Credit crunch: The $4bn killing

House prices are crumbling on both sides of the Atlantic, growing numbers of homeowners face repossession, financial markets are yo-yoing and the UK saw its first run on a bank in living memory. But for three audacious New York traders it all added up to a $4bn (2bn) profit opportunity and the biggest jackpot in the history of Wall Street.

The young guns at the investment bank Goldman Sachs none of them over 40 years old were unmasked yesterday, prompting a wave of adulation and envy among their colleagues, and another bout of handwringing about Wall Street's ability to make multibillion-dollar profits even as millions of ordinary people face losing their homes.

Dan Sparks and two underlings, Josh Birnbaum and Michael "Swenny" Swenson, placed what were in effect giant bets against the US mortgage market at the start of the year and watched their winnings tick higher and higher as the rising numbers of mortgage defaults spiralled into a worldwide financial crisis. Throughout the year, they battled with more cautious bosses who feared the bets were too big and too dangerous, but in part because of their success Goldman Sachs will post record profits next week. In doing so, the firm will stand alone on Wall Street, where rivals have suffered huge losses from the credit market meltdown.

The trio themselves are in line for bonuses of about $10m apiece from a record bonus pool at Goldman of about $19bn. "They are very embarrassed that their names have come out," said a company source. "Until now, nobody had heard of them, including most of the people on the floor where they work."

The Wall Street Journal, the bible of the New York finance industry, revealed yesterday how the three men would forgo lunch breaks, weekend trips with their families and even sleep to keep on top of positions but would always find time to pump themselves up at the gym before heading to the testosterone-fuelled trading desk.

Haunted by the spectre of Nick Leeson, whose unapproved trading racked up the 827m losses that sank Barings Bank in 1995, investment banks have tried to keep a tight leash on their traders, but Goldman Sachs has led a trend to put more and more of the bank's own money on the line in the search for bigger profits. Nonetheless, the trio had to engage in a running battle to keep their bets from being whittled away by more conservative risk managers, and at one point in February when an angry Mr Birnbaum shouted that it was "the wrong time" to be cutting the bets, he was overruled. The decision was reversed and the bets ratcheted back up later in the year.

Their $4bn success more than mitigated other losses on mortgages, and could put the three men into an elite group of legendary traders. Their profit eclipses the $1.1bn made by George Soros when his bets against the currency pushed sterling out of the exchange rate mechanism in 1992 and the estimated $1.5bn made by the hedge fund manager John Arnold last year from the collapse of a rival fund, Amaranth.

Goldman is one of the oldest and certainly the most illustrious firms on Wall Street, with a reputation for hiring athletes and military veterans people who do not necessarily seek the limelight, and are able to be "team players". Wall Street bloggers were yesterday sniping that the revelations about the three traders at the heart of the bank's mortgage market bets had much to do with jockeying for favour as the bonus pool is divvied up.

Goldman itself is trying to play down the scale of the risks taken by the mortgage trading desk, saying that most of the trades were designed to reduce the risk of opposite holdings elsewhere in the business. The plans were being carefully directed from above, a company spokesman said. "These guys were the pilots flying the planes." The bank has also been trying to limit the political fallout from revelations that it made giant profits from a financial crisis that could see millions of Americans forced out of their homes and plunge the rest of the economy into a recession. Chris Dodd, a candidate for the Democratic party presidential nomination and head of the Senate's banking committee, has threatened to investigate Goldman's behaviour.

Wall Street banks have been fingered as a major cause of the credit crisis because of their insatiable demand for mortgages, which they buy and repackage into a dizzying array of complex financial instruments.

Goldman's traders positioned themselves for a crash by betting against some of those instruments even while other parts of the mortgage business spent the first half of the year creating and selling new ones to hungry investors. Meanwhile, independent mortgage brokers were pushing unsuitable loans on to low-income Americans who may not now be able to pay them back.

Mr Dodd said he was concerned because it appeared that Goldman Sachs was "aggressively pushing sub-prime mortgages that they knew to be of concern while simultaneously shorting "mortgage derivatives".

And he has turned his fire on Hank Paulson, President George Bush's Treasury Secretary, who was head of Goldman Sachs until being persuaded to join the administration last year. Mr Paulson is in the awkward position of seeing his Goldman Sachs shares rise in value while having to organise a bail-out for American homeowners who cannot afford their mortgages.

Critics argue that Goldman's aggressive bets against the mortgage market have exacerbated problems in the financial markets, which in turn has made it impossible for many struggling borrowers to refinance.

What at the start of the year had appeared to be a serious but isolated problem for over-extended American homeowners has spiralled into a global financial crisis. The world's central banks this week unveiled a $100bn package of emergency measures to try to get the markets moving again.

The mortgage derivatives created by Goldman and others have been dubbed "toxic waste" by investors, who no longer want to buy them. Wall Street banks have suffered more than $50bn in losses as a result and have dramatically scaled back their activities, causing financial markets to freeze up. Smaller banks such as Northern Rock in the UK, which relied on the markets for funding, have got into trouble and many other sorts of business are threatening to scale back investment plans, which economists fear could lead to rising unemployment.

