Sunday, September 4, 2011


funds – went almost exclusively short, requiring Goldman to take the opposing long side of the
CDS contracts referencing the ABX indices.1623 These transactions enabled Goldman to amass a
30-40% market share in ABX trading during its first year of existence. But by mid-2006, they had
also contributed to the Mortgage Department’s net long position in subprime mortgage related
assets. When the mortgage market began showing signs of strain in the second half of 2006, the
risks associated with the firm’s net long ABX position became more of a concern.1624 Senior
See, e.g., 12/15/2006 email from David Viniar to Tom Montag, “Subprime Risk 1625 Meeting with Viniar/McMahon
Summary,” GS MBS-E-009726498, Hearing Exhibit 4/27-3 (“there will be very good opportunities as the markets
goes into what is likely to be even greater distress”); 2/8/2007 email from Daniel Sparks, “Post,” GS MBS-E-
002201668, Hearing Exhibit 4/27-7 (“Subprime environment going from bad to worse (think whack a mole).”);
1/9/2007 Goldman Presentation, “Mortgage Department Update,” GS MBS-E-002320968 (“Risks, Challenges and
Structural Issues: –Very tough going in Resi Credit world – p&l [profit and loss] will be challenging; –Housing
price and loan volume declines; –Investing in business in very difficult environment”); cf. 11/1/2006 Goldman
Structured Products Strategist memorandum, “Q3 Mortgage Investor Survey,” GS MBS-E-006576068-76 (“Clients
expect a downturn in housing in 2007, investors worried about high LTV [loan-to-value], low/no doc loans, pay
option ARMs, origination volumes to be down 10% in 2007”).
1626 Subcommittee interview of Peter Ostrem (10/5/2010); Subcommittee interview of Darryl Herrick (10/13/2010).
1627 Subcommittee interview of Peter Ostrem (10/5/2010). See also, e.g., 8/10/2006 email from Peter Ostrem to
Daniel Sparks, “Leh CDO Fund,” GS MBS-E-010898470 (urging Goldman to “do our own fund. SP CDO desk.
Big time.”).
1628 Subcommittee interview of Peter Ostrem (10/5/2010).
1629 6/8/2006 email from Darryl Herrick to Peter Ostrem, “**GS ABS** RMBS CDS Lineup,” GS MBS-E-
Goldman executives expressed the view that the subprime mortgage related market was likely to
get much worse, and the firm should prepare for it.1625
In December 2006, Goldman used the Hudson CDO to transfer the risk associated with
$1.2 billion of its ABX long holdings to Hudson investors. But even after this transfer, Goldman
still had billions of dollars in long ABX holdings on its books.
Goldman’s Long Mortgage Holdings. In addition to its long ABX holdings, the
Mortgage Department’s $6 billion net long position in December 2006 was due to a large inventory
of RMBS, CDO, and other mortgage related assets in Goldman’s investment and sale inventories
and in its CDO warehouses. In 2006, the Mortgage Department conducted numerous RMBS and
CDO securitizations that required it to acquire and repackage whole loans, RMBS and CDO
securities, and other mortgage related assets. When assembling CDOs, Goldman often worked
with third party partners. These strategic partners bought a portion of the equity and bore some of
the risk of loss in the CDO. The partners were generally smaller financial firms, such as hedge
funds or asset managers with expertise in CDOs or a particular asset class. For a fee, the partners
also sometimes served as a CDO’s collateral manager, helping to select the assets.1626
Peter Ostrem, who was head of the CDO Origination Desk from 2006 until May 2007, was
aware of substantial problems in the subprime mortgage market, but believed that the market
distress was temporary and the market would stabilize.1627 Mr. Ostrem wanted to continue to
increase the CDO Desk’s business by producing as many marketable CDOs as possible.1628 Darryl
Herrick, who worked for Mr. Ostrem on the CDO Origination Desk expressed the view that hedge
funds were shorting only the worst CDOs: “[CDO] shelves people are shorting are enhanced
The CDO Origination Desk was a primary contributor to the Mortgage Department’s net
long position, as Goldman often had to hold or “warehouse” subprime assets until they were
Subcommittee interview of Daniel Sparks (4/15/2010); Subcommittee i 1630 nterview of Peter Ostrem (10/5/2010).
1631 See 5/19/2007 Goldman presentation, “Mortgages CDO Origination – Retained Positions & Warehouse
Collateral, May 2007,” GS MBS-E-010951926 (“average ramp period 6-9 months”).
1632 See, e.g. 3/7/2007 and 3/13/2007 internal emails, “Timberwolf I, Ltd. Preliminary Offering Circular,” GS MBSE-
001800634 (Collateral manager Greywolf wrote: “We will not be fully ramped and I want to use the remaining
bucket strategically. Is it OK if we have 5% ramp post-close?” Goldman responded: “We represented to BSAM
[Bear Stearns Asset Management] that deal would be fully ramped upon closing. As long as they’re ok (or get veto
rights), I don’t have any issue.”).
1633 Subcommittee interview of Daniel Sparks (4/15/2010); Subcommittee interview of David Lehman (4/12/2010).
1634 See, e.g., 3/16/2007 Goldman memorandum from Mitch Resnick and Peter Ostrem to GSI Risk Committee,
“GSI Warehousing for Structured Product CDOs,” GS MBS-E-001806010; 2/8/2007 email from Daniel Sparks to
Messrs. Cohn, Montag, Viniar et al., “Post,” GS MBS-E-002201668, Hearing Exhibit 4/27-7 (“Loan business is long
by nature and goal is to mitigate.”); Subcommittee interview of Peter Ostrem (10/15/2010).
1635 3/16/2007 Goldman memorandum from Mitch Resnick and Peter Ostrem to GSI Risk Committee, “GSI
Warehousing for Structured Product CDOs,” GS MBS-E-001806010.
1636 Id.
1637 2/28/2007 email from David Rosenblum to Peter Ostrem, “Pete– pls send me cob 2/28 MTM for SP CDO WH’s
first thing in the morning,” GS MBS-E-001800707; 2/28/2007 email from David Rosenblum, “Hedges Status
Report,” GS MBS-E-002640538 (new ABX hedges added and other hedges allocated to ensure that CDO warehouse
risk was fully hedged); 2/22/2007 email from Peter Ostrem to David Rosenblum, “League Tables,” GS MBS-E-
001800683 (“FYI Liquidating 3 warehouses tomorrow.”); 2/22/2007 email from Daniel Sparks to Tom Montag, GS
packaged into a CDO.1630 Each CDO was designed to include or reference hundreds of millions or
billions of dollars in assets, which the CDO Origination Desk and its partners had to locate and
acquire, a process called “ramping” that averaged six to nine months per CDO.1631 Goldman and
its partners acquired these assets from other large Wall Street broker-dealers, often called “the
Street,” or took them from their own inventory of assets.
