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Home > Blogs > Ian Fraser > Senate's Goldman dossier lifts lids on internal practises

Senate's Goldman dossier lifts lids on internal practises

Senate's Goldman Sachs investigation lifts lids on internal practices Ian Fraser

The internal correspondence from inside investment bank Goldman Sachs amassed by the Senate’s Permanent Sub-Committee on Investigations makes for shocking reading—which must be deeply embarrassing for Goldman Sachs and the managing directors concerned.

The voluminous evidence from the Goldman Sachs investigation, including memoranda, personal emails and credentials presentations, would (almost) be enough raw material for someone wanting to write a book or a film script on the bank’s self-interested behavior as the subprime market it and other Wall Street firms had stoked up collapsed around its ears in 2006–08.

The king of investment banks had the advantage of slightly better antennae than European rivals including RBS Greenwich Capital. Goldman traders recognized that bundling parcels of securitized US home loans, invariably polluted by tranches of subprime loans (a.k.a. ‘toxic crap’) into collateralized debt obligations—an activity from which it had been profiting handsomely for several years—was about to turn horribly sour.

In December 2006, Goldman decided to “derisk its portfolio,” which effectively meant hawking the "long" positions on CDOs and other hideously opaque structured products onto unsuspecting European institutions including ABN AMRO (which at the time was of course being eyed up by both Barclays and RBS) and the German lender IKB.

I've no idea whether the 910 pages of evidence [PDF, 43.6 MB] the Senate committee has amassed during the Goldman Sachs investigation proves illegality on Goldman's behalf (that will be for US courtrooms to decide). However, I can says that the material is hugely damaging for the investment bank.

Some of the material was referred to during the Senate hearings on April 27, but much that has so far escaped public notice. This includes the "self-reviews" (self-appraisals in which Goldman-ites tell their bosses why they deserve bonuses or promotions) produced by Dan Sparks, Michael Swenson, Joshua Birmbaum, and Fabrice Tourre to summarize their performance in 2007.

Not only do the documnets suggest the quartet seem to have hugely inflated opinions of their own self-worth, they have no consciousness of the social uselessness of their activities and do sometimes give the impression of placing the interests of Goldman ahead of those of clients.

In a “self-review” Dan Sparks said:

“I delivered the best performance of my career this year to the firm. I led a great team through an incredibly volatile and challenging market, we had to change business approaches dramatically and constantly, we levered the firm's support, and we didn't just survive – we excelled.”

Michael Swenson also a Goldman “managing director” beats this for hubris with:

“2007 was the year I am most proud of to date. I can take credit for recognizing the enormous opportunity for the ABS synthetics business two years ago …. As the architect of the leading franchise in ABS CDS, I was able to identify key market dislocations that led to tremendous profits.”

He was pleased to have said "no" to clients who asked Goldman Sachs to “support the GSAMP" program and claimed that this refusal had “saved the firm hundreds of millions of dollars.” The GSAMP (Alternative Mortgage Products) was a pile of toxic US mortgages that had collapsed in value by September 2007 and whose deceptive construction was assiduously dissected by Fortune Magazine's Alan Sloan around that time.

Joshua Birnbaum also took overall credit for Goldman's decision to go short (=bet against) the subprime market, saying:

“As co-head of ABS trading, my performance in 2007 has been my best ever by any objective measure ... When the prevailing opinion ... was to remain close to home, I pushed everyone to sell risk aggressively and quickly.”

Bizarrely the Frenchman “Fabulous” Fabrice Toure, who Goldman has made the fall guy for its behavior in the ABS space, comes over better than his more hubristic American colleagues. In his self-review, Tourre admitted:

Team work still needs to be improved and leadership skills need to be a focus at this point, in order to become viewed as a firm culture carrier.

During the Goldman Sachs enquiry, Tourre and his former colleagues have categorically denied wrongdoing. But the dossier is still utterly devastating for a firm which once prided itself on its integrity and putting its clients first.

No wonder Goldman is considering settling with the SEC via a $1bn to $10bn fine rather than allowing any more of its dirty laundry to be exposed in this way.

Further reading on the Goldman Sachs investigation and short-selling

Tags: Abacus 2007-AC1 , asset price bubbles , banking , derivatives , financial crisis , Goldman Sachs , US
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