Agony on Main Street, ecstasy on Wall Street

Dan Sparks, 40

Those who get on at Goldman Sachs are those who can leap on a fleeting opportunity a talent that Sparks exudes in his personal life, too. He bumped into a childhood schoolfriend in the street on a shopping trip to New York, invited her for dinner that evening and is now married with two children.

The long-time bond trader was promoted to head of Goldman Sachs' mortgage business a year ago, since when he has had a little less time for weekend trips to his alma mater, the University of Texas A&M, where he and his family are obsessive supporters of the American football team and donors to the athletics department.

Michael "Swenny" Swenson, 40

With no time to break for lunch, Swenson would order the same chicken and vegetable salad from a nearby deli and eat it at the trading desk every day. Nicknamed Swenny everyone has a nickname on a matey Wall Street trading desk the seven-year Goldman Sachs veteran entertains colleagues with a fast, biting wit.

At Williams College, Swenson was an ace hockey player and continues to visit the gym every morning,despite having to commute from the suburbs of northern New Jersey to downtown Manhattan in time to be at the desk by 7.30am. He has four children.

Josh Birnbaum, 35

In the Hamptons, Wall Streeters' exclusive summer getaway, Birnbaum has been something of a hot property. A local magazine last summer named him as one of the area's most eligible bachelors, a "power player" and a "well-mannered Mr Right". The profile also had him down as a "brainiac", and it true that he was the technical brains behind the trio's ability to place efficient bets against what are still obscure and difficult-to-trade mortgage derivatives. Swenson and Sparks wanted him to create a computer model for trading against a new mortgage index, and he netted $1m on his first day.

The big bets that came off...

George Soros made 550m on black wednesday, 1992

Soros studied at the London School of Economics in the 1950s, forming the view that economic growth was reliant on a tolerant and market-oriented society. He put that theory into devastating practice when Britain was forced to leave the exchange rate mechanism (ERM) on 16 September 1992.

Soros realised that the pound had been overvalued against the deutschmark when it joined the ERM and borrowed vast sums of sterling to convert into deutschmarks and French francs. When the inevitable devaluation came along, he sold his position, paid back his borrowings of about 10bn and pocketed a 550m profit earning the sobriquet "The Man Who Broke the Bank of England".

Warren Buffett made 1bn on currencies since 2002

The famously frugal investor, who still lives in the house he bought in 1958 for $31,500, has a history of successful financial gambles. In 2002 he began buying contracts to deliver US dollars against other currencies in effect betting on the fall in value of the dollar. The move surprised fellow investors, not least because Buffett had never before made an investment based on the movements of a currency. It has paid off handsomely, netting his company an estimated $2bn in profits. Buffett also trades on his reputation. In 1998 he started buying huge quantities of silver. Investors followed his lead, raising the price and earning Buffett a handsome profit.

Paul Tudor Jones made 50m from crash of 1987

Early in 1987, a young New York trader made a documentary predicting that the world's financial markets were grossly overvalued and a dramatic crash was inevitable. When Black Monday arrived on 19 October, causing the biggest single drop in stock markets ever seen in a single day, Paul Tudor Jones was feted as a soothsayer. His advice to his clients to sell their shares earned him a $100m pay cheque. Those feeling bullish about the current economic circumstances may do well to listen to the latest predictions by Robert Prechter, who influenced Jones's 1987 forecast. Prechter said recently that stocks are overvalued beyond the level that led to the Great Depression.

...and the ones that came a cropper

John Meriwether lost 2.3bn in 1998 financial crisis

Regarded as a genius in complex trades involving government bonds, Meriwether's hedge fund, LTCM, was a star performer in the first years of its existence, regularly making returns of more than 40 per cent. But as LTCM ran out of bonds to use for its impressive returns, it began to make investments in areas outside its expertise. When stock markets fell in south-east Asia in 1997 and Russia in 1998, investors started selling the government bonds that were the bedrock of LTCM's wealth. In a single month its equity fell from $2.3bn to $600m. By 1998, the Federal Reserve organised a $3.6bn bail-out to avoid a wider collapse in the markets. Total losses eventually reached $4.6bn.

Yasuo Hamanaka lost 1.5bn on copper trades in 1996

Copper trader Hamanaka was known as "Mr Five Per cent" in reference to the proportion of the world's annual supply of the metal that he controlled. For years he was allowed to dictate his company's copper-buying strategy, but he was running two accounts one showing healthy profits and another huge losses. The deficit came to light in 1996 when the authorities in London and New York asked his employer, Sumitomo, to cooperate with an investigation into suspected price-fixing. Panic ensued and Sumitomo was forced to admit that Hamanaka had lost $1.8bn in unauthorised trading. Eventually the losses reached $2.6bn. Hamanaka was jailed for eight years.

Nick Leeson lost 827m at Barings Bank in 1995

In 1992, Leeson's employers had good reason to value his services. After a series of speculative trades on the Singapore currency exchange, he made the company 10m a tenth of its total profits.