When assembling a CDO, Goldman generally opened an internal “warehouse account” for
the CDO in which it stored the acquired assets until a target amount was achieved, and the CDO
was brought to market. While the assets were in the warehouse account, they were included in
Goldman’s warehouse balance sheet and contributed to its long or short positions. When the bulk
of the target assets were acquired for a particular CDO, perhaps 75% to 95% of the total, in some
cases Goldman priced the CDO securities and began selling them to clients who were told what the
remaining assets would likely be.1632 When a CDO transaction “closed” and its securities were
issued, Goldman transferred the relevant assets from its warehouse account to the corporation or
trust established for the CDO.1633 The CDO entity then housed the long assets that had been on
Goldman’s warehouse books, and Goldman was left with a corresponding short position which it
could keep or sell to the CDO’s short parties.
In 2006 and early 2007, since it was often acquiring assets for several CDOs at once, the
CDO Desk generally had a substantial net long position in subprime assets in its CDO warehouse
accounts.1634 For example, as of March 16, 2007, Goldman calculated that its CDO warehouses
contained $4.7 billion in mortgage related assets.1635 After deducting potential liabilities assumed
by Goldman’s partners and making other adjustments, Goldman calculated that it had $2.3 billion
in net long warehouse risk.1636 In early 2007, Goldman executives began to express concern about
the risks posed by the subprime mortgage related assets in the CDO warehouse accounts.1637
MBS-E-010989710 (“There are a few deals that look tough now, including a A-rated CDO of CDOs with Greywolf
12/7/2006 email chain between Daniel Sparks and Tom Montag, “More thorough 1638 response,” GS MBS-E-
010931324. Mr. Montag also raised the possibility of hiring a trader from the Paulson hedge fund to help Goldman
short the mortgage market. In addition, the email exchange indicates that Goldman had previously done $7 billion in
transactions with the Paulson hedge fund, but had not done much with the hedge fund recently. Mr. Sparks wrote:
“They had asked us to do another tranched protection trade for them, and seem fine with it being pushed to January.”
Id. The tranched protection trade for Paulson that Mr. Sparks mentioned later became the Abacus 2007-AC1 CDO
discussed in this Report.
1639 12/7/2006 email chain between Tom Montag and David Viniar, GS MBS-E-009756572.
1640 Subcommittee interview of David Viniar (4/13/2010).
1641 12/14/2006 email from Daniel Sparks, “Subprime risk meeting with Viniar/McMahon Summary,” GS MBS-E-
009726498, Hearing Exhibit 4/27-3.
1642 Id. See also 12/15/2006 email from David Viniar to Tom Montag, GS MBS-E-009726498, Hearing Exhibit
1643 Subcommittee interview of David Viniar (4/13/2010), Daniel Sparks (4/15/2010), and David Lehman
On December 7, 2006, Daniel Sparks, the Mortgage Department head, exchanged emails
with Goldman senior executive Thomas Montag about why Goldman was not doing more to
reduce the firm’s risk associated with its net long positions.1638 On the same day, Mr. Montag
complained to CFO David Viniar about the Mortgage Department’s lack of aggressiveness in
trying to reduce its net long ABX position:
“[O]n ABX having numerous conversations–I don’t think we should panic out but we
certainly didn’t do a good job of keeping pressure on ... makes me mad because they should
have kept doing it ugh.”1639
The next week, Mr. Viniar called a meeting with the Mortgage Department to discuss its holdings.
(b) Going Past Home: Goldman’s First Net Short
CFO David Viniar told the Subcommittee that, in early December 2006, he received reports
showing that the Mortgage Department had lost money on ten successive days.1640
Viniar Meeting. On December 14, 2006, Mr. Viniar convened a meeting in the conference
room next to his office on the 30th floor, in which he and other senior Goldman executives met for
several hours with Mortgage Department managers, as well as representatives from Market Risk
Management & Analysis and from the Controllers group.1641 At the meeting, Mr. Viniar and other
Goldman executives conducted an in-depth review of the Mortgage Department’s holdings. Mr.
Viniar concluded the Mortgage Department’s position in subprime mortgage related assets was too
long, and its risk exposure was too great.1642
Mr. Viniar and others told the Subcommittee that Mr. Viniar’s basic message to the
Mortgage Department at the December meeting was not necessarily to go short, but instead to “get
closer to home.”1643 In trading parlance, “home” means a net neutral trading position – a position
Subcommittee interview 1644 of David Viniar (4/13/2010).
1645 Id.
1646 Id. In terms of risk reduction, taking on offsetting short positions to reduce long positions does not necessarily
offer the same degree of certainty of risk protection as simply selling off the long assets. In many cases, the offsets
may not perfectly match, leaving some degree of risk exposure known as “basis risk.” See, e.g., 2/12/2007 email
from Mr. Sobel to Mr. Cohn, “Post today,” GS MBS-E-009763506 (“Risk that concerns me is basis between ABX
and single names.”); 2/11/2007 email from Tom Montag, GS MBS-E-009688192 (discussing ABX offsets: “There
is no est[imated] loss in the basis risk. Big wildcard. They [the traders] think they have correlation right and moves
either way should be ok but obviously index assumptions have been wrong starting last may or june when positions
were being put on and the gains seduced us to do more.”).
1647 12/14/2006 email from Daniel Sparks, “Subprime risk meeting with Viniar/McMahon Summary,” GS MBS-E-
009726498, Hearing Exhibit 4/27-3. “Residuals” refers to the equity positions that Goldman had retained from the
RMBS and CDO securitizations it originated.
1648 12/14/2006 email from Tom Montag to David Viniar, GS MBS-E-009726498, Hearing Exhibit 4/27-3.
that is neither significantly short nor long.1644 Mr. Viniar told the Subcommittee that, by telling the
Mortgage Department to “get closer to home,” he meant that it should assume a more neutral risk
position.1645 One way to “get closer to home” was for the Department to sell its long assets.
Another way to achieve a more neutral risk position was for the Department to take new short
positions to offset its existing long positions.1646
Internal documents indicate that the directions given to the Mortgage Department in the
December meeting were more detailed than the general instruction to “get closer to home.” In an
email sent on the same day by Mr. Sparks to Goldman executives Messrs. Montag and Ruzika
entitled, “Subprime risk meeting with Viniar/McMahon Summary,” Mr. Sparks wrote:
1. Reduce exposure, sell more ABX index outright, basis trade of index vs. CDS too large.
2. Distribute as much as possible on bonds created from new loan securitizations and clean
previous positions.
