004516519 (Mr. Swenson's reply: "Make that 500mm"). [Back]
1739. Deeb Salem 2007 Self-Review [emphasis in original]. [Back]
1740. Subcommittee interview of Deeb Salem (10/6/2010). [Back]
1742. 5/25/2007 email from Michael Swenson 1742 to Edwin Chin and Deeb Salem, GS MBS-E-012443115. [Back]
1743. 5/29/2007 email from Michael Swenson to Deeb Salem, "they want to think about doing this again," GS MBSE- 012561798. [Back]
1744. Subcommittee interview of Michael Swenson (10/8/2010). [Back]
1745. Goldman's CDS collateral agreements were usually bilateral, meaning collateral could flow either way, to the short or long party, depending upon price movements in the underlying assets. Subcommittee interview of Michael Swenson (10/18/2010). Clients wrote emails to Goldman questioning how they could owe collateral on CDS contracts they had only recently purchased from Goldman. [Back]
1746. 5/21/2007 email from Deeb Salem to Michael Swenson and Edwin Chin, "A few things pain-related," GS MBSE- 021887795 [ellipses in original]. [Back]
1748. 5/21/2007 email to Edwin Chin, "Edwin–Important–Stanfield levels," GS MBS-E-012570169. [Back]
1750. 5/24/2007 email from Stanfield, "Our thoughts 1750 on single-name RMBS CDS," GS MBS-E-012891722. [Back]
1751. 5/31/2007 email from sales to Edwin Chin and Deeb Salem, "Stark CDO CDS potential trade 5/31," GS MBSE- 012443662. [Back]
1752. Id.; see also, e.g., "Valuation & Pricing Related to Transactions with AIG," prepared by Goldman in response to inquiry by the Financial Crisis Inquiry Commission, GS MBS 0000039096. [Back]
1753. 5/31/2007 Goldman email chain, "Stark CDO CDS potential trade 5/31," GS MBS-E-012443675. Mr. Swenson made no mention of his email from two days earlier in which he recommended lowering CDS values to "have people totally demoralized." 5/29/2007 email from Michael Swenson to Deeb Salem, GS MBS-E-012561798. [Back]
1754. 6/7/2007 Goldman internal email chain, "BSAM Post," GS MBS-E-011184213. [Back]
1755. 6/7/2007 email from Deeb Salem to Michael 1755 Swenson and Edwin Chin, GS MBS-E-012444252. [Back]
1759. 6/8/2007 email from Michael Swenson to Benjamin Case, Edwin Chin, and Deeb Salem, "CDO CDS protection offers," GS MBS-E-012551726. [Back]
1760. 6/10/2007 email from Michael Swenson to Deeb Salem, Edwin Chin, and salesman, "CDSs on CDOs," GS MBS-E-012551460. [Back]
1762. 6/13/2007 email from sales, "CDO protection," GS MBS-E-012445931. [Back]
1763. 6/11/2007 Goldman email chain, "Please advise – Client challenging 1763 marks," GS MBS-E-018947548. [Back]
1764. 6/12/2007 email from controllers, "CDS," GS MBS-E-012445404. [Back]
1765. 6/19/2007 email from controllers, "A3 subprime bonds in transition account," GS MBS-E-012458169. Mr. Swenson replied: "Tier 4 bonds talk to Deeb [Salem]." [Back]
1766. See Markowski v. SEC, 274 F.3d 525, 527-28 (D.C. Cir. 2001) (Congress determined that "‘manipulation' may be illegal solely because of the actor's purpose"); In re IPO Litigation, 241 F. Supp. 2d 281, 391 (S.D.N.Y. 2003) (no additional requirements aside from manipulative intent); H.R. Rep. No. 1383, 73rd Cong., 2d Sess. 20 (1934) (under Securities Exchange Act, "if a person is merely trying to acquire a large block of stock for investment, or desires to dispose of his holdings, his knowledge that in doing so he will affect the market price does not make his actions unlawful. His transactions become unlawful only when they are made for the purpose of raising or depressing the market price."); but see GLF Advantage Fund, Ltd. v. Colkitt, 272 F.3d 189, 205 (3d Cir. 2001) (requiring, in addition to manipulative intent, "that the alleged manipulator injected inaccurate information into the market or created a false impression of market activity"). Single name CDS contracts referencing RMBS and CDO securities appear to qualify as "security-based swap agreements" subject to anti-manipulation and anti-fraud prohibitions under the federal securities laws. [Back]
1767. PSI Net Short Position Chart; 8/17/2007 Goldman chart, "RMBS Subprime Notional History (Mtg Dept.)," GS MBS-E-012928391, Hearing Exhibit 4/27-56a. [Back]
1768. 7/25/2007 email from Mr. Viniar to Mr. Cohn, "Private & Confidential: FICC Financial Package 07/25/07," GS MBS-E-009861799, Hearing Exhibit 4/27-26. [Back]
1769. See 6/7/2007 Goldman email chain, "BSAM 1769 Post," GS MBS-E-011184213. [Back]
1770. Id. Some have suggested that the financial problems experienced by the Bear Stearns hedge funds were caused in part by severe markdowns taken by Goldman on assets held in the funds' portfolios, and that Goldman caused the funds to collapse. In its final report, the Financial Crisis Inquiry Commission ("FCIC") briefly addressed these allegations. See The Financial Crisis Inquiry Report 2010 at 237-40, 244 (hereinafter "Final Report"). Goldman denied the allegations with respect to its April and May 2007 marks in filings with the FCIC. See 11/1/2010 letter from Goldman counsel Janet Broecke to FCIC, "FCIC Requests for Documents and Information" and Appendices AG, available at www2.goldmansachs.com. The FCIC's Final Report was critical of Goldman's marks in general as being significantly lower than those of other banks and noted in particular its collateral dispute with AIG. See Final Report at 243-44, 265-71. With respect to the Bear Stearns hedge funds, however, the Final Report merely noted that Bear Stearns had disputed marks from Goldman and three other banks and cited the testimony of the funds' portfolio manager, Ralph Cioffi, that "a number of factors contributed to the April revision [in the hedge funds' values, which ultimately led to the funds' collapse], and Goldman's marks were one factor." Final Report at 240.
In addition to the markdowns in April and May, Goldman also marked down certain CDO securities held by the Bear Stearns funds in June 2007, but it appears those June markdowns did not play a significant role in the hedge funds' collapse. That month, Goldman marked down their positions in four Goldman CDOs by two points each. See, e.g., 6/8/2007 email from Jonathan Egol to Daniel Sparks, "BSAM mark recap," GS MBS-E-001920339 (Mr. Egol emailed Mr. Sparks a recap of the Bear Stearns markdowns and stated: "We lowered the marks on 4 bonds down 2 pts each.").
Mr. Swenson had urged larger markdowns, but his advice was not followed. On June 7, 2007, Mr. Egol had first marked down the funds' holdings in a single Abacus CDO by 2 points, from 89 to 87. Mr. Egol emailed Mr. Sparks a spreadsheet with a cover note: "GS exposure to BSAM [Bear Stearns Asset Management] as of today. ABACUS mark corrected to 87 to handle." 6/7/2007 email from Mr. Egol to Mr. Sparks GS MBS-E-003375593. Since Abacus was only one of four Goldman CDOs in which the Bear Stearns funds held positions, Mr. Swenson emailed Mr. Lehman recommending further markdowns:
Mr. Swenson: I am on the same page [as] egol we n[e]ed to mark him [Ralph Cioffi, Portfolio Manager of the Bear Stearns funds]
Mr. Lehman: Told Egol I'm comfortable w/ the prices, especially when u include the 5 pt [percent] HC [haircut.] Don't think mar[k]ing him down 1 or 2 pts makes sense or sends the right message .... I wud run it by Dan [Sparks] and get his take ... [M]y opinion is that the Firm is appropriately protected w/ current HC [haircut] and mark.
Mr. Swenson: We need to mark him he is the biggest elephant by far and it has an impact on the m$arket[.]
Mr. Lehman: How much do u [sic] want to mark him by?
Mr. Swenson: A lot[.]
Mr. Lehman: I disagree on this one . . . Let's talk tomorrow[.]
Mr. Swenson: He is done[.]
6/7/2007 email exchange between Mr. Swenson and Mr. Lehman, "BSAM Post," GS MBS-E-011184213.
The next day, Friday, June 8, 2007, Mr. Egol reported he had marked down all four CDO positions by two points. 6/8/2007 email from Jon Egol to Daniel Sparks, "BSAM mark recap," GS MBS-E-001920339. Upon reviewing the marks the following Monday, Mr. Sparks wrote: "The marks look stale." 6/11/2007 email from Daniel Sparks, "BSAM Exposure Summary," GS MBS-E-010798675. A Mortgage Department employee replied: "Marks for everything but the correlation positions are taken from work egol did last thurs. Correlation marks are as of friday's cob [close of business]." Id.
