Senate: Goldman planned to profit from housing meltdown

Goldman Sachs developed a strategy to profit from the housing meltdown and reaped billions at the expense of clients, a US Senate investigation found.

Top Goldman executives misled investors in complex mortgage securities that became toxic, investigators for a Senate panel said, pointing to emails and other Goldman documents obtained in an 18-month investigation.

Excerpts from the documents were released yesterday, a day before a hearing that will bring chief executive Lloyd Blankfein and other top Goldman executives before the US Congress.

Mr Blankfein says in his own prepared remarks that Goldman did not bet against its clients and could not survive without their trust.

The Securities and Exchange Commission filed a civil fraud case against the bank this month, saying it misled investors about securities tied to home loans.

The SEC says Goldman concocted mortgage investments without telling buyers they had been put together with help from a hedge fund client, Paulson & Co, that was betting on the investments to fail.

Goldman disputes the charges and says it will contest them in court.

At today's hearing, Mr Blankfein will repeat the company's argument that it lost $1.2bn (€897.9m) in the residential mortgage meltdown in 2007 and 2008 that sparked the financial crisis and a severe recession.

He also will argue that Goldman was not making an aggressive negative bet - or short - on the mortgage market's meltdown.

"We didn't have a massive short against the housing market and we certainly did not bet against our clients," Mr Blankfein says in the prepared remarks released by Goldman.

"Rather, we believe that we managed our risk as our shareholders and our regulators would expect."

But Senator Carl Levin, chairman of the Senate Permanent Sub-committee on Investigations, said tonight: "I think they're misleading the country. ... There's no doubt they made huge money betting against the (mortgage) market."

Goldman "knew of Paulson's involvement in the selection" of securities, Mr Levin told reporters. "They knew Paulson was going short."

A December 2006 email exchange between two Goldman executives says: "Need to decide if we want to do 1-3 (billion) of these trades for our book or engage customers."

On one group of securities, "I'd say we definitely keep for ourselves. On (another), I'm open to sharing to the extent that it keeps these customers engaged with us".

The sub-committee provided excerpts of emails showing a progression from late 2006 through the full-blown mortgage crisis a year later. Mr Levin said they showed Goldman shifted in early 2007 from neutral to a short position, betting that the mortgage market was likely to collapse.

"That directional change is mighty clear," he said. "They decided to go gangbusters selling those securities" while knowing they were toxic.

The issue of how much Goldman executives pushed such policies and were aware of the mortgage trading department's practices is a key one emerging before the Senate hearing.

Some experts say damage to Goldman's reputation has already been done and might be long-lasting.

Regardless of the outcome of the SEC's case, "Goldman Sachs has lost", said James Cox, a Duke University law professor and securities law expert.

"It's lost in the arena of public opinion."