Goldman releases internal paper trail

Goldman releases internal paper trail

By Henny Sender in New York

Published: April 25 2010 19:49 | Last updated: April 25 2010 19:49

Goldman Sachs released internal documents over the weekend that it said demonstrated that its subprime mortgage trading reflected prudent risk management rather than speculation.

Days before Lloyd Blankfein, chief executive, is due to appear before the Senate, the embattled bank said it did not “consistently or significantly short” the market for subprime mortgage securities, and any negative positions it had were intended to counterbalance long exposures.

The material, consisting largely of internal e-mail traffic, is meant to refute allegations by a Senate investigation committee, which claimed on Saturday that Goldman had made big profits betting against the mortgage market, which subsequently crashed.

The Securities and Exchange Commission has also alleged that Goldman fraudulently failed to disclose that a hedge fund influenced the composition of a subprime mortgage security underwritten by the bank. Mr Blankfein is expected to launch a strong defence of the bank on Tuesday, fighting to preserve the firm’s reputation in the eyes of both clients and the US public, many of whom were the victims of the housing crash.

Mr Blankfein will have to tread carefully if he suggests that Goldman is the object of a politically motivated campaign, without further infuriating regulators, according to people familiar with Goldman’s likely defence. “It is always an unequal battle with the government,” said one lawyer. “They have a bazooka and you have a water pistol.”

In a letter to shareholders on April 7, released over the weekend, Goldman said it did not generate enormous revenues or profits by betting against residential mortgage products, but its negative positions merely meant it lost less money than it otherwise would have.

The line between hedging exposures and using the firm’s balance sheet to take positions in the hope of making money is a fine one. At least some of the e-mails suggest that at the end of 2006 its defensive posture came at the possible expense of more bullish investors.

Daniel Sparks, who headed the firm’s mortgage operations – and who is also testifying to the Senate on Tuesday – sent an e-mail urging staff to “distribute as much as possible from new loan securitisations” in what appears to be an effort to reduce the firm’s own exposures.

One major source of losses for firms such as Merrill Lynch, which lost tens of billions of dollars on mortgages, and Citigroup was that they had huge holdings of subprime mortgage securities meant to be turned into complicated collateralised debt obligations they could not get rid of when investors finally turned sour on the market.

Among the materials Goldman released is an email from Fabrice Tourre, who is the only individual charged for his role in the “Abacus” transaction at the heart of the SEC charges and who will also appear at Tuesday’s hearing in Washington. Mr. Tourre describes the deal as “the type of thing you invent telling yourself well what if you created a thing that has no purpose.”

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