On June 12, Bear Stearns announced that it would be changing the hedge funds' Net Asset Valuations (NAVs). 6/12/2007 email to Craig Broderick, "BSAM Bullet Points," GS MBS-E-009967117 ("BSAM is currently in the process of restating their performance figures for April, from down 5% to down 10%. This was due to many dealers changing the way they are marking their Repo positions"). The Mortgage Department later marked down two Timberwolf tranches owned by the Bear Stearns hedge funds by another 2 points and 5 points, respectively, to 95 and 89, before it bought them back from Bear Stearns at 96 and 90 on June 19, 2007, in a negotiated unwind of the Bear funds' positions with Goldman. See 6/22/2007 emails from Mr. Lehman, "BSAM Repo Summary," GS MBS-E-001916435. See also 6/18/2007 email from Mr. Lehman, "Today's Bear Stearns Prices," GS MBS-E- 001919600; 6/27/2007 email from Mr. Sparks to Mr. Viniar, "CDO^2s," GS MBS-E-009747489. [Back]
1771. 6/8/2007 email to Daniel Sparks, "Heads Up – r 1771 ates market volatile," GS MBS-E-010796702. [Back]
1773. 6/8/2007 email from Joshua Birnbaum, "* ABX Markets 07-1, 06-2, 06-1: 11:00 a.m.," GS MBS-E-012900708. [Back]
1774. 6/12/2007 email to Craig Broderick, "BSAM Bullet Points," GS MBS-E-009967117. [Back]
1775. Id. A month later, on July 17, 2007, Mr. Sparks reported to Mr. Mullen and Mr. Montag that the Bear Stearns funds were "returning 9 cents and 0 cents on the dollar in the less-levered and more-levered funds." 7/17/2007 email from Daniel Sparks, "Mortgages Estimate," GS MBS-E-010857498. [Back]
1776. 6/12/2007 email to Craig Broderick, 1776 "BSAM Bullet Points," GS MBS-E-009967117. [Back]
1777. See 6/22/2007 emails from David Lehman, "BSAM Repo Summary," GS MBS-E-001916435. See also 6/18/2007 email from David Lehman, "Today's Bear Stearns Prices," GS MBS-E-001919600; 6/27/2007 email from Daniel Sparks to David Viniar, "CDO^2s," GS MBS-E-009747489. The prices Goldman paid to Bear Stearns on the A1B and A1C tranches of Timberwolf were approximately one cent (or 100 basis points) above its own internal marks on the Timberwolf tranches in the week of June 18, which were then at 95 and 89 points, respectively. Id. In May 2007, Goldman had completed a re-evaluation of its CDO assets, which suggested on a preliminary basis that the AAA Timberwolf securities should be marked down dramatically in value. Accordingly, Goldman may have been generous toward Bear Stearns in buying back the Timberwolf positions at 96 and 90. On the other hand, repurchasing the Timberwolf securities near its own low internal marks might have reduced the price Goldman could obtain in reselling the tranches, which it identified in a June 22 sales directive to its sales force and recommended selling at 98.5 and 95, respectively. When asked about the buyback of the Timberwolf tranches, Mr. Viniar told the Subcommittee that Goldman had financed the purchase of both tranches and may have been legally entitled to seize them, but there are circumstances in which Goldman voluntarily settles a dispute on agreed terms, rather than going through the legal process entailed in seizing and selling collateral. Subcommittee interview of David Viniar. (4/13/2010). [Back]
1778. 6/22/2007 email from Tom Montag to Daniel Sparks, "Few Trade Posts," GS MBS-E-010849103 (Mr. Montag: "Can I get a complete rundown on everything we bought from BSAM and what's left?" Mr. Sparks: "Yes – main thing left is 300mm timberwolfs Other large positions were tmts - gone, octan - gone, abacus - we will collapse against short There were some small rmbs positions."). [Back]
1779. At the time, a trader from another bank stated in a market update: "[T]he BSAM [Bear Stearns Asset Managment] story will dictate the tone in the market in the short term, as a continued liquidation of their holdings will put further downward price pressure on ... ABX trading." 6/18/2007 email to Edwin Chin, "ABX Open," GS MBS-E-021890868. [Back]
1780. 9/26/2007 2007 MD Reviews, Joshua Birnbaum Self-Review, GS-PSI-1780 01956, Hearing Exhibit 4/27-55c. The SPG Desk's ABX shorting efforts caught the attention of another Goldman trader who was apparently unaware of Mr. Birnbaum's strategy. The trader emailed: "yo-who the F- is getting short the ABX at these levels." 6/21/2007 email to Deeb Salem, GS MBS-E-021905440. [Back]
1781. This presentation was drafted to support a proposal that the SPG traders be compensated in a manner similar to hedge fund managers. 10/3/2007 "SPG Trading – 2007," presentation by Joshua Birnbaum, GS MBS-E-015654036. Mr. Birnbaum had drafted the presentation on behalf of the SPG Trading Desk as a whole. Mr. Swenson and Mr. Lehman reviewed and commented upon the presentation, and Mr. Birnbaum revised it to make the changes they suggested. See, e.g., 10/2/2007 email from David Lehman to Joshua Birnbaum, "SPG Trading - 2007.ppt," GS MBS-E-015653681 (providing comments and suggesting text for presentation). Mr. Birnbaum replied and copied Mr. Swenson on the email chain as well: "I added your bullet and one more." Id. See also 10/4/2007 email from Joshua Birnbaum to Michael Swenson and David Lehman, "How's this?," GS MBS-E-015712249 (forwarding another revised bullet point for presentation). Mr. Birnbaum told the Subcommittee, however, that the SPG Trading Desk ultimately did not use the presentation. See Birnbaum responses to Subcommittee QFRs at PSI_QFR_GS0509. [Back]
1782. 10/3/2007 "SPG Trading – 2007," presentation by Joshua Birnbaum, GS MBS-E-015654036 [emphasis in original]. See also Birnbaum responses to Subcommittee QFRs at PSI_QFR_GS0509. [Back]
1783. 6/29/2007 emails between Michael Swenson and David Lehman, "ABS Update," GS MBS-E-011154528. [Back]
1784. 7/10/2007 Goldman internal email, "GS Cashflow/Abacus CDOs Mentioned in S&P Report on CDO Exposure to Subprime RMBS," GS MBS-E-001837256. [Back]
1786. 7/12/2007 email from Joshua Birnbaum, "ABX Markets 1786 07-1, 06-2, 06-1: 12:00 p.m.," GS MBS-E-012944742, Hearing Exhibit 4/27-146. [Back]
1787. 7/27/2007 email to Tom Montag, Daniel Sparks, and Donald Mullen, "Structured Products Weekly Update – 7/27/07," GS MBS-E-010876357. [Back]
1788. 7/20/2007 email from Gary Cohn to Lloyd Blankfein, "Private & Confidential: FICC Financial Package 07/20/07," GS MBS-E-009648405, Hearing Exhibit 4/27-24. [Back]
1789. 7/24/2007 email from David Viniar to Lloyd Blankfein, "Daily Estimate 07-24-07 – Net Revenues $74M," GS MBS-E-009690033, Hearing Exhibit 4/27-25. [Back]
1790. 7/29/2007 email from Daniel Sparks to Tom Montag, "Correlation information you asked for," GS MBS-E- 010876594, Hearing Exhibit 4/27-27. [Back]
1791. 9/26/2007 2007 EMD Reviews, Joshua Birnbaum Self-Review, GS-PSI-01975, Hearing Exhibit 4/27-55c. [Back]
1792. 8/11/2007 email from David Lehman, "1792 Japan exposure to CDOs," GS MBS-E-001929202. [Back]
1793. 8/23/2007 email from Tom Montag to Gary Cohn and David Viniar, "Harbinger Post," GS MBS-E-009739009. See also 8/21/2007 email from Michael Swenson, "Mortgage Commentary for Firmwide Risk Committee," GS MBS-E-010619375 ("Current SPG Trading Desk Position Summary: – RMBS AAA – long $2.2bb"). [Back]
1794. The one short position the Mortgage Department did not attempt to cover was its $3 billion net short in BBB and BBB- rated RMBS securities, as discussed below. [Back]
1795. 8/5/2007 email from Michael Swenson, "great week," GS MBS-E-012376888, Hearing Exhibit 4/27-28. [Back]
1798. 8/8/2007 email from Tom Montag to Michael Swenson and David Lehman, GS MBS-E-011088957. [Back]
1799. 8/9/2007 email from Tom Montag, GS MBS-E-009640293. [Back]
1800. 8/11/2007 emails between Donald Mullen and David Lehman, "Japan 1800 exposure to CDOs," GS MBS-E- 001929202. [Back]
1801. Id. See also 8/11/2007 email from Daniel Sparks to Tom Montag and Donald Mullen, "GSC ms prop/Paulson swap," GS MBS-E-010673306 ("We need to keep buying AAA ABX, and now we can start looking to cover some CDO CDS"). [Back]
1802. 8/20/2007 email exchange between Daniel Sparks and Tim Montag, "Hsbc loans," GS MBS-E-010681855. [Back]
1803. 8/14/2007 email from Michael Swenson, "ABS Summary for Week Ended August 10th," GS MBS-E- 010678428. [Back]
1805. 8/19/2007 email from Tom Montag, "Mtg Department Weekly Update," GS MBS-E-010681647. [Back]
1807. Id. Not everyone at Goldman agreed that the risk of loss on AAA was "remote." On July 29, 2007, Mr. Rosenblum circulated an email to Mortgage Department managers and research analysts with a series of questions about how AAA subprime RMBS securities would be affected by other market developments. 6/29/2007 email from David Rosenblum, GS MBS-E-010060183. The head of Goldman's Structured Product Strategies area, Alan Brazil, responded: "Well, as is becoming clearer to the market is [sic] that the subprime issue is really a triple-a issue, either directly as a aaa subprime or indirectly in a aaa cdo. As a rough guide, over 90% of a subprime deal are in aaas. ... And once you start downgrading bbb/bbb- you will ultimately be start [sic] downgrading aaas. And, in my view, that is a significant escalation of the subprime meltdown. ... At its heart, the main shoe to fall will be when the rating agencies downgrade to the aaa level. I don't see as they have much of a choice. Mez[zanine] aaa cdo trade in the 20 and 30s cannot be overlooked even by the agencies." Id. [Back]
1808. Subcommittee interview of Joshua Birnbaum (4/22/2010). [Back]
1811. 8/14/2007 email from Daniel Sparks, "Fw: Post," GS MBS-E-010678053, Hearing Exhibit 4/27-30. [Back]
