Whoa.
Disclosures filed this week show that the top 25 firms in the commercial banking industry spent more than $11 million on lobbying during the first three months of 2010, up 5 percent from a year earlier. Firms including Goldman, Wells Fargo and Credit Suisse Securities have significantly boosted spending on Washington lobbying this year, the records show.
That $11 million might not be enough to counter this:
In late 2007 as the mortgage crisis gained momentum and many banks were suffering losses, Goldman Sachs executives traded e-mail messages saying that they were making “some serious money” betting against the housing markets....
In the e-mails, Lloyd C. Blankfein, the bank’s chief executive, acknowledged in November of 2007 that the firm had lost money initially. But it later recovered by making negative bets, known as short positions, enabling it to profit as housing prices plummeted. “Of course we didn’t dodge the mortgage mess,” he wrote. “We lost money, then made more than we lost because of shorts.”
In another message, dated July 25, 2007, David A. Viniar, Goldman’s chief financial officer, reacted to figures that said the company had made a $51 million profit from bets that the value of mortgage -related securities would drop. “Tells you what might be happening to people who don’t have the big short,” he wrote in an email to Gary D. Cohn, now Goldman’s president....
The Goldman messages appear to connect some of the dots at a crucial moment of Goldman history. They show that in 2007, as most other banks hemorrhaged losses from plummeting mortgage holdings, Goldman prospered. At first, Goldman openly discussed its prescience in calling the housing downfall. In the third quarter of 2007, the investment bank reported publicly that it had made big profits on its negative bet on mortgages....
But by the end of that year, the firm curtailed disclosures about its mortgage trading results. Its chief financial officer told analysts at the end of 2007 that they should not expect Goldman to reveal whether it was long or short on the housing market. By late 2008, Goldman was emphasizing its losses, rather than its profits, pointing regularly to write-downs of $1.7 billion on mortgage assets and leaving out the amount it made on its negative bets.
Goldman and other firms often take positions on both sides of an investment. Some are long, which are bets that the investment will do well, and some are shorts, which are bets the investment will do poorly.
Goldman has said that it added shorts to balance its mortgage book, not to make a directional bet that the market would collapse. But the messages released Saturday appear to show that in 2007, at least, Goldman’s short bets were eclipsing the losses on its long positions. In May 2007, for instance, Goldman workers e-mailed one another about losses on a bundle of mortgages issued by Long Beach Mortgage Securities. Though the firm lost money on those, a worker wrote, there was “good news”: “we own 10 mm in protection.” That meant Goldman had enough of a bet against the bond that, over all, it profited by $5 million.
On Oct. 11, 2007, one Goldman manager in the trading unit wrote to another, “Sounds like we will make some serious money,” and received the response, “Yes we are well positioned.”
So the entire economy could be crashing down around us, at least "we are well positioned" to "make some serious money." Gordon Gekko lives. The e-mails were released by Carl Levin, whose investigations subcommittee in preparation for a hearing Levin will hold on Tuesday at which Goldman executives including Chief Executive Lloyd Blankfein will testify.
In response to this e-mail release, Goldman released some of its own including several from Fabrice Tourre, the creator of the synthetic CDO, Abacus.
In 2007, Mr. Tourre was a vice president in Goldman's New York office arranging deals on mortgage-related securities. Emails to his girlfriend in the first half of that year suggest Mr. Tourre recognized that the boom in subprime mortgages—which lay behind the products he was marketing—was nearing an end.
"According to Sparks, that business is totally dead, and the poor little subprime borrowers will not last so long!!!" Mr. Tourre wrote in a March 2007 email to his girlfriend, referring to Goldman mortgage executive Dan Sparks.
In January 2007, he described creating a thing "which has no purpose, which is absolutely conceptual and highly theoretical." He added, "It sickens the heart to see it shot down in mid-flight ... it's a little like Frankenstein turning against his own inventor."
....
In a June 2007 email, Mr. Tourre told his girlfriend he had just landed in Belgium where he managed to "sell a few abacus bonds to widows and orphans that I ran into at the airport."
Hard to see how this really helps Goldman in its PR efforts. But it does nicely set up the first vote on Wall Street reform, the cloture vote, on Monday.