3. Sell some more resid[ual]s
4. Mark [the value of assets in] the CDO warehouse more regularly ...
5. Stay focused on the credit of the originators we buy loans from and lend to
6. Stay focused and aggressive on MLN [Mortgage Lending Network] (warehouse
customer and originator we have EPDs [early payment defaults] to that is likely to fail)
7. Be ready for the good opportunities that are coming (keep powder dry and look around
the market hard).”1647
The next day, December 15, 2006, Mr. Montag forwarded Mr. Sparks’ email to Mr. Viniar
asking: “is this a fair summary?”1648 Mr. Viniar replied: “Yes.” Mr. Viniar noted:
“On ABX, the position is reasonably sensible but is just too big. Might have to spend a
little to size it appropriately. On everything else my basic message was let’s be aggressive
distributing things because there will be very good opportunities as the markets [go] into
12/15/2006 email from David Viniar to Tom Montag, 1649 GS MBS-E-009726498, Hearing Exhibit 4/27-3.
1650 See 1/5/2007 “Notionals (ABX Convention)” chart, taken from “Index and Single Name Position History 2006
as of 05Jan07.xls,” attachment to 1/8/2007 email from Joshua Birnbaum to Daniel Sparks, “ABX Subprime Risk by
vintages,” GS MBS-E-010214409. The SPG Desk also periodically updated that chart. See, e.g., chart attachments
to 2/6/2007 email from Kevin Kao to Joshua Birnbaum, “Index and Single Name Position History 2006 as of
05Feb07.xls,” GS MBS-E-012744553; chart attachments to 2/23/2007 email from Tom Barrett to Kevin Kao,
Michael Swenson and Justin Gmelich, “Index and Single Name Position History 2006 As of 22Feb07.xls,” GS
MBS-E-012411673; chart attachments to 3/2/2007 email from Kevin Kao to Joshua Birnbaum, “Index and Single
Name Position History 2006 As of 01Mar07.xls,” GS MBS-E-012776557.
what is likely to be even greater distress and we want to be in a position to take advantage
of them.”1649
In response to the Viniar meeting, the Mortgage Department took immediate action. It
began selling its long ABX positions outright when possible and entering into large single name
CDS shorts to offset its remaining long assets. Goldman personnel developed a chart depicting the
long positions the Mortgage Department had taken on BBB and BBB- rated ABX assets.1650 This
chart also showed how quickly the Mortgage Department moved after the Viniar meeting to offset
those long positions by amassing single name RMBS and CDS short positions.
[SEE CHART NEXT PAGE: Notionals (ABX convention), prepared
by Goldman Sachs, reformatted by the Permanent Subcommittee on
Investigations to be readable in black and white print, GS MBS-E-
Prepared by the U.S. Senate Permanent Subcommittee on Investigations, February 2011.
Derived from Goldman Sachs document, GS MBS-E-010214410.
19-Jan 18-Feb 20-Mar 19-Apr 19-May 18-Jun 18-Jul 17-Aug 16-Sep 16-Oct 15-Nov 15-Dec 14-Jan 13-Feb
Notionals (ABX convention)
BBB Index Only
BBB Index + CDS
BBB- Index Only
BBB- Index + CDS
All BBBs Index Only
All BBBs Index + CDS
BBB bucket includes BBB+ CDS
Notionals: refers to current notionals
Positive notionals: long risk
12/14/2007 email from Mr. Gasvoda, “Retained bonds,” GS MBS-E-010935323, H 1651 earing Exhibit 4/27-72.
1652 2/9/2007 email exchange between Kevin Gasvoda and sales syndicate, “GS Syndicate RMBS Axes
(INTERNAL),” GS MBS-E-010370495, Hearing Exhibit 4/27-73.
1653 2/11/2007 email exchange between Lloyd Blankfein and Tom Montag, “Mortgage Risk – Credit residential,” GS
MBS-E-009686838, Hearing Exhibit 4/27-130.
1654 Id.
Within about a month, in January 2007, the Mortgage Department had largely eliminated or offset
its long subprime mortgage assets, but it didn’t stop there. In January and February, the Mortgage
Department began building a multi-billion-dollar short position as part of a plan by the SPG
Trading Desk to profit from the subprime RMBS and CDO securities starting to lose value. The
plan was discussed with Mr. Sparks and Mr. Ruzika before it was set in motion. By the end of
February 2007, the Department had swung from a $6 billion net long position to a $10 billion net
short position, a $16 billion reversal in the span of two months.
Selling Assets Outright. On December 14, 2006, the same day as the Viniar meeting,
Kevin Gasvoda, head of the Residential Whole Loan Trading group, instructed his staff to begin
selling the RMBS securities in Goldman’s inventory, focusing on RMBS securities issued from
Goldman-originated securitizations. He urged them to “move stuff out” even at a loss:
“[P]ls refocus on retained new issue bond positions and move them out. ... [W]e don’t want
to be hamstrung based on old inventory. Refocus efforts and move stuff out even if you
have to take a small loss.”1651
In February 2007, to further encourage sales, Mr. Gasvoda issued a sales directive or “axe” to the
Goldman sales force to sell the remaining RMBS securities from Goldman-originated RMBS
securitizations. On February 9, 2007, the sales force reported a substantial number of sales, and
Mr. Gasvoda replied: “Great job syndicate and sales, appreciate the focus.”1652
In February 2007, Goldman CEO Lloyd Blankfein personally reviewed the Mortgage
Department’s efforts to reduce its subprime RMBS whole loan, securities, and residual equity
positions, asking Mr. Montag: “[W]hat is the short summary of our risk and the further
writedowns that are likely[?]”1653 After a short report from Mr. Montag, Mr. Blankfein replied:
“[Y]ou refer to losses stemming from residual positions in old deals. Could/should we
have cleaned up these books before and are we doing enough right now to sell off cats and
dogs in other books throughout the division?”1654
2/23/2007 “Significant Cash Inventory Change (Q1’07 vs. Q4’06),” prepared 1655 by Goldman, GS MBS-E-
010037310, Hearing Exhibit 4/27-12. “Scratch and dent” loans are loans that are not performing.
1656 3/26/2007 Goldman presentation to Board of Directors, “Subprime Mortgage Business,” GS MBS-E-
005565527, Hearing Exhibit 4/27-22 ; 3/14/2007 Goldman Presentation to SEC, “Subprime Mortgage Business 14-
Mar-2007,” at 7, GS MBS-E-010022328.
1657 3/2/2007 email from Patrick Welch to Craig Broderick, “Audit Committee Package_Feb
21_Draft_Mortgage_Page.ppt,” GS MBS-E-009986805, Hearing Exhibit 4/27-63. In the context of assets offered
by a customer to the Correlation Desk, it appears that Mr. Egol also may have returned an unappealing bid: “Many of
these assets are garbage. I told her should would not like the level [the price bid by Goldman] . . . .” 2/26/2007
email from Jon Egol, “Portfolio for Proposed Transaction 070226 (2).xls,” GS MBS-E-002631719.
1658 4/22/2007 email from Kevin Gasvoda, “Resi credit QTD/YTD P&L and positions,” GS MBS-E-010474983.