1812. See 8/14/2007 email from Gary Cohn to Daniel Sparks, "Fw: Post," GS MBS-E-010678053, Hearing Exhibit 4/27-30 ("Talk to me before you go long."); 8/14/2007 email from Tom Montag, "Post," GS MBS-E- 009741145("We will not be going long billions. Lots of risk to clean up first imo"). [Back]
1813. 8/15/2007 email from Daniel Sparks, "Post," GS MBS-E-009740784, Hearing Exhibit 4/27-32. [Back]
1814. 8/20/2007 email from Daniel Sparks to Gary Cohn, David Viniar, Jon Winkelried, Tom Montag, and Donald Mullen, "Big Opportunity," GS MBS-E-009739836. See also 8/20/2007 email exchange between Daniel Sparks and Tom Montag, "Hsbc loans," GS MBS-E-010681855 (Mr. Sparks pitched the plan again to Mr. Montag separately: "As a overall business, we're not short AAA's anymore. We are putting on the long index (mostly AAA)/short single name mezz trade on .... We are planning to continue to play offense. . . . Discussions on the up the quality trade (top cap stack and top quality collateral) were had in various times with don [Mullen], gary [Cohn] and bill [McMahon]. We aren't going crazy with it, just being opportunistic. Before we get large, we are going to lay out a strategy for the four of you."). [Back]
1815. 8/21/2007 email from Joshua Birnbaum, "Potential large subprime trade and impact 1815 on firmwide VAR," GS MBS-E-016359332, Hearing Exhibit 4/27-34; 8/21/2007 email from Joshua Birnbaum, "For 2 p.m. meeting," GS MBS-E-010608145 (graphs in support of plan to go long up to $10 billion in AAA ABX index). [Back]
1817. See 8/21/2007 email from Mr. Montag to Mr. Birnbaum, GS MBS-E-010682736 ("FYI. I think it would be much better for all concerned that we all discuss this and any strategy and have agreem[e]nt before we go to the presidents and cfo .... Secondly, I think we should be reducing our basis trades to reduce var as is .... Let's sit down"). [Back]
1818. 8/21/2007 email from Bill McMahon, "Potential large subprime trade and impact on Firmwide VAR," GS MBSE- 012606879. [Back]
1819. 8/21/2007 email from Joshua Birnbaum, "Potential large subprime trade and impact on firmwide VAR," GS MBS-E-016359332, Hearing Exhibit 4/27-34 [Back]
1820. 8/15/2007 email from Gary Cohn, "Trading VaR $165mm," 1820 GS MBS-E-009778573. [Back]
1821. 7/21/2007 email from Daniel Sparks to Donald Mullen, Tom Montag, and others, "Mortgages Estimate," GS MBS-E-009640287. [Back]
1822. See id. (noting $50 million down trading day, followed by a day in which the AAA index accounted for half of the day's profit). [Back]
1824. 8/9/2007 email from Joshua Birnbaum to Deeb Salem, GS MBS-E-012927140. [Back]
1825. 8/8/2007 email from Tom Montag to Michael Swenson and David Lehman, GS MBS-E-011311633. Mr. Swenson explained that the approximately $100 million loss was split between the Residential Whole Loan Trading Desk, the SPG Trading Desk, and the CDO Origination Desk. Id. [Back]
1826. 8/9/2007 email from Joshua Birnbaum to Deeb Salem, GS MBS-E-012927140. [Back]
1827. 8/9/2007 email from Joshua Birnbaum to Deeb Salem, "MarketRisk: Mortgage 1827 Risk Report (cob 08/08/2007)," GS MBS-E-012927200 ("These VAR numbers are ludicrous, btw. Completely overestimated for SPG trading, underestimated for other mortgage desks."). See also 8/21/2007 email from Joshua Birnbaum to Bill McMahon, "Potential large subprime trade and impact on Firmwide VAR," GS MBS-E-012606879 ("We have the 13.5Bln IO which makes us less short by $1-1.5 Bln . . . .") (IO is an asset arising from differences in the duration and timing of CDS premium payment streams); 8/21/2007 email from Michael Dinias, "Trading VaR Analysis," GS MBS-E- 009993267 ("the mortgage desk has questioned the size of the implied short exposure (i.e. desk believes they are less short than implied by the VaR model). We are reviewing the current VaR methodology with the mortgage traders/strategists and assessing the impact of various potential enhancements."); Subcommittee interview of Joshua Birnbaum (10/1/2010). [Back]
1828. For more information on the Mortgage Department's VAR levels, see below. [Back]
1829. On August 7, 2007, a senior risk executive wrote to Messrs. Cohn, Viniar, and McMahon: "We are doing a detailed analysis of mortgage and credit trading var contributors to see where we might get the most efficient var reduction." 8/7/2007 email from Bruce Petersen, "VaR," GS MBS-E-009775575. [Back]
1830. See, e.g., 8/21/2007 email from Joshua Birnbaum, "Potential large subprime trade and impact on firmwide VAR," GS MBS-E-016359332, Hearing Exhibit 4/27-34 (favoring preservation of the $3.5 billion BBB/BBBshort). [Back]
1831. Risk controller Robert Berry explained to Messrs. Viniar, McMahon, and Broderick that VAR was becoming acutely sensitive to estimates of correlation implicit in the data used in the VAR computation: "[T]here will be days where ‘nothing happened' – positions didn't change, markets were quiet, but small changes in correlation will mean the difference between 140 and 160. It will really be difficult to explain to you and to the desks why we were under [VAR limits] yesterday but over today." 8/15/2007 email from Robert Berry, "MarketRisk: End of Day Summary – cob 8/10/07," GS MBS-E-009779885. Mr. McMahon responded: "var can swing between 140 and 160 without any changes in the complexion of our trading books – essentially it is just noise." 8/15/2007 email from Bill McMahon to Gary Cohn and David Viniar, "Trading VaR $165mm," GS MBS-E-009778573. [Back]
1832. See, e.g., 8/15/2007 email from Michael Dinias, "1832 Hedge Analysis cob 8/13/07," GS MBS-E-010678553 (analyzing 6 potential VAR-reducing trading scenarios featuring different proposed transactions); 8/21/2007 email from Michael Dinias, "Trading VaR Analysis," GS MBS-E-009993267 (analyzing the VAR-reducing impact of going long in various classes of assets); 8/22/2007 email from Daniel Sparks to Tom Montag and Donald Mullen, "VAR reduction possibilities," GS MBS-E-010619824 (proposed transactions in single name CDS protection to reduce VAR). [Back]
1833. 8/15/2007 email from Gary Cohn, "Trading VaR $165mm," GS MBS-E-009778573. Mr. Viniar agreed. Two days earlier, after seeing a daily risk report showing Firmwide VAR at $159 million, Mr. Viniar emailed senior risk executives: "No comment necessary. Get it down." 8/13/2007 email from David Viniar to Bill McMahon, Craig Broderick, and Robert Berry, "MarketRisk: End of Day Summary – cob 8/10/2007," GS MBS-E-009779885. Even after Mr. Cohn's order to "get down now," Firmwide VAR continued to increase. On August 16, Firmwide VAR rose from $165 million to $171 million. 8/16/2007 email from Michael Dinias, "Trading VAR $171mm," GS MBSE- 099775568. On August 17, it rose to $174 million. 8/17/2007 email to David Viniar, Gary Cohn, Jon Winkelried, Tom Montag, Bill McMahon, Craig Broderick et al., "Weekly Market Risk Summary as of 8/17/07," GS MBS-E- 009756424. [Back]
1834. On August 22, 2007, Mr. Montag emailed Mr. Blankfein: "[W]e are covering a number of shorts in mortgages today and tomorrow–probably $1.5 billion worth–will reduce mortgages [VAR] hopefully to below 80." 8/22/2007 email from Tom Montag to Lloyd Blankfein, "Trading VaR $144mm," GS MBS-E-009605812, Hearing Exhibit 4/27-36. The next morning Mr. Montag emailed Mr. Blankfein that the Department "covered about 700 million in shorts in mtgs last night–500 million in single names . . . . lots more to go–but they fortunately had bought back 9 billion of AAA abx index over last two weeks." 8/23/2007 email from Tom Montag to Lloyd Blankfein, GS MBSE- 009585951, Hearing Exhibit 4/27-37. [Back]
1835. 8/23/2007 email from Michael Swenson, "Harbinger Post," GS MBS-E-009739009. [Back]
1836. 8/23/2007 email from Daniel Sparks, "Current Outstanding Notional SN ames," GS MBS-E-010621231. [Back]
1838. 8/23/2007 email exchange between Tom Montag and Daniel Sparks, "Current Outstanding Notional SN ames," GS MBS-E-010621324. [Back]
1839. 8/23/2007 email exchange between Gary Cohn and Lloyd Blankfein, "Trading VaR $133mm," GS MBS-E- 009643469. [Back]
1840. Id. Goldman senior executives continued to monitor the Mortgage Department's actions. For example, on August 31, 2007, Mr. Montag emailed Mr. Lehman: "abx hurting us today? Mkt over reacting?" 8/31/2007 email from Tom Montag, "Structured Products Weekly Update – 08/30/07 (Internal Use only)," GS MBS-E-009589083. Mr. Birnbaum responded: "Based on the markets we are making, we would be ok in this move. We are +50mm in AAAs alone right now." Mr. Montag forwarded the emails to Mr. Blankfein who wrote: "Thanks. Appreciate the posts, I'm watching the financial news." [Back]
1841. 12/2007 Quarterly Market Risk Review, GS MBS-E-009586222, Hearing Exhibit 4/27-54f (third quarter mortgages average VAR was $68 million; fourth quarter mortgages average VAR was $75 million). [Back]
1842. Subcommittee interview of David Viniar (4/13/2010); Subcommittee interview of Daniel Sparks (4/15/2010); Subcommittee interview of Joshua Birnbaum (4/22/2010). [Back]
1843. 8/21/2007 email from Michael Swenson, "Mortgage Commentary for Firmwide Risk Committee," GS MBS-E- 010619375 ("Current SPG Trading Desk Position Summary: – RMBS AAA – long $2.2bb"); Michael J. Swenson, responses to Subcommittee QFRs at PSI_QFR_GS0474. [Back]
