Goldman 'bet against securities it sold to clients'

US Senate panel condemns investment bank and releases damning internal emails by its officials

Margareta Pagano,Business Editor
Sunday 25 April 2010 00:00 BST

A damning verdict on the activities of Goldman Sachs and other investment banks was delivered by the chairman of a US Senate panel yesterday when it released emails showing Goldman officials discussed making "serious money" out of the sub-prime crisis.

Senator Carl Levin, the chairman of the Senate permanent Subcommittee on Investigations, said: "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. They bundled toxic mortgages into complex financial instruments, got the credit rating agencies to label them as AAA securities, and sold them to investors, magnifying and spreading risk throughout the financial system, and all too often betting against the instruments they sold and profiting at the expense of their clients."

The subcommittee also released four internal Goldman Sachs emails. In one, says a subcommittee statement: "Goldman employees discussed the ups and downs of securities that were underwritten and sold by Goldman and tied to mortgages issued by Washington Mutual Bank's sub-prime lender, Long Beach Mortgage Company. Reporting the 'wipe-out' of one Long Beach security and the 'imminent' collapse of another as 'bad news' that would cost the firm $2.5m, a Goldman Sachs employee then reported the 'good news' – that the failure would bring the firm $5m from a bet it had placed against the very securities it had assembled and sold."

Goldman is fighting to clear its name after the $1bn fraud charges brought by the US Securities and Exchange Commission last week, and wants the case settled in court.

Sources close to the US bank, still reeling from the SEC's decision tolaunch its civil case without warning, said Goldman will start the fight back by lodging a formal submission with the court within the next 21 days. It will then have access to witness statements from the plaintiff, testimony which will be key to the bank's defence.

The bank has not asked for the case to be dismissed, which it has the right to do. "This has become such a highly charged, political issue in the US that the judge would find it impossible, even if Goldman was able to show the case should be dismissed, to go against the public mood," said one source. "Although this is hugely damaging to Goldman, it's going through to the next stage."

Goldman's lawyers are working flat-out on a response to the charges, which allege that it failed to tell clients that the Abacus mortgage securities they were buying had been created by a billionaire hedge fund investor, John Paulson, who stood to benefit if those securities lost value. Goldman's chief executive, Lloyd Blankfein, has said the lawsuit was "completely unfounded" and has denied the bank "structured a portfolio that was designed to lose money".

An ex-Paulson executive, Paolo Pellegrini, has told the SEC investigators that he told a third party, ACA – which had been asked to review the mortgages underlying the security – that the firm was taking a short, bearish position, thus weakening the SEC's case.

Fabrice Tourre, a Goldman vice-president, now on leave, who was in charge of creating the Abacus mortgage product – has also been charged.

Mr Blankfein is preparing this weekend for a grilling by Senator Levin's sub-committee. He is due to appear at the all-day hearing with four other former and present Goldman mortgage executives, including Mr Tourre.

Join our commenting forum

Join thought-provoking conversations, follow other Independent readers and see their replies


Thank you for registering

Please refresh the page or navigate to another page on the site to be automatically logged inPlease refresh your browser to be logged in