“The Securities and Exchange Commission should be very interested in any financial company that secretly decides a financial product is a loser and then goes out and actively markets that product or very similar products to unsuspecting customers without disclosing its true opinion.  This is fraud and should be prosecuted.”

-Laurence Kotlikoff, a Boston University economics professor


McClatchy has a huge and sobering piece of investigation into Goldman Sachs.

The product of a five-month investigation, it is a damning indictment of how Wall Street is riddled with conflicts of interest. Even after GS concluded the housing bubble would burst, it continued to sell billions of dollars in shaky securities tied to subprime mortgages to pension funds, insurance companies and other investors — while simultaneously betting these same instruments would collapse:

“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.”

That much is well known; Where McClatchy’s inquiry focused investigation into Goldman Sachs was how the firm:

• Bought and converted into high-yield bonds tens of thousands of mortgages from subprime lenders that became the subjects of FBI investigations into whether they’d misled borrowers or exaggerated applicants’ incomes to justify making hefty loans.

• Used offshore tax havens to shuffle its mortgage-backed securities to institutions worldwide, including European and Asian banks, often in secret deals run through the Cayman Islands, a British territory in the Caribbean that companies use to bypass U.S. disclosure requirements.

• Has dispatched lawyers across the country to repossess homes from bankrupt or financially struggling individuals, many of whom lacked sufficient credit or income but got subprime mortgages anyway because Wall Street made it easy for them to qualify.

• Was buoyed last fall by key federal bailout decisions, at least two of which involved then-Treasury Secretary Henry Paulson, a former Goldman chief executive whose staff at Treasury included several other Goldman alumni.

Its detailed investigation, well worth pouring over.

As to professor Kotlikoff’s assertion at the top of the page: Goldman’s defense would likely be “Of course we did not know the future. One division sold this product, another division made a bet against the sector. But it was a gamble, one that hardly anyone else (Aside form John Paulson) took. After the fact, it may look like prescient, but an investment opinion is not the same as knowing the future. That is, of course, impossible.”

Case dismissed . . .




This is a multi-part series; I’ll update this as more stories come out:


Hat tip Bill King

How Goldman secretly bet on the U.S. housing crash
Greg Gordon
McClatchy Newspapers, November 1, 2009



Category: Bailouts, Credit, Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

32 Responses to “How Goldman Bet on a Housing Crash”

  1. torrie-amos says:

    what’s the problem, when you sign your papers with your investment choice, it clearly states they can take your shares and loan them out too others too short, i really think 97% of investors do not even know this fact

  2. ZackAttack says:

    How would you feel about flying on an airline if the mechanics were allowed to take out life insurance policies on the passengers? Because, after all, the airplane’s maintenance record is a matter of public knowledge, at least for those who know how to get hold of that data.

    Also, a number of the shop supervisors have been promoted to the FAA, and they don’t see anything wrong with this practice.

  3. VennData says:

    Was it Goldman Sachs who sold all that bad dry-wall? The lead-laden toys? Oh.. that was one of our “evil” trading partners. I guess if its your financial health, it’s really not a problem.

    Good thing the GOP is fighting so hard to support the “Consumer Financial Protection Act of 2009.”


  4. constantnormal says:

    “Case dismissed . . .”

    Yeah, and while Glass-Steagall is no more, I wonder if this isn’t something akin to the situation of an investment banker conducting an IPO from one side of the house, while massively shorting the same stock from the other … or is there no law against that anymore either?

  5. constantnormal says:

    @torrie-amos 9:09 am

    what’s the problem, when you sign your papers with your investment choice, it clearly states they can take your shares and loan them out too others too short, i really think 97% of investors do not even know this fact

    At least that IS disclosed, whether the investor bothers to read the fine print or understand what they are agreeing to or not — d’ya think that the fine print on the CMO paperwork says anything about the issuer betting against them?

  6. Bruce in Tn says:


    I find myself curiously agreeing with torrie-amos on this. Some of the things in the article I wish you’d clarify. Did Goldman Sachs rate the securities as AAA or was this the rating from one or more of the rating agencies? It makes a difference. I mean, GS was betting their own money on the housing bubble bursting. It is similar to people here, knowing that nothing has really been fixed, but betting in March that we’ve have a relief rally. They bet their money, even though the debt monster still lives under the bed.