1844. In the week of December 6, 2007, the Mortgage Department's risk managers noted "an increase in net short position in the residential sector." 12/7/2007 email to David Viniar, "Weekly Market Risk Summary as of 12/06/07," GS MBS-E-009708911, Hearing Exhibit 4/27-53. See also 9/5/2007 email from Michael Swenson to Tom Montag, "ABS Update," GS MBS-E-012386239, Hearing Exhibit 4/27-39; 9/23/2007 email to David Viniar, "Mortgage P&L for the Week Ended 9/21," GS MBS-E-009732431, Hearing Exhibit 4/27-43 (Finance division reported that, in week of September 21, the Mortgage Department reported $63 million from "short synthetic positions including SPG Trading (+$40M), CDO (+22M) and Residential Credit (+12M)."). [Back]
1845. Salem 2007 Self-Review. [Back]
1846. Id. [emphasis in original]. [Back]
1847. Id. Mr. Salem described the trading strategies as follows:
"a. The Dispersion Trade More than a year ago, Edwin [Chin] and I realized that the dispersion amongst single-name subprime CDS was grossly mispriced. Bad names (tier 4), that the market almost universally disliked traded only 50 bps wider than securities that we all agreed were superior. ... So for the past year, we bought protection on tier 4 names at every chance possible . . . When we wanted to flatten out the book, we just wrote protection on the tier 1 names. Amazingly we did this for most of the year without a usable model to value different single names. ... We were very aggressive with pricing and only shared risk with smart guys if they gave us insight on names to go short or go long in return. Even when the dispersion widened out . . . by the end of February, Edwin and I refused to monetize the trade .... With 3-4bb of notional in this dispersion trade, we have recognized $750mm of P&L so far on this trade.
"b. Our single name market share: Having traded over $200bb of notional in SN [single name] CDS, GS is the dominant market-maker in single name CDS. We approximate our market share to be greater than 33%. ... This market share and willingness to trade size proved invaluable in November, December and January when we decided to make the HUGE directional bet of being long SN CDS protection [or "short risk," i.e., taking the short side of a CDS transaction]. ... If we did not have such presence in the SN CDS market, it is unlikely that we would have achieved the size short that we desired and eventually put on. We're up $1.7bb in RMBS SN CDS!
"c. Willingness to put on trades that others don't want/know where to price
The 2 most successful trades in this regard have been our $70mm long Alt-A protection and our $1-2bb long subprime Single-A protection [i.e., being "short risk" or taking short side in a CDS transaction]. When CDOs wanted to sell Alt-A and single-A protection ... the rest of the street was tentative. ... We viewed this as a tremendous opportunity to buy cheap out-of-the-money options at a significant discount to fair-value. Our exit strategy was always that if sub-prime fundamentals got bad enough, and they did, that the contagion would have to spread up the capital structure because cum loss vol/uncertainty has to go up thus. . . .$400mm so far for the desk ...."d. CDO CDS trade:
This trade has made $900mm so far, which exceeded all of our high expectations for the trade. I had the confidence and desire for the desk to buy A, AA, and AAA CDO CDS protection in size during the fall of 2006 for several reasons: ... [T]he rating agencies' correlation assumptions were out of whack with the growing concern about the housing market and the remarkable similarity between the bonds in a CDO, the difficulty that GS was having in placing such mezzanine liabilities and the complexity of such securities scared hedge funds from buying the protection themselves. Edwin and I used the same aggressive strategies in purchasing protection that we used to dominate the SN CDS market. Our market share was enormous ... and we did every ... trade possible." Id. [Back]1848. See, e.g., 10/11/2007 email from Michael Swenson to Donald Mullen, "1848 Early post on P and L," GS MBS-E- 016031234, Hearing Exhibit 4/27-69. For more information about this downgrade, see Chapter V. [Back]
1851. 10/12/2007 email exchange between Michael Swenson and Donald Mullen, "P and L," GS MBS-E-018936577, Hearing Exhibit 4/27-68. [Back]
1853. See 10/3/2007 Goldman presentation, "SPG Trading – 2007," GS MBS-E-015654036. See also 11/16/2007 Goldman chart, "Mortgages Weekly Metrics 16-November-2007," GS MBS-E-015863620 ("P&L YTD Annl 3,742,461"). [Back]
1854. See, e.g., 4/2010 "Goldman Sachs Mortgage Department Total Net Short Position, February - December 2007 in $ Billions," chart prepared by the Subcommittee, Hearing Exhibit 4/27-162 (compiled from Top Sheets); examples of Top Sheets include GS MBS-E-010369585 and GS MBS-E-010850895, Hearing Exhibit 4/27-162. [Back]
1856. See 2/26/2007 Mortgage Department Top Sheet, GS MBS-E-010388545, and 6/25/2007 Mortgage Department Top Sheet, GS MBS-E-010850895, Hearing Exhibit 4/27-162. [Back]
1857. Subcommittee interview of Daniel Sparks (4/15/2010). [Back]
1858. Subcommittee interview of Daniel Sparks (4/15/2010); 2/26/2007 email to Daniel Sparks, Michael Swenson, and others, "New cross desk Top Sheet risk report," GS MBS-E-010386051. [Back]
1859. Subcommittee interview of Daniel Sparks (4/15/2010). [Back]
1860. Subcommittee discussions with Goldman Controller staff on Responses to Questions for the Record and related documents. Despite the fact that the Mortgage Department Top Sheet was the primary comprehensive position report available to Mortgage Department managers, some more senior Goldman executives appeared to be unaware of its existence. Chief Risk Officer Craig Broderick, for example, testified that he was unaware of a Mortgage Department Top Sheet and he thought the "top sheet" concept might not be suitable for the Mortgage Department. Subcommittee interview of Craig Broderick (4/9/2010). His risk office produced its own daily risk reports that translated the Mortgage Department's electronic trading data directly into risk measures, such as "VAR." Id.; see also, e.g., 8/9/2007 email from risk manager, "MarketRisk: Mortgage Risk Report (cob 08/08/2007)," GS MBS-E- 010674894 (attached Goldman report, "Mortgage Risk Report – 8/9/07," GS MBS-E-010674895). The Controller's office also produced its own reports based on the Mortgage Department's electronic trading data, such as the daily profit and loss report for the Mortgage Department. Subcommittee discussions with Goldman Controller staff on responses to Subcommittee QFRs and related documents. See also 7/20/2007 email from controllers, "Mortgages Estimate," GS MBS-E-009640287. [Back]
1861. 2/26/2007 email to Daniel Sparks, Michael Swenson, and others, "New cross desk 1861 Top Sheet risk report," GS MBS-E-010386051. The Mortgage Department shared its Top Sheet and several sub-reports for September 25, 2007, with Mr. Viniar around October 1, 2007, in a presentation that summarized the changes in the Mortgage Department's long/short positions across all desks and all assets since the initiation of the Gameplan in May 2007. 10/1/2007 Goldman internal document, "September Risk Pack Viniar," GS MBS-E-013693128 (attached to 10/1/2007 email, "Viniar Risk Pack - Sept," GS MBS-E-013693127). [Back]
1862. The balance of the page provided detail regarding the amount of each asset class held by each of the Mortgage Department's desks or business units. Behind the top sheet, the report provided detailed data regarding the various desks and provided different data analyses, such as changes in position from week to week. The last page of each report listed all of the electronic data sources and separate reports from which the Top Sheet was compiled. See, e.g., 2/5/2007 Mortgage Department Top Sheet, GS MBS-E-010369585, Hearing Exhibit 4/27-162. [Back]
1863. See chart entitled, "Goldman Sachs Mortgage Department Total Net Short Position, February-December 2007 in $ Billions," prepared by the Permanent Subcommittee on Investigations, Hearing Exhibit 4/27-162 (April 2010 version), updated January 2011 (updated version), derived from Goldman Sachs Mortgage Strategies, Mortgage Dept Top Sheets provided by Goldman Sachs (hereinafter "PSI Net Short Chart"). [Back]
1864. 8/17/2007 Goldman internal chart, "RMBS Subprime Notional H 1864 istory (Mtg Dept - Mtg NYC SPG Portfolio)," GS MBS-E-012928391, Hearing Exhibit 4/27-56a. The title of the Goldman chart, "NYC SPG Trading" is confusing, as Mr. Birnbaum asked the analyst, Kevin Kao, for a chart of all synthetic positions across the entire Mortgage Department (including areas other than SPG Trading). In an email to Mr. Birnbaum, Mr. Kao confirmed that despite the title, the chart actually included all synthetic positions across the entire Mortgage Department, and not just the SPG Trading Desk positions. 8/17/2007 email from Mr. Kao to Mr. Birnbaum, GS MBS-E-012929469. Mr. Kao explained that his chart did not include cash positions, meaning long positions in mortgage loans or RMBS from any remaining warehouse inventory. Id. That omission was not significant, however, since Goldman had rapidly sold off the vast bulk of its cash inventory starting in November 2006. 4/2010 "Goldman Sachs Long Cash Subprime Mortgage Exposure, Investments in Subprime Mortgage Loans, and Investments in Subprime Mortgage Backed Securities November 24, 2006 vs. August 31, 2007 - in $ Billions," chart prepared by the Subcommittee, Hearing Exhibit 4/27-163. In any event, the Subcommittee's net short chart includes the Department's cash positions and demonstrates that any long cash positions were insufficient to offset the shorts, as the Mortgage Department was massively net short throughout most of 2007. See PSI Net Short Chart.
