Goldman Sachs Didn't Profit From Mortgage Defaults, But It Tried

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Goldman Sachs, the publicly vilified former investment bank famously nicknamed a "great vampire squid wrapped around the face of humanity" by Rolling Stone's Matt Taibbi for the way its seemingly wraps its tentacles around every far flung money-making opportunity, issued a defense in its annual letter to shareholders this week. The company did not benefit by wagering that the mortgages behind the securities it originally issued and sold would default, it said. Goldman's chief operating officer Gary Cohn wrote in the letter: "The firm did not generate enormous net revenues or profits by betting against residential mortgage-related products, as some have speculated."

So, fine, Goldman didn't reap huge profits off bets against securities built upon the plummeting prospects of underwater homeowners. But that's not to say that it didn't try.
Earlier this year, Goldman CEO Lloyd Blankfein endured tough accusations from Congress's Financial Crisis Inquiry Commission, whose chairman, Philip Angelides, compared Goldman to a car salesman who hawks autos with "faulty brakes, and then [buys] an insurance policy on the buyer of those cars." In Goldman's case, the insurance policies were held by the insurance giant American International Group (AIG), which was rescued by a $182 billion federal bailout in fall 2008.

In fact, buying credit default swaps--essentially insurance bets against the success of mortgage-backed securities--from AIG was one of the key ways in which Goldman protected itself against the housing crash. In the same letter, Cohn admits that Goldman's "relatively early risk reduction resulted in our losing less money than we otherwise would have when the residential housing market began to deteriorate rapidly."

Admittedly, Goldman Sachs was obliged to manage the risks of its clients' investments. And the credit default swaps it purchased were primarily for its clients. The only trouble is that Goldman was a direct benefactor of the AIG bailout -- orchestrated by none other than former Goldman CEO and then-Fed chief Hank Paulson -- which resulted in counterparties to the insurance conglomerate being repaid in full. As part of that process, Goldman got $12.9 billion. (Goldman repaid its TARP debt to the government in June 2009, which does not include the AIG payments, although they were indirectly from taxpayers).

That $12.9 billion payment seemed outrageous to many observers at the time, especially when considering that Goldman was reporting record profits. In sum, Goldman, which became a traditional bank holding company on September 21, 2008, was able to use taxpayer money to limit its losses on a financial product it helped create and which was a main cause of the economic implosion of 2008.

In addition, the shareholder letter seeks to explain Goldman's collateral calls to AIG in the months before the September 2008 bailout, in a seeming defense to charges in The New York Times that Goldman's aggressive demands for payment exacerbated AIG's problems and forced the government to intervene.

Most of the AIG discussion was confined to a section towards the end of the letter titled "Our Relationship with AIG," which followed sections on the firm's commitment to women and philanthropic giving.

What Goldman Sachs doesn't seem to understand is that failing to take any blame for the current housing mess is as much a perception problem as it is a reality problem.

If only average homeowners in foreclosure or on the brink of it had a taxpayer-funded option to mitigate their mortgage losses, as Goldman did. If they had, perhaps the home mortgage catastrophe plaguing the nation wouldn't have been as dire as it currently is.
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