WASHINGTON — In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting.
Goldman’s sales and its clandestine wagers, completed at the brink of the housing market meltdown, enabled the nation’s premier investment bank to pass most of its potential losses to others before a flood of mortgage defaults staggered the U.S. and global economies.
Only later did investors discover that what Goldman had promoted as triple-A rated investments were closer to junk.
Tag Archives: Goldman Sachs
If I read this article right and, admittedly, I may not be grasping its implications correctly, it would seem that Goldman Sachs bought a sub-prime mortgage lender precisely because they knew its customers would default and, by betting against their own loans, GS would get rich.
Senderra was just a blip in the subprime world, originating about $1.71 billion in mortgages from 2006 to 2008, according to an analysis by The Wall Street Journal of data filed by the lender. But loans it made through mortgage brokers across the U.S. were bundled into pools sold by Goldman and Merrill Lynch & Co. Those securities were hammered when housing prices slid.Losses on some of the pooled loans approached 20%.
The subprime operation was overseen by Dan Sparks, the head of Goldman’s mortgage department, which wagered that the value of loans to borrowers with weak credit would fall. Those bets generated nearly $4 billion in profit, offsetting other mortgage-related losses at the firm and becoming one of the biggest trading home runs in recent Wall Street history.
So GS buys a sub-prime, cranks out loans, packages them as prime and sells them to its customers, then shorts the trade and makes billions, for which its creator is praised, admired and no doubt, bonused.
Doesn’t this seem sort of – to use an old-fashioned word – immoral?
According to officials trying to tackle it, the crime is directly linked to rising levels of development and prosperity – and an increasing belief that witchcraft can help people get rich quickly.
Defending lavish bonuses expected at the U.S. investment bank, Brian Griffiths said he was not “ashamed” of his bank’s compensation package.
It was already reported that Goldman Sachs offered loans to 1,000 of its lower-tier partners to help them meet margin calls (from Goldman!) and bail out of outside investments gone sour. Now it turns out that senior partners aren’t much better off.
The executives are not the only Goldman employees who have faced a liquidity squeeze. Goldman also offered loans earlier this month to more than 1,000 employees who invested in its internal investment funds. About 10 percent of those employees have indicated interest in the loans, according to a person briefed on the matter. The employees will use the loans to meet their contractual obligations to put more money into the bank’s internal investment funds.
Few banks were as high-flying as Goldman when Wall Street was riding high. In 2006, the bank paid more than 50 people more than $20 million each. But longtime partners at the firm, like Mr. Palm and Mr. Winkelried, have been particularly stung by the slide in its stock, and Goldman has been among the banks that have made margin calls on their own workers.
Goldman was the last Wall Street firm to go public, and many partners there, current and former, have held onto their stock since the offering 10 years ago because they did not want to pay the large tax bills attached to the profits that would accrue from sales of their shares.
Some partners and other employees there borrowed against their stock for living expenses or to make other investments in areas like hedge funds and private equity funds.
In a much-noticed sign of the times, Mr. Winkelried, a former investment banker, put his estate in Nantucket on the market last fall for $55 million. He has since lowered the price. He also owns a home in Short Hills, N.J., and a horse farm in Colorado.
IB’r sent me this link to a New York Times story about Goldman Sachs having to loan money to its partners and employees. Do you remember when, long ago (maybe 2002) attaining partnership at Goldman was an instant ticket to becoming a millionaire? No longer. I heard recently that 56 current Goldman partners are in bankruptcy, a figure I didn’t believe until IB’r sent me this story. Now I do.
Working at Goldman has long been regarded as a sure path to riches. But Goldman’s employees are losing money on their personal investments — particularly in Goldman’s own elite investment funds, which have been considered one of the perks of working at the bank.
Now these funds have stumbled, and some Goldman employees who financed their gilded lifestyles by borrowing in good times are suddenly short on cash needed to meet commitments to their personal investments in the funds. “It’s a problem with the culture of spending,” said Gustavo Dolfino, the president of Whiterock Group, a Wall Street recruitment firm. “No matter how much you have, you spend like you have a lot more.”
But one former Goldman partner estimated that a quarter of the bank’s roughly 100 partners are now worth $5 million or less because of losses on their company stock and other investments. Last year, the bank’s seven top executives received no bonuses. One of them, Jon A. Winkelried, resigned from his position as co-president a few weeks ago, saying he wanted to spend more time with his family. His estate on Nantucket is on the market.
Beyond the drop in the stock market, there are various reasons cash is tight for some Goldman employees. Some traders, for instance, are facing tax bills for bonuses paid in early 2008. They already spent that money, and their bonuses early this year were too small to foot the bill.
Others who borrowed against their stock holdings have been forced to sell at losses or put up more collateral against their loan. Goldman is one of many banks that has issued margin calls on its employees.
To some, the development underscores how many wealthy Wall Streeters got in over their heads.
“Most people investing in Whitehall thought this was a sound and probably even a conservative investment,” said Janet Hanson, a former Goldman employee who is the founder of 85 Broads, an organization for women that takes its name from the address of Goldman’s headquarters. “No one saw the entire thing collapsing.”
I don’t think anyone with a net worth less than $5 million will be buying that $25 million spec house on Round Hill any time soon. Or at least, I fit in (well within) that category, and I’m not planning on it.