At the end of February, Goldman’s controllers prepared a summary of the changes in
Goldman’s RMBS and whole loan inventory since December 2006, and reported:
“Residential Credit Loans: The overall loans inventory decreased from $11bn to $7bn. ...
subprime loans decreased from $6.3bn to $1.5bn, Second Liens decreased from $1.5bn to
$0.7bn and S&D [scratch and dent] Loans remained unchanged at $0.8bn.”1655
This analysis indicates that, in less than three months, Goldman had reduced its subprime loan
inventory by over two-thirds, and its second lien inventory by half.
The Mortgage Department reduced its inventory, not only by selling assets outright, but
also by reducing its purchase of whole loans and securitization efforts. In March 2007, Goldman
informed its Board of Directors and the SEC that it had stopped purchasing subprime loans and
RMBS securities through, in its words, the use of “conservative bids.”1656 While those
presentations did not explain the phrase “conservative bids,” an email to Goldman’s Chief Credit
Officer, Craig Broderick, discussing a March 2007 presentation to Goldman’s Audit Committee
about the subprime mortgage business, was much more explicit: “Just fyi not for the memo, my
understanding is that the desk is no longer buying subprime. (We are low balling on bids).”1657
Still another method to reduce its loan inventory was an ongoing effort by the Mortgage
Department to return defaulted or fraudulent loans to the lenders from which it had purchased
On April 23, 2007, Mr. Gasvoda reported to Messrs. Montag and Sparks a dramatic
reduction in Goldman’s inventory of subprime loans and RMBS securities:
“[W]e have $180mm in loans (unsecuritized) and $255mm of residuals off old deals. The
$180mm of loans is the smallest we’ve been since we started the business in 2002. We had
been running at an average loan position balance in subprime of around $4B . ... The
$255mm we have retained is from deals dating back to 2002 and while we’ve developed
some buying partners, it is not a deep market. These have been intentional principal
retained positions.”1658
The Mortgage Department also worked to sell assets from its CDO warehouse 1659 accounts, an issue discussed in
part below and in part in connection with the Report’s section on Goldman’s CDO activity.
1660 Subcommittee interview of Michael Swenson (4/16/2010).
1661 Id. By adopting the strategy of offsetting the long positions with similar, but not necessarily identical short
positions, the SPG Desk was incurring a very large amount of basis risk – the risk of a mismatch between the
offsetting assets. Mr. Sparks and other senior Goldman executives wanted to reduce that basis risk by paring the
positions down on both sides – selling the long assets and covering the short assets. The SPG Desk was not,
however, making the progress Mr. Sparks wanted to see in reducing the basis risk. On January 23, 2007, Mr. Sparks
wrote to Messrs. Swenson, Birnbaum, and Lehman:
“It does not look like you made any progress on the things we discussed – I want a plan and daily reports on
progress. Not to be difficult, but if you 3 are too busy I can add someone who can focus on the issue. My
other concern is I want to stay nimble, and not get too wedded to one way positions – getting massively
short could be more painful than what we have experienced.”
1/23/2007 email from Daniel Sparks, GS MBS-E-010267341. A week later, Mr. Swenson requested a meeting with
Mr. Sparks and Mr. Ruzika to discuss the difficulties the traders were encountering in reducing the basis risk. He
wrote: “I want to go over the facts of what we are up against.” 1/30/2007 email from Michael Swenson to David
Lehman, GS MBS-E-011375519. Mr. Swenson and Mr. Birnbaum met with Mr. Ruzika and Mr. Sparks around
February 1, 2007. The group apparently discussed the SPG Desk’s net short position and the difficulties of reducing
the basis risk. On February 5, 2007, Mr. Ruzika wrote to Mr. Cohn about how the short position was “allowed to get
too big” and stated: “I don’t want to be short – I want to neutralize the risk and shed our basis risk.” 2/5/2007 email
from Richard Ruzika to Gary Cohn, “Are you living Morgatages [sic]?,” GS MBS-E- 016165784. About a week
later, when the large net short positions began producing large profits, Mr. Ruzika apparently changed his mind and
became supportive of the large net short, though he still wanted to reduce basis risk “whenever possible.” 2/13/2007
email from Richard Ruzika to Gary Cohn, “Catch up,” GS MBS-E-019794071.
1662 Salem 2007 Self-Review, GS-PSI-03157 at 71-72.
The subprime loan balance of $180 million was just over one-tenth of the $1.5 billion total
Goldman had held at the end of February 2007, reflecting a reduction in its subprime inventory
over a two-month span by nearly 90%. Overall, the $180 million loan balance was down from an
average subprime loan position balance of $4 billion, which was a 95% reduction in overall
subprime loan inventory levels.
Building the First Short Position. At the same time the Residential Whole Loan Trading
Desk was selling loans and RMBS securities, the Structured Product Group (SPG) Trading Desk
was working to sell its inventory of long CDS contracts linked to the ABX indices.1659 At first, in
December and January, because so many market participants were going short, the SPG’s ABX
Trading Desk found its long ABX positions difficult to sell.1660 The ABS Desk then decided to
offset the long ABX assets in part by purchasing the short side of single name CDS contracts on
certain RMBS and CDO securities.1661 Within about six weeks, by February 2007, the ABS Desk
had acquired a huge net short position in single name CDS contracts referencing RMBS and CDO
securities that totaled more than $5 billion. By then, the ABX market had stabilized somewhat,
and the ABS Desk was able to sell outright more of its long ABX positions. Rather than slow
down once its $6 billion long position was offset, however, the ABS Desk used CDS contracts to
short RMBS and CDO securities “at every opportunity,” in the words of one trader, going
increasingly net short.1662
The reference to 70% in the email involves correlation assumptions. 1663 Correlation trading depends upon
assumptions about the relative values between one asset (such as a CDS contract referencing the ABX Index) and
another (such as a CDS contract referencing a single RMBS security). A correlation value of 100% means that the
values of both assets move together in the same amounts. With 100% correlation, a 10% decline in the value of one
asset implies a 10% decline in the value of the other. The correlation ratios between different assets are a matter of
the trading desk’s informed judgment. As one Goldman mortgage trader noted: “We should discuss base
correlations live . . . there is no market standard for calculating them.” 3/26/2007 email from SPG Trading to
Goldman London, “ABX – TABX : Request from [customer],” GS MBS-E-021893369. Once a correlation ratio
was set, however, the general practice at Goldman was to change correlation ratios only upon a showing of
observable market trade prices supporting the change. Traders, thus, engaged in frequent discussions of
“observability.” A change in correlation ratios could result in an immediate markdown or markup of particular
positions, which could effect Goldman’s profit and loss calculations, collateral calls, and the value of individual
customer positions.
In his February 12 email, Mr. Sparks wrote that the SPG Desk had been marking down the value of single
name long CDS contracts by only one-third of the amount that would apply if the desk’s true calculation of the
correlation between single name and ABX CDS contracts was correct – that the two products were more closely
correlated than the market recognized. Mr. Swenson told the Subcommittee that, in late 2006 and early 2007, single
name long CDS contracts were trading at higher prices than similar ABX CDS contracts, and the observable market
prices of single name CDS contracts were not falling as quickly as market professionals thought they should.