In his Supplemental Responses to Questions for the Record from the Subcommittee, Mr. Birnbaum conceded that the Subcommittee's net short chart includes cash positions and therefore fixed the problem of being limited to synthetics as was the case with Goldman's own net short chart. See 8/17/2007 Goldman internal chart, "RMBS Subprime Notional History (Mtg Dept - Mtg NYC SPG Portfolio)," GS MBS-E-012928391, Hearing Exhibit 4/27-56a; Birnbaum responses to Subcommittee QFRs at PSI_QFR_GS0509. Mr. Birnbaum maintained his objection that the Subcommittee's net short chart improperly summed the notional amounts of different asset classes. Id. However, as noted in the text, the Mortgage Department's Top Sheet actually converted the notional amounts of each asset class into their market values, making it fair to sum across all asset classes. [Back]
1865. See Birnbaum responses to Subcommittee QFRs at PSI_QFR_1865 GS0509. Subcommittee interview of Joshua Birnbaum (10/1/2010). [Back]
1866. Subcommittee interview of Joshua Birnbaum (10/1/2010); Subcommittee interview of Michael Swenson (10/8/2010). [Back]
1867. Subcommittee interview of Joshua Birnbaum (10/1/2010). [Back]
1868. Subcommittee interview of Joshua Birnbaum (10/1/2010). [Back]
1869. Id. Mr. Swenson made similar statements in his second Subcommittee interview. "Were we ever net short? It's hard to say what ‘net short' means really." Subcommittee interview of Michael Swenson (10/8/2010). Mr. Swenson had no such difficulty, however, in his first Subcommittee interview. When asked the greatest amount by which he remembered his desk being net short, Mr. Swenson replied: "$9 billion." Subcommittee interview of Michael Swenson (4/16/2010). [Back]
1870. As noted above, the risk management and controller areas at Goldman kept their own daily reports based on the Mortgage Department's electronic trading data, but they did not track Goldman's aggregate positions in each asset class on either a notional or market value basis. Rather, the risk area converted the Mortgage Department data into risk measures, while the controllers' area converted the data into profit and loss reports. Though based on the Mortgage Department's reported daily trading, these reports did not directly reflect specific net positions in subprime mortgage assets. [Back]
1871. In general, positions were expressed in market values for all liquid assets and 1871 in "hedge equivalents" of illiquid assets, meaning the market value of a position that could be used to hedge that asset. See e.g., 3/5/2007 Mortgage Department Top Sheet, GS MBS-E-010630691 (Legend: "Market Value (MM$)(Hedge Equiv MV for CDS)"); 9/11/2007 email, GS MBS-E-010690522, attaching 9/10/2007 Mortgage Department Top Sheet, GS MBS-E- 010690523 ("Market value of bonds/loans, bond equiv mkt val for synthetics."). [Back]
1872. See e.g., 3/5/2007 email from Daniel Sparks to Tom Montag and others, GS MBS-E-010646842 ("We think the overall business is net short"); 3/8/2007 email from Daniel Sparks to Jon Winkelried and others, "Mortgage Risk," GS MBS-E-002211242 ("We are still net short"); 7/21/2007 email from Daniel Sparks to Donald Mullen and others, "Mortgages Estimate," GS MBS-E-009640287 ("There is also a large net short that we are chipping away to cover"). [Back]
1873. 1/10/2011 Concordance search of all documents produced to the Subcommittee by Goldman for the phrase "net short." [Back]
1874. Subcommittee interview of Joshua Birnbaum (10/1/2010). [Back]
1875. 8/5/2007 email from David Lehman to Tom Montag, "Mtg Department 1875 Weekly Update," GS MBS-E- 010671564. [Back]
1878. See, e.g., 8/23/2007 email from Tom Montag to Daniel Sparks, "Current Outstanding Notional in SN ames," GS MBS-E-010621231 (Mr. Montag said, "so if I make you sell a whopping 800 out of 3 billion which is less than 30% how can anyone complain- -the position is huge and outsized."); 3/14/2007 email from Tom Montag to Lloyd Blankfein, "Cactus Delivers," GS MBS-E-009632839 ("Covered another 1.2 billion in shorts in mortgages"); 8/23/2007 email from Tom Montag to Gary Cohn and David Viniar, "Harbinger post," GS MBS-E-009739009 ("We had bought back almost 9 billion of aaa abx over last two weeks though"); 2/27/2007 email from Richard Ruzika to Tom Montag, GS MBS-E-002204942 ("I want to see us getting the short down to 4.5 bil[lion] net"). [Back]
1879. Subcommittee interview of David Viniar (4/13/2010). [Back]
1880. See, e.g., Testimony of David Viniar, April 27, 2010, Subcommittee Hearing at 98, 99-100; 4/7/2010 Blankfein & Cohn Letter to Shareholders (quoted in 4/2010 Goldman report, "Risk Management and the Residential Mortgage Market," at 12, Hearing Exhibit 4/27-161). [Back]
1881. 9/26/2007 email from Lloyd Blankfein, "Fortune: How Goldman Sachs Defies Gravity," GS MBS-E- 009592726. Mr. Blankfein went on to explain what he meant by "hedge": "Ie, the avoidance of a bet. Which is why for a part it subtracted from var, not added to var." Mr. Blankfein did not explain the "part" in which the big short subtracted from VAR. In February and August 2007, most of Goldman's senior management expressed concern that the large net short positions added to VAR, rather than subtracted from it, and indeed, pushed the firmwide VAR to record levels. [Back]
1882. 10/3/2007 Goldman presentation, "SPG Trading – 2007," GS M 1882 BS-E-015654036. Mr. Swenson and Mr. Lehman reviewed and commented upon the "SPG Trading – 2007 " presentation. Mr. Birnbaum revised the presentation to make the changes Mr. Swenson and Mr. Lehman suggested. See, e.g., 10/2/2007 email from David Lehman to Joshua Birnbaum, "SPG Trading - 2007.ppt," GS MBS-E-015653681 (providing comments and suggesting text for presentation). Mr. Birnbaum replied and copied Mr. Swenson on the email chain as well: "I added your bullet and one more." Id. See also 10/4/2007 email from Joshua Birnbaum to Michael Swenson and David Lehman, "How's this?," GS MBS-E-015712249 (forwarding revised bullet point for presentation). This collaboration indicates the presentation was made on behalf of the SPG Trading Desk as a whole. Mr. Birnbaum, however, told the Subcommittee that the SPG Trading Desk ultimately did not use the presentation in connection with its proposal for 2007 compensation. See Birnbaum responses to Subcommittee QFRs at PSI_QFR_GS0509. [Back]
1883. 10/3/2007 Goldman presentation, "SPG Trading – 2007," GS MBS-E-015654036 [emphasis in original]. [Back]
1884. See Birnbaum responses to Subcommittee QFRs at PSI_QFR_GS0509. [Back]
1885. 2/28/2007 email from David Rosenblum to Peter Ostrem, "Pete– pls send me cob 2/28 MTM for SP CDO WH's first thing in the morning," GS MBS-E-001800707; 2/28/2007 email from David Rosenblum,"Hedges Status Report," GS MBS-E-002640538 (new ABX hedges added and other hedges allocated to ensure that CDO warehouse risk was fully hedged). [Back]
1887. 2/12/2007 email from Daniel 1887 Sparks, "Post today," GS MBS-E-002202310. [Back]
1888. Id.; PSI Net Short Chart. [Back]
1889. Subcommittee interview of Craig Broderick (4/9/2010). See also Philippe Jorion, "Value at Risk: The New Benchmark for Managing Financial Risk," at 20, (3d ed. 2007). [Back]
1890. See Mortgage Department Quarterly Average VAR. (Third Quarter 2006 - $13 million; Fourth Quarter 2006 - $14 million; Second Quarter 2007 - $63 million; Third Quarter 2007 - $68 million; Fourth Quarter 2007 - $75 million). See 9/2007 Quarterly Market Risk Review, "Market Risk Management and Analysis," GS MBS-E- 009590673, Hearing Exhibit 4/27-54e; see also 12/2007 Quarterly Market Risk Review, "Market Risk Management and Analysis," GS MBS-E-009586222, Hearing Exhibit 4/27-54f. [Back]
1891. 8/9/2007 email from Joshua Birnbaum to Deeb Salem, "MarketRisk: Mortgage Risk Report (cob 08/08/2007)," GS MBS-E-012927202. [Back]
1892. 2/27/2007 email from Richard Ruzika to Tom Montag and others, GS MBS-E-002204942; 8/15/2007 email from Gary Cohn, "Trading VaR $165mm," GS MBS-E-016344758; Subcommittee interview of Joshua Birnbaum (10/1/2010). [Back]
1893. Subcommittee interview of Craig Broderick (4/9/2010). [Back]
1894. 8/8/2007 email from Tom Montag to David Lehman and Michael Swenson, GS MBS-E-011311633. [Back]
1895. Subcommittee interview of David Viniar (4/13/2010). [Back]
1896. Mr. Birnbaum frequently argued that VAR, or at least Goldman's then-current model of VAR, was an inappropriate risk measure for the Mortgage Department's shorting activities. 8/9/2007 email from Joshua Birnbaum to Deeb Salem, "MarketRisk: Mortgage Risk Report (cob 08/08/2007)," GS MBS-E-012927200 ("These VAR numbers are ludicrous, btw. Completely overestimated for SPG trading, underestimated for other mortgage desks."). He contended that for various reasons, the Mortgage Department was not actually as short as the VAR measure reflected. See, e.g., 9/26/2007 2007 MD Reviews, Joshua Birnbaum Self-Review, GS-PSI-01956, Hearing Exhibit 4/27-55c. In arguing for a special compensation model for the SPG Trading Desk, Mr. Birnbaum pointed out that the desk never lost as much money as the firm's VAR measure predicted it would. 10/3/2007 Goldman presentation, "SPG Trading – 2007," GS MBS-E-015654036. Accordingly, Mr. Birnbaum may have been correct that the firm's VAR measure did not accurately measure risk to the firm. Id. On the other hand, since VAR rests on probability theory which is based on a "normal" distribution of profits and losses (the typical "bell curve"), the Mortgage Department may have benefitted from the extraordinary and continual one-way movement downward in the subprime mortgage markets.