Soon, Leeson's luck changed. By the end of 1994, the deficit had reached 208m and on 16 January 1995, Leeson decided to place a huge bet on the Tokyo stock exchange going up. Overnight the Kobe earthquake struck and the exchange sank.

He tried to recoup his losses by betting again but this, too, failed. Leeson fled, leaving a note saying "I'm sorry". Barings collapsed as a result of his losses, and Leeson was eventually sentenced to six and a half years in prison in Singapore.

Have your say

Should the Goldman Sachs bankers be able to profit from the misery of Americans caught up in the sub-prime crisis? Or do the benefits of globalised financial markets outweigh the costs? Tell us what you think. Email or go to

Start your day with The Independent, sign up for daily news emails
There will be a chance to bid for a rare example of the SAS Diary, collated by a former member of the regiment in the aftermath of World War II but only published – in a limited run of just 5,000 – in 2011
charity appealTime is running out to secure your favourite lot as our auction closes at 2pm tomorrow
Arts and Entertainment
James May, Jeremy Clarkson and Richard Hammond in the Top Gear Patagonia Special
Claudia Winkleman and co-host Tess Daly at the Strictly Come Dancing final
Arts and Entertainment
Caroline Flack became the tenth winner of Strictly Come Dancing
tvReview: 'Absolutely phenomenal' Xtra Factor presenter wins Strictly Come Dancing final
Arts and Entertainment
The Apprentice finalists Mark Wright and Bianca Miller
tvBut who should win The Apprentice?
Elton John and David Furnish will marry on 21 December 2014
peopleSinger posts pictures of nuptials throughout the day
Brendan Rodgers looks on from the touchline
Life and Style
A still from the 1939 film version of Margaret Mitchell's 'Gone with the Wind'
Arts and Entertainment
J Jefferson Farjeon at home in 1953
booksBooksellers say readers are turning away from modern thrillers and back to golden age of crime writing
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Carlton Senior Appointments: Private Banking Manager - Intl Bank - Los Angeles

$200 - $350 per annum: Carlton Senior Appointments: Managing Producer – Office...

Carlton Senior Appointments: San Fran - Investment Advisor – Ind Advisory Firm

$125 - $225 per annum: Carlton Senior Appointments: San Fran - Investment Advi...

Sheridan Maine: Commercial Finance Manager

Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Sheridan Maine: Regulatory Reporting Accountant

Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Day In a Page

The week Hollywood got scared and had to grow up a bit

The week Hollywood got scared and had to grow up a bit

Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

Panto dames: before and after

From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
Thirties murder mystery novel is surprise runaway Christmas hit

Thirties murder mystery novel is surprise runaway Christmas hit

Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

Anne-Marie Huby: 'Charities deserve the best'

Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
The botanist who hunts for giant trees at Kew Gardens

The man who hunts giants

A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
The 12 ways of Christmas: Spare a thought for those who will be working to keep others safe during the festive season

The 12 ways of Christmas

We speak to a dozen people who will be working to keep others safe, happy and healthy over the holidays
Birdwatching men have a lot in common with their feathered friends, new study shows

The male exhibits strange behaviour

A new study shows that birdwatching men have a lot in common with their feathered friends...
Diaries of Evelyn Waugh, Virginia Woolf and Noël Coward reveal how they coped with the December blues

Famous diaries: Christmas week in history

Noël Coward parties into the night, Alan Clark bemoans the cost of servants, Evelyn Waugh ponders his drinking…
From noble to narky, the fall of the open letter

From noble to narky, the fall of the open letter

The great tradition of St Paul and Zola reached its nadir with a hungry worker's rant to Russell Brand, says DJ Taylor
A Christmas ghost story by Alison Moore: A prodigal daughter has a breakthrough

A Christmas ghost story by Alison Moore

The story was published earlier this month in 'Poor Souls' Light: Seven Curious Tales'
Marian Keyes: The author on her pre-approved Christmas, true love's parking implications and living in the moment

Marian Keyes

The author on her pre-approved Christmas, true love's parking implications and living in the moment
Bill Granger recipes: Our chef creates an Italian-inspired fish feast for Christmas Eve

Bill Granger's Christmas Eve fish feast

Bill's Italian friends introduced him to the Roman Catholic custom of a lavish fish supper on Christmas Eve. Here, he gives the tradition his own spin…
Liverpool vs Arsenal: Brendan Rodgers is fighting for his reputation

Rodgers fights for his reputation

Liverpool manager tries to stay on his feet despite waves of criticism
Amir Khan: 'The Taliban can threaten me but I must speak out... innocent kids, killed over nothing. It’s sick in the mind'

Amir Khan attacks the Taliban

'They can threaten me but I must speak out... innocent kids, killed over nothing. It’s sick in the mind'
Michael Calvin: Sepp Blatter is my man of the year in sport. Bring on 2015, quick

Michael Calvin's Last Word

Sepp Blatter is my man of the year in sport. Bring on 2015, quick