In other words, what was indeed a big short from the perspective of individual traders, or even one desk within Goldman, was more of a wash from the perspective of the entire firm. Because of the losses, Goldman contends that it had less than $500 million of net revenue from residential mortgage related products in 2007—about 1 percent of the firm's total net revenue of $46 billion. (The subcommittee argues that factoring in the losses gets you to a profit of $1.1 billion for the mortgage department in 2007. I'm told that the subcommittee included commercial real estate in its analysis.)
A skeptic would argue that Goldman is now lumping those losses in with its big wins in order to bolster its defense. But Goldman defined its mortgage-related revenues this way even before there was any controversy. On the firm's conference call for investors in the fall of 2007, Viniar said about the mortgage business, "We took significant markdowns on our long inventory positions during the quarter as we had in the previous two quarters. However, our risk bias from that market was to be short, and that net short position was profitable." Profitable, yes, under either Goldman or the subcommittee's calculation. Can Goldman plausibly argue that $500 million, or even $1.1 billion, in revenues isn't "massive" or "large" in a year when the firm's total profits were more than 40 times as great? I think it can.
The profit Goldman realized from its mortgage department isn't the real issue. The real issue is whether the firm reduced its exposure—sold off "cats and dogs," as Blankfein said in a February 2007 email—in a manner that was legal and ethical. The firm already paid $550 million last summer to settle charges brought by the Securities and Exchange Commission over the sale of a mortgage-based product called Abacus. The subcommittee's investigation lays out other instances of unsavory practices, including a draft presentation in which Goldman says it expects some securities it is marketing "to underperform."
Another, even more promising, topic for prosecutorial inquiry is how on earth Goldman and other Wall Street banks could truthfully have professed to customers that they had performed "due diligence" on the mortgages they bought (meaning they'd investigated the quality of the underlying mortgages before they packaged them up and sold them off). How could that possibly be true? There's talk that the SEC is actively investigating this.
It's possible Goldman's actions were legal, but only in a narrow sense of the word. Morgan Stanley took the other side of a Goldman-arranged deal in which Goldman would benefit if the underlying mortgages tanked. From the Senate report, it appears that Goldman used (and abused) the powers it had as the arranger of the deal to make the outcome as favorable as possible to Goldman. In another deal, Goldman sold securities to customers, including an Australian hedge fund and a Korean life-insurance company. A Goldman executive later described that particular offering as "one shitty deal."
Goldman's argument, which might be technically correct, is that such chicanery is not just OK but expected, because the buyers were "large financial institutions, insurance companies and hedge funds with a focus on this type of product" and that "these investors had access to highly detailed information that allowed them to conduct their own independent research and analysis." Translation: If you were dumb enough to buy what we sold, or not to see that we'd work the fine print to our advantage, that's your problem.
A corollary to such market-based analysis is that if customers do find Goldman's practices "troubling and abusive," as the subcommittee described them, then they would be well advised to stop doing business with Goldman, just as you'd stop doing business with an appliance store that won't take responsibility for selling you a defective refrigerator. Which would spell the end of Goldman more fittingly than a debatable perjury case. Convincing customers that they have a fair shot explains why Goldman completed a review of its business practices earlier this year. Will that suffice? Lloyd Blankfein, take note. The market giveth and the market taketh away.
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