Subcommittee interview of Michael Swenson (4/16/2010). Nonetheless, in a steeply declining market, Goldman’s
Mortgage Department assumed that the single name long CDS contracts would eventually fall to the same low values
as the long ABX contracts. If that happened, since the SPG Desk was net short single name CDS contracts, the
anticipated drop in value would result in an equivalent amount of profit for the desk’s short position – hence, Mr.
Sparks’ reference to the “upside embedded in” the book.
On February 14, 2007, the Mortgage Department actually captured that upside by changing its correlation
assumptions to recognize a higher correlation between single name CDS and ABX CDS contracts. Using the new
assumptions, Goldman then marked down the value of its customers’ single name CDS contracts to levels closer to
the ABX Index assets. As the short party to those same CDS contracts, Goldman also realized a profit of $100
million in a single day. See 2/14/2007 email from Arbind Jha to Michael Swenson, “Mortgages Estimate
REVISED,” GS MBS-E-012474685.
1664 2/12/2007 email from Daniel Sparks, “Post today,” GS MBS-E-009763506.
On February 12, 2007, Mr. Sparks reported to senior management on the Mortgage
Department’s progress and the substantial profits that its new net short position was already
“(1) +20mm [million] P&L [profit and loss] today.
Secondary trading desk is net short risk in the form of single names and structured
index vs index longs (some index shorts also). Large move down again today ....
(2) Possible significant upside in book.
The desk has been moving [marking down] single names about 1/3 of what they feel
the correct correlation [to ABX Index] is (around 70%). . . . As the market has
moved so much one way, there is the potential for the book to currently have
significant upside embedded in it.1663
(3) Loan & resid[ual] books flat [i.e., already hedged].”1664
2/14/2007 email from Daniel Sparks, “Post,” 1665 GS MBS-E-009635410, Hearing Exhibit 4/27-8.
1666 3/21/2007 email from Daniel Sparks to Tom Montag, GS MBS-E-010629379, Hearing Exhibit 4/27-21. See
also 2/19/2007 email from Mr. Sparks to Mr. Montag, “2 things,” GS MBS-E-010378492 (“Please send a short note
to Josh Birnbaum, Mike Swenson and David Lehman telling them great week – short singles and short CDOs.”);
2/28/2007 email from Michael Sherwood to Messrs. Sparks, Swenson, Birnbaum and Lehman, “ABX/Single name
notional/risk history,” GS MBS-E-010389296 (Mr. Sherwood, a London managing director and member of the
Firmwide Risk Committee, wrote: “Many congrats on last few weeks trading ... keep it up!”).
1667 2/8/2007 email from Daniel Sparks, “Post,” GS MBS-E-002201668, Hearing Exhibit 4/27-7.
1668 Id.; see also 3/10/2007 email from Mr. Dinias to Daniel Sparks, “Mortgage Presentation to the board,” GS
MBS-E-013323395, Hearing Exhibit 4/27-17; 3/11/2007 email from Daniel Sparks, “Risk Changes Over Quarter,”
GS MBS-E-010400546, Hearing Exhibit 4/27-18; cf. 3/27/2007 Presentation to GS Board of Directors, “Subprime
Mortgage Business,” GS MBS-E-005565527, Hearing Exhibit 4/27-22.
1669 9/26/2007 2007 EMD Reviews, Joshua Birnbaum Self-Review, Hearing Exhibit 4/27-55c. In his self-review,
Mr. Birnbaum provided a detailed explanation of his reasons for recommending that the SPG Desk go “VERY
short”: “(1) Given how much ABX we had purchased through the broker market in 2006, the world would think GS
was very long for the foreseeable future. We could use that fear to our advantage if we could flip our risk, (2) After
unsuccessfully trying to sell our long to some of [a Goldman salesperson’s] accounts, I realized traditional distressed
buyers were no more likely to buy ABX at 85, 75, 65, etc. than at 95. The cash flow was just too binary, so there
would be little support if negative momentum began, (3) The fundamentals for mortgage credit were undeniably
deteriorating, (4) CDO managers were in denial ... [their positive market] sentiments would allow us to amass large
amounts of cheap single name protection if we desired, and (5) If the market truly tanked, the already large CDO
warehouses would have to liquidate, further exacerbating the move and ultimately allowing us to cover.” Id.
1670 Id.
On February 14, 2007, Mr. Sparks again reported to senior management on the
Department’s progress, describing how it was neutralizing its net long position:
“[O]ur risk reduction program consisted of: (1) selling index outright (2) buying single
name protection and (3) buying protection on super-senior portions of the BBB/BBBindex.
... That is good for us position-wise, bad for accounts who wrote that protection ....
but could hurt our CDO pipeline position as CDOs will be harder to do.”1665
“Overall,” Mr. Sparks wrote, “as a business we are selling our longs and covering our shorts.”1666
With respect to market conditions, Mr. Sparks reported:
“Subprime environment – bad and getting worse. Everyday is a major fight for some aspect
of the business (think whack-a-mole). Trading position has basically squared ... plan to
play from short side. Loan business is long by nature and goal is to mitigate. Credit issues
are worsening on deals and pain is broad (including investors in certain GS-issued deals).
Distressed opportunities will be real, but we aren’t close to that time yet.”1667
In order to “play from the short side,” the Mortgage Department continued building a net
short position, employing aggressive strategies.1668 Mr. Birnbaum, Goldman’s ABX trader, later
wrote: “I concluded that we should not only get flat, but get VERY short.”1669 He wrote that he
then “socialized,” or discussed, his proposal with others in the Mortgage Department, and “we all
agreed the plan made sense.”1670 The ABS Desk began implementing the plan by taking a very
1671 Id.
1672 Id.
1673 Salem 2007 Self-Review at GS-PSI-03157 at 71-72.
1674 Subcommittee interview of Deeb Salem (10/6/2010).
1675 3/12/2007 Mortgage Capital Committee memo, “ABACUS Transaction to be Lightly-Managed by Lion
Capital,” at 2, GS MBS-E-002665382, Hearing Exhibit 4/27-150.
1676 See 3/10/2007 email from Mr. Dinias to Daniel Sparks, “Mortgage Presentation to the board,” GS MBS-E-
013323395, Hearing Exhibit 4/27-17; 3/11/2007 email from Daniel Sparks, “Risk Changes Over Quarter,” GS MBSE-
010400546, Hearing Exhibit 4/27-18; 3/27/2007 presentation to GS Board of Directors, “Subprime Mortgage
large short position in single name CDS contracts referencing RMBS and CDO securities to offset
the Department’s remaining ABX long position:
“After socializing the plan with [Daniel] Sparks and ultimately [Richard] Ruzika, we
implemented the plan by hitting on almost [every] single name CDO protection buying
opportunity in a 2-month period. Much of the plan began working by February when the
market dropped 25 points and our profitable year was underway.”1671
By clearing the plan with Mr. Sparks and Mr. Ruzika first, SPG Trading Desk informed
senior management of its intent to use the firm’s capital to build the net short position. Mr.