    Now if Goldman rated the securities triple A….that is a completely different giant squid attack…

  7. rktbrkr says:

    GS and Paulson engaged in criminality on the highest order. I’m sure the Sorcerer’s Apprentice, Turbo Timmy, is advising that criminal prosecution would be too destabilizing for the system…

  8. Mannwich says:

    Hey, that’s just “free market capitalism” at work, folks. What’s the problem? If there is mass pain and woe, Goldman will find a way to make money off it. There’s nothing wrong with that in the good old U.S of A! They’re a “force for good”, dontcha know?

  9. Mike in Nola says:


    Of course Goldman didn’t rate all those securties itself; it paid Moody’s or someone else a commission to do it. And, if the ratings agency did not come through, they would find another one that would play ball.

  10. jdmckay says:

    Right… read that yesterday as well as McClatchy’s ongoing series on the subject.

    But those $gazillion GS bonuses are just a-ok because…. ///???

  11. Moss says:

    Further evidence that GS has no conscience and is ethically bankrupt.

  12. Mannwich says:

    When they do it, it’s “business” and the make billions. When the little guy/gal does it, it’s “fraud” and they are prosecuted to the fullest extent of the law. The Sheeple may be dumb but that’s clearly what they see.

  13. I definitely have major issues with the financial structure which permits all the various participants to participate in creating these mortgages without anyone taking risk (underwriters, brokers, servicers). Unfortunately, nothing has been done to change this very basic problem.

    I read about a woman in California that obtained a 3% down FHA loan and then received another loan on top of it for furnishings. Once she gets her tax credit back, she’ll actually walk away with money from the deal and has no skin in the game. These toxic incentives in the system must be fixed. Every mortgagor needs to have a skin in the game financially. This very simple rule would deflate housing prices more and force more to rent in the immediate term, but it would but the financial system on a sounder footing going forward and would bring housing prices down making them more affordable. This of course is just one example of a simple fix to the financial system that hasn’t been done.

    Back to Goldman, while I don’t believe they should have been able to create these junky securities in the first place, the financial framework permitted them to do so. So I actually agree with the defense. They made a bet that housing would crash but that was a bet. They didn’t know it was going to occur and they didn’t have control over the housing market to cause it to crash. So I don’t have an issue with them selling a security and taking the other side of the bet in the marketplace. The fact that the financial framework in this country permitted these securities to be created is the real problem. I understand GS has influence over the financial structure. But this is really a Washington problem and not a Wall Street problem.



  14. Jdamon33 says:

    While I don’t like what GS did here, I can’t see any “legal” reason why they couldn’t do it. there was a market for the MBS’s and they were supplying the market with these products. Now, why we haven’t seen hundreds of perp walks from the fly by night mortgage companies who were clearly committing fraud all along the process, as well as some of the folks from the FP division of AIG, is what I’m really surprised about.

    I have a much bigger problem with the US Govt. bailout of AIG which in effect allowed a bunch of people with bets against the housing market (CDO’s) to get paid off with taxpayer money (i.e. Goldman). this was orchestrated by ex Goldman employees which just reeks of inpropriety and criminal activity.

    Mannwhich was dead on. When the little guy does stuff like this, they get fined, go to jail and lose everything. When you are “connected” or filthy rich, you get off scott f*cking free. I have to say, it’s really starting to piss me off.

  15. about the Source:

    “The McClatchy Company is the third-largest newspaper company in the United States, a leading newspaper and internet publisher dedicated to the values of quality journalism, free expression and community service. Building on a 152-year legacy of independence, the company’s newspapers and websites are steadfast defenders of First Amendment values and advocates for the communities they serve.”

    “The McClatchy Washington Bureau represents a coming together of two strong journalistic traditions in Washington — the national and foreign reporting strength of the former Knight Ridder bureau and the regional reporting firepower of the McClatchy bureau.
    All of those strengths are present in the merged bureau, which is also the home base for McClatchy’s foreign correspondents stationed abroad.

    The bureau is located at 700 12th St., NW, Suite 1000, Washington, D.C., 20005-3994. The main phone is 202-383-6000.

    Key Contact: John Walcott, bureau chief

    as an aside, if peep understood they could subscribe to more than ‘Newspapers’, http://finance.yahoo.com/q/pr?s=MNI , maybe the MSM wouldn’t be so laden w/ AP Stenography, Weekly Reader ‘graphics’, and DWTS updates..

  16. Jdamon33 says:

    BTW, I used to work in the “business” and I can tell you without a doubt 90% of traders are buffoons. They couldn’t survive in any other business/industry, but yet wihtin the Securities Industry, they make millions.

