So, I decided to do some research on how much Paulson, Goldman Sachs and their cronies played in the mortgage game. Here are a few articles I dug up on their strategy and some very interesting observances from the market following the initial bust...
From "Daily Reckoning" in October, 2007: "Goldman Sachs Escaped Subprime Collapse by Selling Subprime Bonds Short"
To paraphrase here, while other sub-prime investment banks took a serious hit last year, as the real estate economy tanks, Goldman Sachs inexplicably escaped without a major scratch, much to the befuddlement of the other market players.
Highlights:
"Only Goldman Sachs (NYSE: GS) escaped the carnage - and even then, it seems, only on paper. "Common sense tells me that a lot of their losses were real and a lot of their gains were paper," says Charles Peabody, head of research at Portales Partners in New York.
The opaqueness of Goldman's balance sheet makes us immediately question how they made money in the [third] quarter."
So how did Goldman - "increasingly perceived as the world's biggest hedge fund" according to the IHT - succeed where everyone else failed? The bank
made no secret of its success in its Q3 report of Sept. 20th:
"Net revenues in [trading] mortgages were...significantly higher, despite continued deterioration in the market environment. Significant losses on non-prime loans and securities were more than offset by gains on short mortgage positions."
Put another way, Goldman Sachs cleaned up during this summer's collapse in subprime mortgage bonds...by selling the subprime mortgage-backed market short. And why not?
It's not like Goldman is barred from shorting the investment markets that it helps bring into being. Nor did it have any special insight; all of the big investment banks were busy creating and selling subprime junk in 2005-2006.
None of the other big banks, however, had the chutzpah to short the very market in junk they'd given birth to - not yet, at least. And few banks seem to have created bonds quite as toxic as Goldman did.
"It gets even hinkier," Sloane goes on. "Some 58% of the loans were no- documentation or low-documentation. This means that though 98% of the borrowers said they were occupying the homes they were borrowing on - 'owner-occupied' loans are considered less risky than loans to speculators - no one knows if that was true. And no one knows whether borrowers' incomes or assets bore any serious relationship to what they told the mortgage lenders."
Whatever the truth, one in every six of the 8,274 mortgages bundled together in GSAMP Trust 2006-S3 was already in default 18 months later. Whoever bought the S3 bonds will have either taken a 100% loss, or they're now waiting - and hoping against hope - for some other schmuck to turn up and take this toxic waste off their hands at a very heavy discount.
Oh, would that be the U.S. Treasury, headed by their ex-Chairman, Paulson, perhaps? Did you read that above? We are the schmucks taking it off their hands!
UPDATE: I realize that GS short sold these bonds and are not holding them now, (who/what has them is to be told) but the fact that they were one of the largest holders of this bond market, did not take the hit when everyone else did, hence adjusting to a reset market, it makes it all the more critical that this paper is still out there due to their actions is what Peabody warned of.
Here's the earlier set up with BofA!!
From the New York Sun, February 10, 2005: "Goldman Sachs Investment is Envied on Wall Street"
"...Mr. Hendler said that a sharp interest rate move could easily cost the firm over $300 million, potentially lowering 2005 consensus earnings per share by 7%.Moreover, risk analysis is made harder by the fact that the lines between proprietary trading and client trading often blur. An example of this is seen in Goldman's unique relationship with Bank of America - envied across Wall Street - specifically, with the portfolio managers of the Charlotte based bank's multi-billion-dollar portfolio of bonds. On at least three occasions since 2002, Goldman has purchased between $15 billion-$20 billion dollars worth of mortgage-backed securities from the bank in single trades. As one rival noted, "trading $15 billion is a good day at some shops - in one trade it is unheard of." The strategy certainly has paid off though, as Goldman's MBS department regularly ranks within the top two or three positions in most trading and issuance categories."
So now, Goldman Sachs is now transferred to a bank holder, getting out of investments! I don't know about anyone else, but as the rats prepare to leave the ship,they are making sure to protect their cheesemakers and at the same time take their cheese with them!