Birnbaum also wrote:
“When we were socializing our plan to get short in the beginning of the year, I put together
a tool . . . quantifying our position risk and the p&l [profit and loss] under various market
level scenarios. I believe this was key for senior management to gain confidence that we
were taking controlled and quantifiable risk that was well understood.”1672
The Mortgage Department’s lead trader in single name CDS contracts referencing RMBS
securities, Deeb Salem, also described the plan in his 2007 performance self-evaluation:
“Mike [Swenson], Josh [Birnbaum] and I were able to learn from our bad long position at
the end of 2006 and layout the game plan to put on an enormous directional short. The
results of that are obvious.”1673
In an interview, Mr. Salem told the Subcommittee that the “obvious” results he was referring to
were the desk’s resulting profits.1674
The ABS Desk within the Structured Product Group (SPG) used CDS contracts to short
RMBS and CDO securities as well as the ABX Index. The Correlation Desk within SPG used a
different technique, obtaining approval to use a Goldman-designed CDO platform, Abacus, “to
short structured product CDOs in bulk. The ABACUS transactions are currently one of the unique
formats available to . . . [short] in large size on this type of structured product risk.”1675
From January to late February, the Mortgage Department continued to pile on short
positions in the subprime mortgage market.1676 By the end of the first quarter in 2007, it had built a
Business,” at 8, GS MBS-E-005565527, Hearing Exhibit 4/27-22 [footnote omitted].
1677 Salem 2007 Self-Evaluation [emphasis in original].
1678 8/23/2007 email from Tom Montag, “Current Outstanding Notional SN ames,” GS MBS-E-010621231.
1679 2/8/2007 email from Bill McMahon, “VaR limit for Mtg SPG,” GS MBS-E-009980807.
1680 2/23/2007 Goldman internal document, “Mortgage VaR Change (Q1’07 vs. Q4’06),” GS MBS-E-010037310,
Hearing Exhibit 4/27-12; 3/8/2007 email from Jha Arbind, “Risk changes over the quarter,” GS MBS-E-010400546,
Hearing Exhibit 4/27-18.
1681 Id.
1682 2/23/2007 Goldman internal document, “Mortgage VaR Change (Q1’07 vs. Q4’06),” GS MBS-E-010037310,
Hearing Exhibit 4/27-12.
1683 2/14/2007 email from Mr. Gmelich to Tom Montag, GS MBS-E-016165580.
$10 billion net short position. In a later performance self-evaluation, Mr. Salem described the
aggregate $10 billion net short position as “HUGE” and “enormous.”1677 A Goldman senior
executive, Thomas Montag, later referred to a net short position of $3 billion in subprime mortgage
backed securities as “huge and outsized.”1678 Goldman’s net short position in February 2007 was
more than three times that size.
Profiting from the First Net Short. In February 2007, Goldman’s senior management
decided that the $10 billion net short position had become too risky, and ordered the Mortgage
Department to cover a portion of the short. Covering some of the short not only reduced the risk,
but also locked in some of the profit associated with the position.
In late February 2007, the Mortgage Department’s net short position, coupled with added
volatility in the subprime mortgage market, caused a sharp increase in the Department’s risk
profile, as measured by Value at Risk or “VAR.” Goldman had assigned a VAR limit of $35
million to the Mortgage Department.1679 In November 2006, the Department’s reported VAR was
$13 million, well below its limit.1680 By late February 2007, however, its VAR had reached $85
million – an increase of over 550%.1681
Goldman senior management closely monitored the Department’s increasing VAR. On
February 23, 2007, Goldman risk controllers told senior executives that the Mortgage
Department’s increasing VAR was “primarily driven by a combination of increased volatility in
ABX market and the [SPG] desk increasing their net short risk in RMBS subprime sector.”1682 On
February 14, 2007, Justin Gmelich, a managing director asked to help Mr. Sparks with the
Mortgage Department on a short term basis, sent an email to Mr. Montag expressing unease with
the Department’s increasing risk profile:
“Abx risk should be working to get closer to home. My opinion, singles v. short index is
too big (no news here). Abx correlation trade is good. I think we should be covering a bit
of our short. There is a lot to do.”1683
1684 Id.
1685 2/22/2007 email from Daniel Sparks to Messrs. Birnbaum, Swenson and Lehman, “Block size tranche protection
offers for Paulson or others,” GS MBS-E-010381411.
1686 Id.
1687 Subcommittee interview of Joshua Birnbaum (4/22/2010) (Mr. Birnbaum wanted to continue to hold the short
position, rather than cover it, since he thought it would earn additional profit); see also 2007 Birnbaum Self-Review,
Hearing Exhibit 4/27-55c (Mr. Birnbaum wrote that he should have argued more forcefully against covering the
shorts in February 2007).
1688 2/21/2007 email chain from Daniel Sparks, “Mortgages today,” GS MBS-E-010381094, Hearing Exhibit 4/27-
10. In response, Mr. Viniar wrote to Mr. Sparks: “Good start. Keep covering.” 2/21/2007 email from David Viniar
to Daniel Sparks, “Mortgages today,” GS MBS-E-009757841. In another email, Mr. Montag wrote: “How hard are
Mr. Montag forwarded Mr. Gmelich’s email to Goldman’s Co-Presidents, Gary Cohn and Jon
Winkelried, as well as to Mr. Ruzika, commenting: “clearly need to opportunistically take position
On February 21, 2007, senior management told Mr. Sparks to reduce the size of the
Mortgage Department’s $10 billion net short position by covering $3 billion.1685 Mr. Sparks
communicated the decision to personnel on the SPG Desk:
“We need to buy back $1 billion single names and $2 billion of the stuff below [CDO
securities] – today. I know that sounds huge, but you can do it – spend bid/offer, pay
through the market, whatever to get it done.
It is a great time to do it – bad news on HPA [housing price appreciation], originators
pulling out, recent upticks in unemployment, originator pain. . . .
This is a time to just do it, show respect for risk, and show the ability to listen and execute
firm directives.
You called the trade right, now monetize a lot of it.
You guys are doing very well.”1686
Although some SPG traders disagreed with the decision,1687 the Mortgage Department took
immediate action in response to the order. By the end of the day, February 21, 2007, Mr. Sparks
reported to senior management that the ABS Desk had covered $400 million in single name CDS
contracts, but had not been able to reach the $3 billion goal:
“Market sold off significantly (BBB and BBB- indices over 100 bps wider) We covered
over $400mm single names – still significant work to do. ...
“We are net short, but mostly in single name CDS and some tranched index vs the
some [sic] index longs. We are working to cover more, but liquidity makes it tough.