    I still know traders that for 4 years haven’t found a job because they have no skill set and think they are worth half a million a year just becuase they once made that number. The entire securities industry (excluding Barry of course) should be purged.

  17. Rob Dawg says:

    Dear ZckAttack,
    It is generally considered polite to provide attribution and authorship when reposting. Your comments came straight from the Calculated Risk blog comments (mine & “JP”) on Sunday.

  18. rustum says:

    States weigh Fraud suits against banks.

    It looks like regulators are there to protest these banks not the customers/public.

  19. Stuart says:

    3-4 minute reading, but highly recommended and when discussing Goldman, this fits VERY well.

    Alfred Pennyworth: “A long time ago, I was in Burma. My friends and I were working for the local government. They were trying to buy the loyalty of tribal leaders by bribing them with precious stones. But their caravans were being raided in a forest north of Rangoon by a bandit. So we went looking for the stones. But in six months, we never found anyone who traded with him. One day I saw a child playing with a ruby the size of a tangerine. The bandit had been throwing them away.”
    Bruce Wayne: “Then why steal them?”
    Alfred Pennyworth: “Because he thought it was good sport. Because some men aren’t looking for anything logical, like money. They can’t be bought, bullied, reasoned or negotiated with. Some men just want to watch the world burn.”

    — The Dark Knight


  20. Mike in Nola says:

    Turned on CNBC to see today’s party line and Gasparino was on touting his book. Guess what his conclusion was: It was the governement’s fault. It should have stopped the bankers from committting all these sins.

    He also absolved himself and his toady colleagues for not reporting on what was happening with the excuse that the info was not available because those on the inside weren’t squealing. Another who coulda know’d?

  21. hue says:

    MEH, KR’s Wash Bureau did ___ work leading into the war in Iraq. fill in the blank depending on your political leaning.

    Isn’t this standard practice on Wall Street? taking the other side of your client’s trade. or selling American mortgage derivatives to cities in Norway.

  22. sharkbait says:

    “This is fraud and should be prosecuted.”

    There’s a litany of news / investigative journalism (e.g.: Taibbi’s RS GS articles) regarding the alleged skullduggery of the ( infamous?) Goldman Sachs. And yet, has there been any real serious, substantive (i.e.: Pecora Commission) investigation of any allegations by 1) US Justice Dept., 2) SEC , 3) CFTC, etc.? We all know the answer is no. Same day, different story. Rinse, and repeat.

    Nor has anyone addressed the litany of conflicts of interest, and revolving door policies between former GS employees, and US gov’t agcy’s. I could list them, but it would just be a “who’s who” of heads of Wall St. watch dogs, Treas., Fed, etc.

    Nothing will change until there is fear – on Wall St. for a change – of real substantive consequences (i.e.: significant financial penalties, incl. jail time for guilty CEO’s, and insiders + break up of guilty Co’s).

    I can only suggest that real campaign reform, removal of the vast herds of lobbyists, and publicly-funded campaigns would “bring balance to the force” in the US financial system. Right now it’s a farce, and “the dark side” is prevailing. Congress is mostly useless here – as it is on healthcare “reform”. See comments on lobbyists, above.

    We all know the system is broken, and the fraud continues with impunity. It won’t be fixed, nor will there be real reform until 1) the people who created this mess are out of positions of authority, and 2) there are enforceable rules, and regulations. ‘Can’t imagine a soccer game without a referee.

  23. Mannwich says:

    @Mike: Charlie G = a fine example of “Wetware Bias”, no?

  24. torrie-amos says:


    1/2 of it was toungue and cheeck, they guys buying that stuff were huge institutions probably 2% of there portfolio, obviously some, who have already gone bankrupt were doing a carry trade with the yes, taking 20-1 leverage and all in on sub-prime………this paper was sold worldwide, what GS did not see coming was the severity of the decline in home prices taking down all the banks and them with them, which is why Paulson got involved, make no mistake the shorts had been in control of the market for 24 months and did not care if all the banks went too zero………they were scared pee-less

  25. Mike in Nola says:

    Manny: Have to admit I don’t know what “Wetware Bias” means, even after reading the tidbit on TBP. Binging it only refers back to this site.

  26. wally says:

    The defense will probably be: “We’re too big to know what we are doing”.
    That should sell well in Washington (a captive market, of course).