One risk management expert testified before Congress: "It is well known that VaR cannot measure crisis risk. During periods of crisis the relationship between securities changes in strange and seemingly unpredictable ways. VaR, which depends critically on a set structure for volatility and correlation, cannot provide useful information in this situation. It contains no mechanism for predicting the type of crisis that might occur, and does not consider the dynamics of market crises. This is not to say that VaR has no value or is hopelessly flawed. Most of the time it will provide a reasonable measure of risk – indeed the vast majority of the time this will be the case. If one were forced to pick a single number for the risk of a portfolio in the near future, VaR would be a good choice for the job." Prepared statement of Richard Bookstaber, "The Risks of Financial Modeling: VaR and the Economic Meltdown," before the U.S. House of Representatives Committee on Science and Technology, Subcommittee on Investigations and Oversight, H.R. Hrg. 111-48 (9/10/2009), at 4. [Back]
1897. Subcommittee interview of Craig Broderick (4/9/2010). [Back]
1898. The Mortgage Department had other risk limits aside from VAR, including Credit Spread Widening or "CSW," which seeks to measure what would happen if credit spreads suddenly widened by large amounts (called "shocks"); "dv01," which measures the dollar amount by which a security's value would change based on a 1 basis point change in the relevant index or interest rate; and balance sheet limits, meaning the amount of Goldman's balance sheet the relevant business unit would be permitted to consume. Subcommittee interview of Craig Broderick (4/9/2010). [Back]
1899. 9/2006-12/2007 Goldman Sachs Quarterly Market Risk Review, "M 1899 arket Risk Management & Analysis," Hearing Exhibits 4/27-54a-f and GS MBS-E-010674895. [Back]
1900. 11/13/2007 Goldman email, GS MBS-E-010023525 (attachment, 11/14/2007 "Tri-Lateral Combined Comments," GS MBS-E-010135693-715). In November 2007, Goldman's Chief Risk Officer, Craig Broderick, Controller Sarah Smith, and senior members of their staffs met with the Tri-Lateral Review Group, which included representatives of the Federal Reserve Bank, the SEC, and the United Kingdom's Financial Services Authority, to discuss risk management during the financial crisis. The "Trilateral Combined Comments" are the talking points prepared by Goldman senior executives for that meeting, in order to respond to specific written questions Goldman and other firms had received from the Trilateral Review Group. [Back]
1902. Id. The reference to the 30th floor was to the floor on which Goldman's senior executives then had their offices in Goldman's New York headquarters. Goldman also noted that "sr mgmt participated actively in all of the significant exposure management including when / how to reduce positions."11/13/2007 Goldman email, GS MBS-E-010023525 (attachment, 11/14/2007 "Tri-Lateral Combined Comments," GS MBS-E-010135693-715 at 695). [Back]
1903. Subcommittee interview of Joshua Birnbaum (10/1/2010); Subcommittee interview of Craig Broderick (4/9/2010). [Back]
1904. Subcommittee interview of Joshua Birnbaum (10/1/2010). [Back]
1905. See, e.g., 2/8/2007 email from Michael Dinias to Robert Berry, and Craig Broderick, GS MBS-E-009980807; 2/24/2007 email from Robert Berry to David Viniar, Craig Broderick and Bill McMahon, "Mortgage VaR," GS MBS-E-009778897 (recommending model parameters for VAR calculations); 4/18/2007 email from Jeremy Primer to Joshua Birnbaum, "Resolution from MRMA meeting?," GS MBS-E-012868698 (discussing further adjustment to VaR calculation); 4/23/2007 email from Robert Berry to Daniel Sparks and SPG Trading Desk, "Mortgage VaR," GS MBS-E-009708690 (adjustments to VAR calculations). [Back]
1906. See, e.g., 8/21/2007 email from Tom Montag 1906 to Gary Cohn, GS MBS-E-016344758; 8/21/2007 email from Michael Dinias, "Trading VaR Analysis," GS MBS-E-009742070; Subcommittee interview of David Viniar (4/13/2010) and Joshua Birnbaum (10/1/2010); 2/24/2007 email from Robert Berry to David Viniar and others, "FW: Mortgage VaR," GS MBS-E-009778897. [Back]
1907. See generally "The Risks of Financial Modeling: VaR and the Economic Meltdown," before the U.S. House of Representatives Committee on Science and Technology, Subcommittee on Investigations and Oversight, H.R. Hrg. 111-48 (9/10/2009), at 4 (Written Testimony of Richard Bookstaber); Philippe Jorion, "Value at Risk: The New Benchmark for Managing Financial Risk (3d ed. 2007) at 64. [Back]
1908. See id. Based on these factors, VAR is generally lower if a desk has many small and non correlated (well diversified) positions that are trading at steady and predictable price levels. By contrast, VAR is higher if a desk is holding a small number of very large and highly correlated positions that are trading at volatile and unpredictable price levels. The position size/correlation and volatility factors may also operate independently. Thus, even if the desk has a large number of relatively small and non correlated positions, VAR tends to rise as the volatility of trading rises. Similarly, even if there is little volatility in trading, VAR tends to rise as the desk's position sizes become larger and increasingly correlated. The two factors also reinforce one another – large position sizes combined with high volatility tend to increase VAR dramatically. [Back]
1909. Market Risk Management & Analysis, Quarterly Market Risk Review, December 2006, GS MBS-E-009583144, Hearing Exhibit 4/27-54; see also 2/6/2007 email from MarketRisk,"MarketRisk: Mortgage Risk Report (cob 02/06/07)," GS MBS-E-009980807 (Mortgage SPG VaR Limit 20). [Back]
1910. 2/8/2007 email from Michael Dinias, "VaR limit for Mtg SPG," GS MBS-E-009980807. [Back]
1913. Subcommittee interview of Craig Broderick (4/9/2010). [Back]
1914. 2/27/2007 email from Richard Ruzika to Tom Montag, others, GS MBS-E-002204942; Subcommittee interview of Joshua Birnbaum (4/22/2010); Subcommittee interview of Daniel Sparks (4/15/2010); 8/9/2007 email from Joshua Birnbaum to Deeb Salem, "MarketRisk: Mortgage Risk Report (cob 08/08/2007)," GS MBS-E-012927202; 8/16/2007 email from Michael Dinias, "mortgage var contribution," GS MBS-E-011247689 ("Mortgage Trading has 53.8% marginal contribution to Firmwide VaR and removing the entire mortgage business reduces Firmwide VaR by $53mm (from $165mm to $112mm). ... As expected SPG Trading desk dominates this risk with 56% contribution and adds $49mm to Firmwide VaR. This is primarily driven by ABS Synthetics and Correlation book which have the bulk of the mortgage shorts."); 8/21/2007 email from Michael Dinias, "Trading VaR Analysis," GS MBS-E- 009742070 (Mortgage VAR "primarily driven by mortgage shorts on the ABS Synthetics and Correlation desks."); 8/22/2007 email from Tom Montag to Lloyd Blankfein, "Trading VaR $144mm," GS MBS-E-009605812, Hearing Exhibit 4/27-36 ("we are covering a number of shorts in mortgages today and tomorrow–probably 1.5 billion worth–will reduce mortgages [VAR] hopefully to below [$]80 [million]"). [Back]
1915. Subcommittee interview of Joshua Birnbaum (10/1/2010). [Back]
