Goldman Sachs e-mails suggest firm profited from mortgage mess, Senate panel says

Goldman Sachs executives bragged in internal e-mails in 2007 that they were making “some serious money” as the real estate bubble burst, according to documents released Saturday by a Senate subcommittee.

The e-mails released contradict previous statements by Goldman officials that the investment bank did not aggressively bet against the housing market and that it, too, lost money on mortgage-related investments along with many of its clients.

The blunt comments are likely to further fuel the backlash against Goldman and came as seven top executives prepared to be grilled at a high-profile Senate hearing Tuesday about the legendary Wall Street firm’s role in the financial crisis.

“Of course we didn’t dodge the mortgage mess. We lost money, then made more than we lost because of shorts,” Chief Executive Lloyd Blankfein wrote in a Nov. 18, 2007, e-mail to Goldman executives, referring to the practice of “shorting,” or betting against an investment. “Also, it’s not over, so who knows how it will turn out ultimately.”

The e-mails go to the heart of civil fraud allegations brought this month by the Securities and Exchange Commission against the investment bank. The agency alleges that Goldman sold mortgage-backed securities to investors that the company knew would fail. Goldman has denied the allegations and reiterated Saturday that that it did not make money by betting that the mortgage market would collapse.

The investment bank expressed concern that the Senate subcommittee “seems to have reached its conclusion even before holding a hearing,” Goldman spokesman Lucas Van Praag said. “In its statement, the U.S. Senate subcommittee has cherry-picked just four e-mails from the almost 20-million pages of documents and e-mails provided to it by Goldman Sachs.”

Democrats have seized on the allegations as they push for sweeping legislation to tighten regulation of Wall Street, a top priority heading into this fall’s congressional elections.

The e-mail exchange was one of four released by the Senate Permanent Subcommittee on Investigations, which independently has been probing the role of Goldman Sachs and other investment banks in the financial crisis. The subcommittee will release many more internal Goldman documents on Monday ahead of the hearing and more at the session itself.

Sen. Carl Levin (D-Mich.), the subcommittee’s chairman, said its 18-month investigation into the causes of the financial crisis had found that Goldman and other investment banks helped trigger the mortgage meltdown and then profited from it.

Goldman’s earnings soared to $3.5 billion in the first quarter of this year, up 90% over the same period last year. The firm’s employees reaped 2009 compensation totaling more than $16 billion, an average of about half a million dollars per employee.

“Investment banks such as Goldman Sachs were not simply market-makers, they were self-interested promoters of risky and complicated financial schemes that helped trigger the crisis,” Levin said. “They bundled toxic mortgages into complex financial instruments, got the credit rating agencies to label them as AAA securities, and sold them to investors, magnifying and spreading risk throughout the financial system, and all too often betting against the instruments they sold and profiting at the expense of their clients.”

Goldman on Saturday denied the allegations. As part of an aggressive defense, it released a 12-page memo it prepared in advance of Tuesday’s hearing that said the company had total net losses of more than $1.2 billion in residential mortgage-related products in 2007 and 2008.

“Goldman Sachs did not take a large directional ‘bet’ against the U.S. housing market, and the firm was not consistently or significantly net ‘short the market’ in residential mortgage-related products in 2007 and 2008, as the performance of our residential mortgage-related products business demonstrates,” the document said. It added that even as the market was faltering, “there was continued debate amongst senior managers” about its direction.

Goldman also released several detailed internal e-mails that it said showed losses the company incurred on mortgage-related investments. In one e-mail from Dec. 5, 2006, Dan Sparks, head of the company’s mortgage department at the time, wrote “subprime market getting hit hard…at this point we are down $20mm [million] today.”

Among those scheduled to testify Tuesday will be Fabrice Tourre, the Goldman vice president at the center of the government’s lawsuit.

The suit alleges that Tourre and the company created securities based on subprime mortgages that would likely default. The investments were secretly chosen for Goldman by hedge fund Paulson & Co., which was betting the investments would fail. Paulson paid Goldman a $15 million fee for setting up those securities, according to the SEC.

Goldman has said the SEC suit is “completely unfounded” and that it had actually lost money on the security referred to in the suit, known as a collateralized debt obligation, or CDO.

The SEC built its case in part on e-mails it released this month in which Tourre, now 31, appears to gloat about coming investor losses.

“The whole building is about to collapse anytime now,” Tourre wrote. “Only potential survivor, the fabulous Fab[rice] standing in the middle of all these complex, highly leveraged exotic trades that he created without necessarily understanding all of the implications of those monstruosities [sic]!!!”

Goldman Sachs said in its 2009 annual report that it “did not generate enormous net revenues by betting against residential related products.” But Levin said the documents his committee has uncovered showed it did.

“These e-mails show that, in fact, Goldman made a lot of money by betting against the mortgage market,” he said.

One of the e-mail exchanges featured Michael Swenson, managing director of Goldman’s structured products trading group, commenting on news that a credit rating agency downgrade of $32 billion in mortgage-related securities would cause losses for many investors. But Goldman had bet against those securities, the subcommittee said.

“Sounds like we will make some serious money,” Swenson wrote on Oct. 11, 2007, to a colleague, Donald Mullen, who e-mailed back, “Yes we are well positioned.”

Another e-mail exchange involved Goldman Chief Financial Officer David Viniar, who was responding to a report that the firm netted more than $50 million in one day by shorting mortgage investments.

“Tells you what might be happening to people who don’t have the big short,” Viniar wrote.

The final e-mail exchange showed Goldman employees talking in May 2007 about the “wipeout” of one mortgage-backed security and the imminent collapse of another written by Long Beach Mortgage Co., the Southern California-based subprime arm of Washington Mutual, which became the largest U.S. bank failure when it collapsed in 2008.

Under “bad news,” one employee noted Goldman lost $2.5 million from the soured investments. But under “good news,” the employee said Goldman had bet against the securities, which the Senate panel said the firm had assembled and sold to investors, and would make $5 million.

Goldman has emerged from the financial crisis stronger than almost any other firm. It has been buffeted by criticism over its marketing of complex securities prior to the credit crisis, and for the huge bonuses it pays its employees.

The investigation by the subcommittee had received little attention until this month when it released hundreds of internal documents involving Washington Mutual that suggested executives knowingly took huge risks with subprime mortgages and regulators failed to halt them.

Subcommittee staff said they had been looking closely at Goldman Sachs as part of the probe and issued subpoenas on June 30, 2009 and March 12. The subcommittee planned its hearing with no knowledge of the SEC case and had notified the company on April 5 of the executives it planned to call to testify, a spokeswoman said.

The White House has also said it was unaware of the SEC case until it was filed on April 16. But some Republicans have questioned the timing of the SEC’s action, which provides a detailed example of Wall Street excesses featuring one of the alleged villains of the crisis just as the full Senate prepares to take up the financial regulatory overhaul legislation.