April 26, 2010

Goldman’s Defense: ‘We Didn’t Know

Filed under: Uncategorized — ktetaichinh @ 2:15 am

An article in the Washington Post by Zachary A. Goldfarb discusses an eleven page document that Goldman Sachs (GS) has prepared for CEO Lloyd Blankfein to use in his testimony April 28 before the Senate Permanent Subcommittee on Investigations. The internal document details examples of the debate within Goldman in 2006 and 2007 as executives wrestled with decisions about the strength and weakness in the mortgage markets and the positions that Goldman should be taking with their own investments.

It appears the bottom line for the Blankfein testimony will be centered on the uncertainty among Goldman executives about how the mortgage market was unfolding. Would the market remain viable? If there was a decline, how serious would it be? Goldfarb says that the picture the GS document tries to develop is that Goldman was confused. Blankfein will say something like: We didn’t have a crystal ball. We couldn’t mislead anyone about what was going to happen. We couldn’t have plotted the course of the financial collapse.

We didn’t know!

It’s clear that Goldman wasn’t in the dark for long. Internal Goldman e-mails, released Saturday morning by the Senate Permanent Subcommittee on Investigations, reveal that by the middle of 2007 Goldman was profiting from the declining housing market, according to an article by Louise Story, Sewell Chan and Gretchen Morgenson in the New York Times. From the article:

Carl Levin, Democrat of Michigan and head of the Permanent Subcommittee on Investigations, said that the e-mail messages contrast with Goldman’s public statements about its trading results. “The 2009 Goldman Sachs annual report stated that the firm ‘did not generate enormous net revenues by betting against residential related products,’ ” Mr. Levin said in a statement Saturday when his office released the documents. “These e-mails show that, in fact, Goldman made a lot of money by betting against the mortgage market.”

A Goldman spokesman did not immediately respond to a request for comment.

Another report later Saturday morning by Stephanie Kirchgaessner at contains a rebutal:

The Wall Street bank on Saturday accused the Senate panel of cherry-picking just four emails from almost 20m pages of documents it had handed over to congressional investigators.

“It is concerning that the subcommittee seems to have reached its conclusion even before holding a hearing,” said Lucas Van Praag, the firm’s chief spokesman. He added that Goldman was making available its residential profit and loss information for every quarter of 2007 and 2008, information that he said showed Goldman had net losses of more than $1.2bn in residential mortgage-related products in the period.

As the picture continues to unfold, it is becoming clearer why Goldman was prospering in late 2007 and 2008 when so many other firms were hemorrhaging with mortgage losses. The may not have known for sure which way the wind was blowing in 2006 and the beginning of 2007. They certainly had their spinnaker set and were sailing before the wind by the summer of 2007.

Blankfein may be quite successful in his testimony before the senate subcommittee. However, the congressional hearing will have little impact on the course of the civil action the SEC has initiated. The court case will not be affected by the broad array of positions and hedges that Goldman entered leading up to the crisis. The case will turn on specific isolated actions related to the marketing of the synthetic CDO package known as Abacus-2007-Ac1. The court case will hinge on whether Goldman provided sufficient disclosure to purchasers of the securities. One very succinct discussion of the crux of the case has been given by Barry Ritholtz.

There will be much discussion of how the senate hearing affects the court case. In the final analysis there will probably be little connection between the two events. One exception may come if the Goldman VP Fabrice Tourre, who was named in the SEC complaint, gives testimony. Tourre may be asked questions that have a direct connection to the Abacus case. If and how he answers such questions may give a preview of what will happen in court.


  1. I have previously discussed the outlook for the Blankfein senate appearance in an article a week ago.
  2. The SEC complaint can be read in full here.

Disclosure: No positions.


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