1916. 8/9/2007 email from Joshua Birnbaum to Deeb Salem, "MarketRisk: Mortgage Risk Report (cob 08/08/2007)," GS MBS-E-012927198. It is unclear the extent to which Goldman's regulators were aware of the Mortgage Department's VAR levels. In November 2007, Goldman met with the Tri-Lateral Review Group, which included the Federal Reserve Bank, the SEC, and the United Kingdom's Financial Services Authority, regarding its risk management during the financial crisis. Talking points prepared by Goldman personnel for that meeting stated that with respect to VAR: "Exposures were managed responsibly by the business units within agreed limits. Highs were set in Mortgages .... Benign P&L allowed for a disciplined but measured response."11/13/2007 Goldman email, GS MBS-E-010023525 (attachment, 11/14/2007 "Tri-Lateral Combined Comments," GS MBS-E-010135693-715 at 707). This description did not disclose that the Mortgage Department, for nearly the entire year, had routinely exceeded its $35 million VAR limit by significant amounts for months on end. [Back]
1917. 2/8/2007 email from Michael Dinias, "FW: VaR limit for Mtg SPG," GS MBS-E-009980807. [Back]
1918. 2/13/2007 email, "MarketRisk: End of Day Summary - cob 02/12/2007," GS MBS-E-009716432; see also 2/14/2007 Goldman internal email, "Increase in Mortgage VaR," GS MBS-E-010374687 ("MTG SPG Desk VaR increase from $21 mm to $48mm from cob Feb 6 to cob Feb 13, driven primarily by SPG Trading desk"). [Back]
1919. 2/14/2007 email, "MarketRisk: End of Day Summary - cob 02/1919 13/2007," GS MBS-E-009763394 ("Mortgages VAR is over its $35mm limit. Temporary $50mm limit was granted until cob 02/20/2007."). [Back]
1920. 2/20/2007 email, "MarketRisk: End of Day Summary - cob 02/16/2007," GS MBS-E-009724779. 2/22/2007 email, "MarketRisk: End of Day Summary - cob 02/21/2007," GS MBS-E-009762741 (Mortgages VAR on 2/20 was 63 million). [Back]
1921. Id. ("Mortgages VAR has a temporary $60mm limit until cob 2/27/2007."). [Back]
1922. 2/26/2007 email, "MarketRisk: End of Day Summary - cob 2/23/2007," GS MBS-E-009720057; 2/27/2007 email, "MarketRisk: End of Day Summary - cob 2/26/2007," GS MBS-E-009764685. [Back]
1923. 2/27/2007 email, "MarketRisk: End of Day Summary - cob 2/26/2007," GS MBS-E-009764685 ("Mortgages VAR has a temporary $90mm limit until cob 03/06/07."). 2/28/2007 email, "MarketRisk" End of Day Summary - cob 2/27/2007," GS MBS-E-009762239. [Back]
1924. 2/27/2007 email from Richard Ruzika to Tom Montag, others, GS MBS-E-002204942. [Back]
1925. 3/1/2007 email, "MarketRisk: End of Day Summary - cob 02/28/2007," GS MBS-E-009757430. [Back]
1926. 3/2007 Goldman "Quarterly Market Risk Review, Market Risk Management & Analysis," GS MBS-E- 009685934, Hearing Exhibit 4/27-54c. [Back]
1927. 4/2010 Goldman report, "Risk Management and the Residential Mortgage Market," Hearing Exhibit 4/27-161. [Back]
1928. 12/2006 Goldman "Quarterly Market Risk Review, Market Risk Management & Analysis," GS MBS-E- 009583144, Hearing Exhibit 4/27-54b. [Back]
1929. 3/2007 Goldman Quarterly Risk Review, "Market Risk Management 1929 and Analysis," GS MBS-E-009685958, Hearing Exhibit 4/27-54. [Back]
1930. 8/14/2007 Market Risk Report, Mortgage Portfolio Summary, GS MBS-E-012380294, Hearing Exhibit 4/27-35 (Mortgage Structured Products, VAR 110.1 on 8/14/07, Percentage Contribution to Firmwide VaR 53.8%). [Back]
1931. 2/27/2007 email from Richard Ruzika to Tom Montag and Daniel Sparks, GS MBS-E-002204942; 8/15/2007 email from Gary Cohn, "Trading VaR $165mm," GS MBS-E-016344758. [Back]
1932. 8/16/2007 email from Jon Winkelried to Daniel Sparks, "Mort P&L Explanation," GS MBS-E-010680327-330; 7/25/2007 email from David Viniar to Gary Cohn, "Private & Confidential: FICC Financial Package 07/25/07," GS MBS-E-009861799, Hearing Exhibit 4/27-26; 2/27/2007 email from Richard Ruzika to Tom Montag, others, GS MBS-E-002204942; 8/15/2007 email from Gary Cohn, "Trading VaR $165mm," GS MBS-E-016344758. [Back]
1933. 8/16/2007 email from Jon Winkelried to Daniel Sparks, "Mort P&L Explanation," GS MBS-E-010680327-330. [Back]
1934. 8/21/2007 email from Joshua Birnbaum, "Potential large subprime trade and impact 1934 on firmwide VAR," GS MBS-E-016359332, Hearing Exhibit 4/27-34 [Back]
1935. 6/28/2007 email from David Lehman to Daniel Sparks, GS MBS-E-010623720. [Back]
1936. See 8/16/2007 email from Jon Winkelried to Daniel Sparks, "Mort P&L Explanation," GS MBS-E-010680327- 330; 7/25/2007 email from David Viniar to Gary Cohn, "Private & Confidential: FICC Financial Package 07/25/07," GS MBS-E-009861799, Hearing Exhibit 4/27-26. 2/27/2007 email from Richard Ruzika to Tom Montag, others, GS MBS-E-002204942; 8/15/2007 email from Gary Cohn, "Trading VaR $165mm," GS MBS-E-016344758. [Back]
1937. 2/26/2007 Market Risk Report, Mortgage Risk Portfolio Summary, GS MBS-E-010388177. [Back]
1938. 2/22/2007 email from Daniel Sparks, "FW: Block size tranche protection offers for [1938 redacted] or others," GS MBS-E-010381411. [Back]
1939. 2/27/2007 email from Richard Ruzika to Tom Montag, Justin Gmelich, and Daniel Sparks, GS MBS-E- 002204942. [Back]
1941. Subcommittee interview of Joshua Birnbaum (10/1/2010); see also 2/22/2007 email from Mr. Ruzika to Mr. Montag and Mr. Sparks, GS MBS-E-010381967 (Mr. Ruzika: "covering the single name bbb and bbb- is prudent because it cuts vol and var the most"). [Back]
1942. 8/9/2007 email from Deeb Salem to Joshua Birnbaum, "MarketRisk: Mortgage Risk Report (cob 08/08/2007)," GS MBS-E-012927200. [Back]
1943. Id.; Subcommittee interview of Joshua Birnbaum (10/1/2010). [Back]
1944. 8/9/2007 email from Joshua Birnbaum to Deeb Salem, "MarketRisk: Mortgage Risk Report (cob 08/08/2007)," GS MBS-E-012927200. [Back]
1948. Subcommittee interview of Joshua Birnbaum (10/1/2007). [Back]
1950. 8/15/2007 email from Daniel Sparks, "Trading VaR $165mm," GS MBS-E-016344758; See, e.g., 8/15/2007 email from Michael Dinias, "Hedge Analysis cob 8/13/07," GS MBS-E-010678553 (analyzing 6 potential VARreducing trading scenarios featuring different proposed transactions); 8/21/2007 email from Mr. Dinias, "Trading VaR Analysis," GS MBS-E-009993267 (analyzing the VAR-reducing impact of going long in various classes of assets); 8/22/2007 email from Daniel Sparks to Tom Montag and Donald Mullen, "VAR reduction possibilities," GS MBS-E-010619824 (proposed transactions in single name CDS protection to reduce VAR). [Back]
1951. See, e.g., 8/14/2007 Goldman Market Risk Report, GS MBS-E-010679220; 8/21/2007 email from MarketRisk,"MarketRisk: End of Day Summary - cob 8/20/07," GS MBS-E-009740158. [Back]
1952. 8/21/2007 email from MarketRisk, "MarketRisk: End of Day Summary - cob 8/20/07," GS MBS-E-009740158. [Back]
1953. 8/15/2007 email from Gary Cohn, "Trading VaR $165mm," GS MBS-E-016344758. [Back]
1954. See, e.g, 8/28/2007 email from MarketRisk, "MarketRisk: End of Day Summary - cob 8/28/07," GS MBS-E- 009716460 (Mortgages temporary VAR limit was $110 million); 9/14/2007 email from MarketRisk, "MarketRisk: End of Day Summary - cob 9/13/07," GS MBS-E-009714807 (Mortgages temporary VAR limit was $90 million); 9/27/2007 email from MarketRisk, "MarketRisk: End of Day Summary - cob 9/27/07," GS MBS-E-009708872 (Mortgages temporary VAR limit was $90 million); 10/3/2007 email from MarketRisk, "MarketRisk: End of Day Summary - cob 10/2/07," GS MBS-E-009717721 (Mortgages temporary VAR limit was $85 million); 10/19/2007 email from MarketRisk, "MarketRisk: End of Day Summary - cob 10/18/07," GS MBS-E-009724040 (Mortgages temporary VAR limit was $85 million); 12/13/2007 email from MarketRisk, "MarketRisk: End of Day Summary - cob 12/12/07," GS MBS-E-009707379 (Mortgages temporary VAR limit was $80 million). [Back]
1955. Subcommittee interview of Craig Broderick (4/9/2010). [Back]
1956. 9/28/2007 Goldman Market Risk Report, GS MBS-E-009926240. [Back]
1957. See 4/3/2007 Goldman Sachs Group Inc. Form 10-Q at 79 (first quarter 2007 Average Daily VAR reported as $127 million); 10/9/2007 Goldman Sachs Group, Inc. Form 10-Q at 86 (third quarter 2007 Average Daily VAR reported as $139 million). [Back]
1958. See 10/9/2007 Goldman Sachs Group Inc. Form 10-Q at 66. See also, e.g., "How Goldman Sachs Defies Gravity," Fortune (9/20/2007). [Back]