  27. torrie-amos says:

    roflmao…….wally, as much as it’s toungue and cheek it is actually true………Ken Lay, famed ceo of Enron in all reality happened to him, all the numbers on the spread sheets looked fine to him and skilling, little did they know how fastow had manufactured them………fastow was madoff on the inside, he started out small thought he could make it up and it became untenable, what makes these stories so fascinating is rather than stand up and say what they had done, knowing it would all fall is they kept it going, these types of people are physchologically more concerned 100% with me myself and thee, than anything else, empathy is non-existent in there make-up……..when folks like these get into positons of power is when things go awry

    when they got rid of glass stegall the mantra was “cross-selling”, save expense by combining back room offices……….okay, as much as it is bs on the cross-selling back room makes sense, yet, the reality is you end up with 1000 fiefdoms who fight for power………..obviously who gained control were the computer hedgers who believed everything in the world could be hedged, thus CEO go after that 40-1 leverage, which they did and all life was good and grand……….until AIG the bookee for the hedges disclosed, nope we aint got the money………then it was discovered, by gosh you cannot hedge away everything always, which was the believe………what happened was simple math, they ran out of things too hedge against, they had essentially hedged it all and it all reigned down on em, thus, like you say, they were too big too know what they were doing because they did not believe anyone else was doing likewise

  28. alexp says:

    I have trouble identifying anything of true value coming from Wall St. They aren’t greasing the wheels of industry or innovation, and they aren’t making the economy more efficient.

    Seems clear that they pay politicians to do whatever is in the best interest of Wall Street, and exploit their customers to the hilt for as long as possible. When a scam stops working, they take a “loss” for one year, reload, and start on the next scheme. When this doesn’t work they simply take over the government and transfer money directly.

    Am I wrong about this (in any way)?

  29. hue,

    that’s the point, peep would better off if they understood that, instead of wasting Time, and then some, w/ http://www.morningstar.com/ , or other Touts for http://www.ici.org/ , they could control the Quality of the Content, in their Troft, by, merely, being, personally, Responsible in their Spending and Investing decisions..

    or, differently, let someone else make your decisions for you, and you’ll get what they like/what serves them..

    see http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=Wetware+Bias
    and, remember, Bing Blowz!~

  30. randy says:

    I’m not in the fiancial business, so maybe this is a dumb rookie question. But can someone please explain the difference to me between “betting these same instruments would collapse” and “hedging”?

    Is is a matter of degree? Or is it the fact that GS held little of the risk on the products they sold, but stood to gain quite a bit from the hedge?

    If GS had told clients that they needed to hedge also, would that make you feel better?

    I don’t see any wrongdoing here. I have a huge problem with lots of other things that GS did, but this seems perfectly legal.

    Mind you, I’m not a GS client. If I were a GS client I would be absolutely livid and would skin my salesman/broker alive. And I would never do business with them after they sold me this mis-rated pile. But, as others have said above, the rating agencies bear the principle blame for that.

  31. Mike in Nola says:

    randy: Don’t think you can lay blame off on the agencies. They were being paid to say what the issuers wanted, but the scam wasn’t a secret to those who understood it. Securities rated AAA, i.e. same as Treasuries, without being backed by the US and paying substantially better interest rates than comparable Treasuries? It was the proverbial free lunch and was fishy on the surface.

  32. flipspiceland says:

    Given all the above, if I had the opportunity to do what Lord Blankfein, Joe Cassano and all the rest did including the multi-billions short bet on mortgages by Goldman Sucks, I would have done it with not one scintilla of regret for the rest of those who lost their life savings and some, their lives, to me. The billions I made in doing so would be a balm. I am an animal, first.

    The fact that I could so construct the government of the country to solely benefit me I would also do.
    That I can get away with it because the people will not throw out their incumbents forcing me to re-jigger at every cycle, every year, and eventually put me out of business, is a glorious dividend, a nod from Kalki, that I am in synch with the universe. Truly anointed.

    And given that, I would find a fort to live in. For sure as the earth rolls towards the sun every morning, I would be on alert the rest of my life that one day one of those people or several of them that I made money on, is going to see me as Tsar Nicholas, end my life, regardless of the legality, morality or ethics of my trades and my takeover of the global financial levers of government, placing my lieutenants at all crucial crossroads, and placed me and mine so far above the law I might as well dwell in the clouds, if not heaven itself.

    Having considered and commented for months now about what The Tribe has done and continues to do, (right now Goldman Sucks is forming other securitizations to ‘earn’ fees on, and there are groups of investors who have approached Goldman Sucks and to prepare to securitize other instruments including diamonds, distressed RE, etc.) I can agree with those above who see nothing wrong in the Goldman Sucks activities.