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 haveyoursay@independent.co.uk or go to www.independent.co.uk/haveyoursay

Start your day with The Independent, sign up for daily news emails
Life and Style
love + sex
Arts and Entertainment
Victoria Wood, Kayvan Novak, Alexa Chung, Chris Moyles
tvReview: No soggy bottoms, but plenty of other baking disasters on The Great Comic Relief Bake Off
Sport
Ashley Young celebrates the winner for Manchester United against Newcastle
footballNewcastle 0 Man United 1: Last minute strike seals precious victory
Life and Style
Tikka Masala has been overtaken by Jalfrezi as the nation's most popular curry
food + drink
Arts and Entertainment
Seth Rogan is one of America’s most famous pot smokers
filmAmy Pascal resigned after her personal emails were leaked following a cyber-attack sparked by the actor's film The Interview
News
Benjamin Netanyahu and his cartoon bomb – the Israeli PM shows his ‘evidence’
people
ebooks
ebooksA special investigation by Andy McSmith
Arts and Entertainment
80s trailblazer: comedian Tracey Ullman
tv
News
i100
Life and Style
A statue of the Flemish geographer Gerard Kremer, Geradus Mercator (1512 - 1594) which was unveiled at the Geographical Congree at Anvers. He was the first person to use the word atlas to describe a book of maps.
techThe 16th century cartographer created the atlas
Arts and Entertainment
Stephen Tompkinson is back as DCI Banks
tvReview: Episode one of the new series played it safe, but at least this drama has a winning formula
News
i100
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Graduate Application Support Analyst

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Reach Volunteering: External Finance Trustee Needed!

Voluntary post, reasonable expenses reimbursed: Reach Volunteering: Would you ...

Christine McCleave: FP&A Analyst

£36,000 - £40,000: Christine McCleave: Are you looking for a new opportunity a...

Recruitment Genius: Sales Executive - OTE £40,000

£15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...

Day In a Page

War with Isis: Iraq's government fights to win back Tikrit from militants - but then what?

Baghdad fights to win back Tikrit from Isis – but then what?

Patrick Cockburn reports from Kirkuk on a conflict which sectarianism has made intractable
Living with Alzheimer's: What is it really like to be diagnosed with early-onset dementia?

What is it like to live with Alzheimer's?

Depicting early-onset Alzheimer's, the film 'Still Alice' had a profound effect on Joy Watson, who lives with the illness. She tells Kate Hilpern how she's coped with the diagnosis
The Internet of Things: Meet the British salesman who gave real-world items a virtual life

Setting in motion the Internet of Things

British salesman Kevin Ashton gave real-world items a virtual life
Election 2015: Latest polling reveals Tories and Labour on course to win the same number of seats - with the SNP holding the balance of power

Election 2015: A dead heat between Mr Bean and Dick Dastardly!

Lord Ashcroft reveals latest polling – and which character voters associate with each leader
Audiences queue up for 'true stories told live' as cult competition The Moth goes global

Cult competition The Moth goes global

The non-profit 'slam storytelling' competition was founded in 1997 by the novelist George Dawes Green and has seen Malcolm Gladwell, Salman Rushdie and Molly Ringwald all take their turn at the mic
Pakistani women come out fighting: A hard-hitting play focuses on female Muslim boxers

Pakistani women come out fighting

Hard-hitting new play 'No Guts, No Heart, No Glory' focuses on female Muslim boxers
Leonora Carrington transcended her stolid background to become an avant garde star

Surreal deal: Leonora Carrington

The artist transcended her stolid background to become an avant garde star
LGBT History Month: Pupils discuss topics from Sappho to same-sex marriage

Education: LGBT History Month

Pupils have been discussing topics from Sappho to same-sex marriage
11 best gel eyeliners

Go bold this season: 11 best gel eyeliners

Use an ink pot eyeliner to go bold on the eyes with this season's feline flicked winged liner
Cricket World Cup 2015: Tournament runs riot to make the event more hit than miss...

Cricket World Cup runs riot to make the event more hit than miss...

The tournament has reached its halfway mark and scores of 300 and amazing catches abound. One thing never changes, though – everyone loves beating England
Katarina Johnson-Thompson: Heptathlete ready to jump at first major title

Katarina Johnson-Thompson: Ready to jump at first major title

After her 2014 was ruined by injury, 21-year-old Briton is leading pentathlete going into this week’s European Indoors. Now she intends to turn form into gold
Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

Climate change key in Syrian conflict

And it will trigger more war in future
How I outwitted the Gestapo

How I outwitted the Gestapo

My life as a Jew in wartime Berlin
The nation's favourite animal revealed

The nation's favourite animal revealed

Women like cuddly creatures whilst men like creepy-crawlies
Is this the way to get young people to vote?

Getting young people to vote

From #VOTESELFISH to Bite the Ballot