1959. 9/19/2007 Goldman internal document, "Third Quarter 2007 Earnings Call Script for David Viniar," GS MBSE- 009779213, Hearing Exhibit 4/27-45. [Back]
1960. 9/17/2009 email to Daniel Sparks, "Mortgage commentary on Q3 earnings call," GS MBS-E-009853301, Hearing Exhibit 4/27-44. [Back]
1961. 9/17/2007-9/18/2007 Goldman Sachs Board of Directors Meeting, 1961 "Financial Summary, Quarter Ended August 31, 2007," GS MBS-E-009776900, Hearing Exhibit 4/27-42. [Back]
1962. 10/5/2007 Goldman presentation, "Global Mortgages Business Unit Townhall Q3 2007," GS MBS-E- 013703463, Hearing Exhibit 4/27-47. [Back]
1965. 4/2010 "Goldman Sachs: Risk Management and the Residential Mortgage Market," report prepared by Goldman Sachs, Hearing Exhibit 4/27-161. [Back]
1966. 10/5/2007 Goldman presentation, "Global Mortgages Business Unit Townhall Q3 2007," GS MBS-E- 013703463, Hearing Exhibit 4/27-47. [Back]
1967. "Global Mortgages Business Unit Townhall 1967 Q3 2007," Final version, GS MBS-E-013668603. [Back]
1968. Subcommittee interview of Daniel Sparks (10/4/2010). In his subsequent responses to the Subcommittee's Questions for the Record, Mr. Sparks said: "The presentation should have used the words ‘net short position,' not ‘proprietary position.'" Daniel L. Sparks responses to Subcommittee QFRs, PSI_QFR_GS0452 at 470 (Question 6). Mr. Sparks' response did not resolve the question of whether the position was proprietary or undertaken on behalf of customers, as a "net short position" could be either. [Back]
1969. 10/29/2007 "Contagion and Crowded Trades," Goldman Sachs Tax Department Presentation, GS MBS-E- 010018511, Hearing Exhibit 4/27-48 [emphasis in original]. [Back]
1970. Joshua Birnbaum Self-Review, Hearing Exhibit 4/27-55c. The figures cited for ABS synthetics and ABS (both cash and synthetics) are apparently both included within the total of $3 billion profit cited for the SPG Trading Desk as a whole. [Back]
1971. Id. Mr. Birnbaum also wrote: "During this period, I would also add that the ABS team contributed significantly to the Correlation desk[']s $800+mm in YTD p&l by dissuading that desk from externalizing their shorting opportunities to the likes of Paulson Partners, even when significant risk-free p&l was available at the time." Id. [Back]
1972. Michael Swenson Self-Review, Hearing Exhibit 4/27-55b. The $2 billion pro 1972 fit figure attributed to ABS trading is apparently included within the $3 billion figure cited as the year-to-date profit for the SPG Trading Desk. [Back]
1973. Salem 2007 Self-Review. [Back]
1974. See description of Mr. Salem's single name trading strategies, above. [Back]
1975. 10/4/2007 letter from Goldman Sachs to the SEC, GS MB S-E-009758287, Hearing Exhibit 4/27-46 [emphasis added]. [Back]
1976. 11/7/2007 letter from Goldman Sachs to the SEC, 1976 GS MBS-E-015713460, Hearing Exhibit 4/27-50. [Back]
1977. 11/13/2007 Goldman email, GS MBS-E-010023525 (attachment, 11/14/2007 "Tri-Lateral Combined Comments," GS MBS-E-010135693-715 at 694). [Back]
1979. "Goldman Doesn't Plan Significant Mortgage Writedown," Bloomberg (11/13/2007); see also 11/13/2007 email to Lloyd Blankfein, GS MBS-E-009601759 (forwarding Bloomberg article regarding Mr. Blankfein's remarks at conference sponsored by Merrill Lynch & Co. in New York City on Nov. 13, 2007). [Back]
1980. "Goldman Sachs Rakes in Profit in Credit Crisis," New York Times (11/19/2007). [Back]
1981. 11/18/2007 email from Lloyd Blankfein, "RE: NYT," GS MBS-E-009696333, Hearing Exhibit 4/27-52. Goldman's Co-President, Gary Cohn, replied to Mr. Blankfein's message, adding, "We were just smaller in the toxic products" Id. [Back]
1982. 11/7/2007 Goldman document, "How Did GS Avoid the Mortgage Crisis?," GS MBS-E-009713204, Hearing Exhibit 4/27-51. [Back]
1985. See 11/30/2007 "SPG Trading Mortgages Weekly Metrics 30-November-2007," GS MBS-E-015646485. [Back]
1986. See Goldman Sachs Form 10-K for the fiscal year ending Nov. 30, 2007, filed on 1/28/2008, at 64; see also Goldman presentation, "Overview of Goldman Sachs," at 5, available at http://www2.goldmansachs.com/our-firm/investors/creditor-information/creditor-presentation-3-1-11.pdf. [Back]
1987. April 27, 2010 Subcommittee Hearing at 96. See also 235, 252, 345. [Back]
1989. 11/30/2007 "SPG Trading Mortgages Weekly Metrics 30-November-2007," GS MBS-E-015646485. [Back]
1990. In the third quarter of 2007, for example, Lehman Brothers had $700 1990 million in loan and mortgage writedowns. 9/23/2007 email to Lloyd Blankfein and others, "Weekly Competitor, EM and Regulatory News – Week Ending 9/21/07," GS MBS-E-009653853. Morgan Stanley had $940 million in loan writedowns. Id. Bear Stearns had $250 million in loan writedowns and $450 million in mortgage writedowns. Id. Citibank had approximately $1.6 billion in mortgage writedowns and a $636 million loss in credit trading. 10/21/2007 email to Lloyd Blankfein and others, "Weekly Competitor, EM and Regulatory News – Week Ending 10/19/07," GS MBS-E-009631348. JPMorgan Chase had $1.3 billion in loan writedowns and $339 million in mortgage writedowns. Id. [Back]
1991. 7/25/2007 email from David Viniar to Gary Cohn, "Private & Confidential: FICC Financial Package 07/25/07," GS MBS-E-009861799, Hearing Exhibit 4/27-26. [Back]
1992. 10/3/2007 Goldman presentation, "SPG Trading – 2007," GS MBS-E-015654036. [Back]
1993. Goldman also highlighted losses it suffered in 2008, related to its mortgage business, particularly mortgage related products associated with prime and Alt A residential loans. The Subcommittee did not investigate Goldman's use of short positions in 2008, nor its involvement with prime and Alt A loan products. [Back]
1994. Gregory Zuckerman, The Greatest Trade Ever (2009); Michael Lewis, The Big Short (2010). [Back]
1995. 7/20/2007 email from Joshua Birnbaum, "ABX Markets 07-02, 07-01, 06-2, 1995 06-1: 3:00 p.m.," GS MBS-E- 012962076 (Mr. Birnbaum: "greatest trade ever . . . I have a huge short . . ."). [Back]
1996. 7/12/2007 email from Joshua Birnbaum, "ABX Markets 07-1, 06-2, 06-1: 12:00 p.m.," GS MBS-E-012944742, Hearing Exhibit 4/27-146. [Back]
1997. 10/3/2007 Goldman presentation, "SPG Trading – 2007," GS MBS-E-015654036; Birnbaum Self-Review, Hearing Exhibit 4/27-55c. [Back]
1998. See 9/17/2007 Goldman presentation to Board of Directors, "Residential Mortgage Business, Global Impact of the Mortgage Crisis," at 2, GS MBS-E-001793840, Hearing Exhibit 4/27-41 (noting bankruptcies of Goldman clients IKB and Basis Capital). See also 8/10/2007 Goldman internal memorandum, "Summary of German Bank US Sub Prime Exposure," GS MBS-E-009994305; 11/27/2007 email from Mr. Lehman to Mr. Sparks, "ACA" (discussing "what would happen upon an ACA bankruptcy (which is the most likely scenario in our opinion)."), GS MBS-E-013746511. [Back]
1999. See, e.g., April 27, 2010 Subcommittee Hearing, testimony of Lloyd Blankfein at 132 and David Viniar at 98. [Back]
2000. 4/7/2010 Blankfein & Cohn, Letter to Shareholders (quoted in Hearing Exhibit 4/27-161 at 12). [Back]
2001. 4/2010 Goldman report, "Risk Management and the Residential Mortgage Market," Hearing Exhibit 4/27-161. [Back]
2003. 4/7/2010 Blankfein & Cohn, Letter to Shareholders (quoted 2003 in 4/2010 Goldman report, "Risk Management and the Residential Mortgage Market," at 12, Hearing Exhibit 4/27-161). [Back]
2004. April 27, 2010 Subcommittee Hearing at 132. [Back]
Back to Contents (3) Overview of Goldman Sachs Case Study (5) How Goldman Created and Failed to Manage Conflicts of Interest in its Securitization Activities
This document has been published on 08Jul11 by the Equipo Nizkor and Derechos Human Rights. In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.