Volatility is causing our VAR numbers to grow dramatically.”1688
we pushing covering some of singlename. Let’s not be bidoffer foolish. The downside isn’t worth the upside imo.”
2/21/2007 email from Tom Montag to Daniel Sparks, GS MBS-E-017237596. Mr. Sparks replied: “Pushing hard,
but need to be realistic with respect to expectation on liquidity. Very hard to force it. Trade has been right, and
should continue to run (though there will be bumps). Entire team knows we have to reduce and is focused on it.” Id.
Mr. Montag responded: “If you sold it in a bad market u ough[t] to be able to buy it.” Id.
2/22/2007 email from Richard Ruzika to Tom Montag 1689 and Daniel Sparks, GS MBS-E-010381967.
1690 Subcommittee interview of Michael Swenson (4/16/2010).
1691 Id.
1692 Id.
1693 A similar situation existed at the time in the market for commercial mortgage backed securities (CMBS). In a
February email to Mr. Lehman, a CMBS trader remarked: “It’s amazing that everyone was lifting [accepting bids
on] cmbs 1 and 2 [CMBX indices], but NOBODY will bid single names.” 2/23/2007 email from [CMBS trader] to
David Lehman, “CT CDO w/ [Bank],” GS MBS-E-011270138-39 [emphasis in original].
1694 2/25/2007 email from Daniel Sparks to Tom Montag, “Questions you had asked,” GS MBS-E-010987763.
Mr. Ruzika sent an email to Mr. Montag and Mr. Sparks commenting on the covering efforts:
“I think Dan’s guys are being practical. I know Bill [McMahon] was upset but covering the
single name bbb and bbb- is prudent as it cuts vol and var the most. ... Guys didn’t give up
bid ask but they also didn’t stand on the bid.”1689
The Mortgage Department found that its single name CDS contracts were difficult to cover,
in part because many of the referenced RMBS and CDO securities had already been acquired by
securitizers for inclusion in CDOs and so were not for sale.1690 That meant the SPG Trading Desk
could not cover its single name short positions simply by buying the offsetting long asset – the
RMBS and CDO securities were no longer available for purchase.1691 Instead, the SPG Desk had
to use offsetting CDS contracts, ones which referenced the same RMBS or CDO securities, but in
which Goldman took the long side.1692 The problem with those contracts, however, was that many
market participants had already acquired short positions on RMBS and CDO securities and weren’t
in the market to buy more. In addition, their purchases had driven up the price of short contracts.
Between market saturation and high price levels, Goldman found few buyers when it wanted to
cover its shorts.1693 The Mortgage Department’s inability to cover its single name shorts concerned
Messrs. Montag and Ruzika, who continued to press for quick progress.
On February 25, 2007, Mr. Sparks reported to Messrs. Montag and Ruzika on the Mortgage
Department’s progress after a week of effort:
“Cover[ed] around [$]1.55 billion single name subprime BBB- CDS and about $700mm
single name subprime BBB CDS. The desk also net sold over $400mm BBB- ABX index.
Desk is net short, but less than before. Shorts are in senior tranches of indexes sold and in
single names. Plan is to continue to trade from short side, cover more single names and sell
BBB- index outright.”1694
On February 27, 2007, Mr. Ruzika sent an email to Messrs. Montag, Gmelich and Sparks
indicating that the Mortgage Department needed to reduce its net short position by covering even
more than $3 billion in shorts: “There are two issues – first is the size of the short – I want to see
2/27/2007 email from Richard Ruzika to Tom Montag, Justin Gmelich, 1695 and Daniel Sparks, GS MBS-E-
1696 Id.
1697 2/27/2007 email from Daniel Sparks, “Opcom Directive,” GS MBS-E-017250218.
1698 2/27/2007 email from Daniel Sparks, “Goals,” GS MBS-E-010387086, Hearing Exhibit 4/27-11.
1699 See, e.g., 2/22/2007 Goldman internal emails, GS MBS-E-018938493, GS MBS-E-018940734; 2/27/2007 email
from Michael Swenson to Bill McMahon, GS MBS-E-012502371 (“Bought 1.5bb of sn baa3 risk from harbinger.”);
3/1/2007 email from Daniel Sparks, “SN Protection Offers for Harbinger (50 names),” GS MBS-E-019460848
(“Trade was executed at +725 ”); 3/3/2007 email to Michael Swenson and Daniel Sparks, “Harbinger Update,” GS
MBS-E-010707216. As a result, Harbinger became Goldman’s largest hedge fund counterparty credit risk:
“Harbinger is our #1 hedge fund exposure globally. We had to explain this to the SEC this month.” 4/20/2007
Goldman internal email, “Harbinger didn’t add the last piece we had spoke of, but are now thinking of adding
~50mm,” GS MBS-E-012523933. Harbinger was also instrumental in Goldman’s second round of short covering
efforts in August 2007. See, e.g., 7/30/2007 email to Michael Swenson, “Harbinger Single-A Offerings.xls,” GS
MBS-E-012374026; 8/23/2007 email from Michael Swenson, “Harbinger Post,” GS MBS-E-009739009.
us getting the short down to 4.5 bil[lion] net. ... Second – the basis in the book needs to be reduced
as well.”1695 Less than an hour later, Mr. Ruzika sent Mr. Sparks another email at the conclusion of
a meeting of Goldman’s Operating Committee (OpCom), comprised of Goldman’s senior
executives. In an email entitled, “OpCom Directive,” Mr. Ruzika wrote:
“Dan. Directly from the opcom we have to pick up the pace of buying back single names
even if it costs us some money. I know your guys are trying but we can pay away some if it
helps to get size done.”1696
In response, Mr. Sparks immediately sent an email to Mr. Swenson, Mr. Lehman, and Mr.
Birnbaum regarding the “Opcom directive.” He wrote: “Buyback single names in size today.”1697
He also sent the SPG and CDO Desk managers a set of “Goals”:
“Reduce risk. That means:
(1) get m[o]re super-seniors done on CDOs or take other steps to reduce CDO pipeline
(2) cover more single name shorts BBB- and BBB
(3) reduce the basis trade between BBB- index and BBB- single names
(4) reduce the index/index trades in A and AAA.”1698
Mr. Sparks’ list of goals showed that he was closely tracking the SPG Desk’s activities and
directed them to reduce rather than eliminate its basis and index trades.
At the end of February, the Mortgage Department’s efforts got a substantial boost when a
new hedge fund client, Harbinger, purchased the short side of $4 billion in single name CDS
contracts referencing RMBS securities.1699 By taking the long side in those contracts, the Mortgage
Department was able to cover its shorts by the same amount.
2/28/2006 Goldman internal memorandum, “Firmwide Risk Committee: February 1700 28th FWR Minutes, ”GS
MBS-E-009687468, Hearing Exhibit 4/27-13 [sic - correct year is 2007].
