Goldman Sachs has lifted the veil of secrecy surrounding its multibillion dollar trading in the mortgage market at the height of the credit crisis, giving a unique insight into the world's most powerful investment bank and the controversial deals that have landed it with fraud charges.
In a high-risk strategy that it hopes will head off the worst crisis in its 141-year history, the bank released a slew of internal emails and other documents – just hours after a Congressional panel published secret correspondence showing how Goldman profited from the meltdown in the mortgage market in 2007. That set showed executives boasting about profits they made from "shorting" mortgages, or betting that prices will go down.
And an internal email from Lloyd Blankfein, the chief executive, confirms that those shorts meant Goldman was up on the deal by the end of 2007, even as most of the other Wall Street banks headed deep into the red.
The emails also include love letters written by Fabrice Tourre, a young Goldman trader who has personally been charged with fraud, to his girlfriend, in which he describes his work as "intellectual masturbation" and jokes about selling toxic mortgage bonds to "widows and orphans" – Wall Street's traditional euphemism for unsuspecting investors.
The revelations come at the start of a dangerous week for Goldman Sachs, when Mr Blankfein and other executives will be called to account for their activities in the mortgage market in front of a Senate investigation into the credit crisis. Carl Levin, the Senator in charge of the grilling, said the emails showed that Goldman Sachs had been lying to the public by claiming it did not make significant income from betting against the housing market.
"Investment banks such as Goldman Sachs were not simply market-makers; they were self-interested promoters of risky and complicated financial schemes that helped trigger the crisis," he said.
Goldman Sachs denies all charges and by releasing almost 100 pages of internal correspondence, the firm is hoping to win the battle if not for hearts, then at least for minds. Its emails show that it was not always betting against the mortgage market, and even considered buying a subprime mortgage lender. The bank's executives say it started 2007 with heavy exposure to the mortgage market and was prudently trying to reduce its risk of losses.
Specifically, it points out that its profits from mortgage trading in 2007, when the meltdown began, were more than wiped out in 2008 as the credit crisis went into its critical phase. In all, it lost $1.7bn (£1.1bn) in 2008.
In November 2007, though, the picture was much better because Goldman Sachs had been moving aggressively all year to clear out its exposure to the mortgage market, following an internal debate that concluded it was headed for crisis. Mr Blankfein wrote that month: "Of course we didn't dodge the mortgage mess. We lost money, then made more than we lost because of shorts."
In a second email, Goldman's chief financial officer, David Viniar, responded to a report on the firm's trading activities, showing that – in one day – the firm netted over $50m (£32.5m) by taking short positions. Mr Viniar wrote: "Tells you what might be happening to people who don't have the big short".
Goldman Sachs was not the biggest Wall Street player in the mortgage market. High street banks that had big mortgage lending operations tended to be more deeply involved in the business of packaging these mortgages into toxic securities for sale to investors across the world.
However, Goldman was quicker than those rivals to spot the possible effects of a crash in the US housing market. All the exotic derivatives built on the back of subprime mortgages cratered in value in 2007, and the rest of the mortgage market collapsed in 2008, bringing chaos to Wall Street. Even Goldman had to be bailed out by US taxpayers.
Fraud charges laid against Goldman and Mr Tourre earlier this month suggest that they duped investors in a mortgage derivative called Abacus, by not telling them that the derivative had been created on behalf of a hedge-fund client that was betting on a coming crash. Mr Tourre himself appears in no doubt that a crash is coming, according to his emails, and is already discussing his next career move with his girlfriend in the weeks before he sold the controversial bonds to investors.
The 31-year-old maths graduate says the products he traded were "the product of pure intellectual masturbation, the type of thing which you invent telling yourself: 'What if we created a "thing" which has no purpose, which is absolutely conceptual and highly theoretical and which nobody knows how to price?'" And he jokes, on a trip to Belgium, "I managed to sell a few Abacus bonds to widows and orphans that I ran into at the airport".
The passage of legislation to reform Wall Street has quickened since the fraud charges against Goldman, which have galvanised support and undercut Republican opposition. A procedural vote to begin debating the measures in the Senate could come as early as today.
Richard Shelby, a Republican Senator who had previously opposed the reform plans as they stood, appeared on NBC's Meet The Press yesterday to say he was working to settle some of the fine print, but was likely to support a bill. "We've got to end the casino atmosphere on Wall Street, where they're gambling on synthetic ideas with somebody else's money, putting whole banking system at risk and producing nothing."
Christopher Dodd, chair of the Senate banking committee and author of the reform bill, urged quick action. "Here we are 17 months after someone broke into our house and robbed us... and we still haven't even changed the locks."
Join our new commenting forum
Join thought-provoking conversations, follow other Independent readers and see their replies