1701 Id. See also 2007 Swenson Self-Review (“we prudently covered $5bb of single-name shorts at the all time lows
at the time back in February”), Hearing Exhibit 4/27-55b.
1702 3/5/2007 email from Tom Montag, GS MBS-E-010393092. Goldman COO Gary Cohn expressed concern that a
positive move in the markets would cause the Mortgage Department to incur large losses due to its net short: “A big
plus would hurt the Mortgage business but Justin [Gmelich] thinks he has a big trade lined up for the morning to get
us out of a bunch of our short risk.” 3/5/2007 email from Gary Cohn, GS MBS-E-009656525, Hearing Exhibit 4/27-
15. The big trade referred to by Mr. Cohn was one of the Harbinger trades that enabled Goldman to cover $4 billion
of its single name CDS short positions.
1703 3/9/2007 email to David Viniar, “Mortgage Talking Points for Earnings Call,” GS MBS-E-009762678, Hearing
Exhibit 4/27-16.
1704 9/17/2007 Presentation to GS Board of Directors, Residential Mortgage Business at 5, GS MBS-E-001793840,
Hearing Exhibit 4/27-41.
On February 28, 2007, Mr. Sparks reported at a Firmwide Risk Committee meeting on the
Mortgage Department’s progress in reducing its VAR.1700 The committee minutes reflect that Mr.
Sparks’ report stated the following:
“–VaR up due to vols. Business working to reduce exposures; a lot of shorts already
–ABX widened 500bp on the week. Business covered $4BN in single names.
–Noted a lot of negative news in the subprime market with rumors on everyone.
–CDS on CDOs started to widen significantly over the week . ...
–Business continuing to clear out loans.”1701
Five days later, on March 5, 2007, Mr. Montag requested another update: “Do we think the
business is net short, long or flat right now?” Mr. Sparks responded: “We think the overall
business is net short.” Mr. Gmelich added: “I think we have a very modest short across all the
businesses at current market levels. I concur with Dan.”1702
The Mortgage Department’s efforts to cover its $10 billion net short position reduced its
VAR; it also allowed the Department to lock in and record large profits from its net shorts. In
March 2007, in connection with Goldman’s quarterly earnings call with analysts, “Mortgage
Talking Points” prepared for Mr. Viniar stated that the Department’s revenues were primarily the
result of its short positions:
“The Mortgage business’ revenues were primarily driven by synthetic short positions
concentrated in BBB/BBB- sub prime exposure and single A CDO exposure which
benefitted from spread widening.”1703
At the end of the first quarter of 2007, the Mortgage Department reported total net revenues of
$368 million.1704
The Mortgage Department continued its efforts to cover the rest of its short position. On
March 14, 2007, Mr. Sparks reported to Messrs. Cohn and Montag that a Goldman salesperson
3/17/2007 email from Daniel Sparks and Tom Montag, 1705 “Cactus Delivers,” GS MBS-E-009632839.
1706 Id. Mr. Montag’s comment suggests that he may have wanted the Mortgage Department to reduce the size of
both its longs and shorts to reduce its overall risk, or to reduce its basis risk, the risk that arises when two different
types of assets are used to offset one another, and the assets are imperfectly matched.
1707 3/14/2007 email from David Lehman, “ABS Trading - Subprime risk,” GS MBS-E-010397102.
1708 Id.
1709 See “Notionals (ABX Convention),” chart attached to 5/23/2007 email from Kevin Kao to Joshua Birnbaum,
“RMBS Subprime risk history as of 18May07,” GS MBS-E-012890599.
1710 See, e.g., 3/8/2007 email from Mr. Sparks, “Mortgage Risk,” GS MBS-E-002206279, Hearing Exhibit 4/27-75
(noting Mortgage Department’s $9 billion short position on the AAA ABX index).
1711 Subcommittee interview of Daniel Sparks (4/15/2010), David Lehman (4/12/2010), Joshua Birnbaum
(4/22/2010), and Michael Swenson (4/16/2010).
1712 See chart entitled “Goldman Sachs Mortgage Department Total Net Short Position, February-December 2007 in
$ Billions,” prepared by the Subcommittee, April 2010, updated January 2011, derived from Goldman Mortgage
Strategies and Mortgage Department Top Sheets.
1713 Subcommittee interview of Daniel Sparks (10/3/2010).
“did a fantastic job for the desk by bringing in $1.2BB [billion] in A-rated single names today.”1705
Mr. Montag in turn reported to Goldman CEO Lloyd Blankfein: “Covered another 1.2 billion in
shorts in mortgages–almost flat–now need to reduce risk.”1706
That same day, March 14, 2007, in response to his request, the Mortgage Department sent
Mr. Ruzika a detailed breakdown of its subprime mortgage holdings.1707 It disclosed that, despite
offsetting short and long positions in a number of areas, the SPG Desk still held three sizeable net
short positions involving about $2.6 billion in ABX assets, $2.2 billion in single name CDS
contracts, and $2 billion in mezzanine CDOs.1708
Goldman personnel prepared the following chart tracking the SPG Trading Desk’s efforts
to cover its BBB and BBB- net short position from February through mid-May 2007.1709
[SEE CHART NEXT PAGE: Notionals (ABX convention), prepared
by Goldman Sachs, reformatted by the Permanent Subcommittee on
Investigations to be readable in black and white print, GS MBS-E-
AAA Disaster Insurance. Despite all the attention paid to the Mortgage Department’s
subprime mortgage holdings beginning in December 2006, one large short position seemed to have
escaped the directives of senior management in the first quarter of 2007 to cover the Department’s
shorts. It consisted of a massive $9 billion net short position made up of CDS contracts
referencing an ABX index that tracked a basket of 20 AAA rated subprime RMBS securities.1710
Goldman representatives could not recall when that short position was acquired, who acquired it,
or whether proprietary funds were used,1711 but the CDS contracts appear to have been held at a
relatively constant level of $9 billion from some time in 2006 until July 2007.1712 Mr. Sparks told
the Subcommittee that the net short position served as a form of low cost “disaster insurance” that
would pay off only in a “worst case” scenario – when even the top tier AAA rated RMBS
securities, among the safest of all subprime mortgage investments, lost value.1713
Prepared by the U.S. Senate Permanent Subcommittee on Investigations, February 2011.
Derived from Goldman Sachs document, GS MBS-E-012890600.
Index Price
Notionals (ABX convention)
BBB Index Only
BBB Index + CDS
BBB- Index Only
BBB- Index + CDS
All BBBs Index Only
All BBBs Index + CDS
06-2 BBB- Index Equiv
06-2 BBB- Idx Eq (MRMA)
06-2 BBB- Index Equiv
06-2 BBB- Index Price
BBB bucket includes BBB+ CDS
Notionals: refers to current notionals
Positive notionals: long risk
CDS: 2005 / 2006 vintages only
8/17/2007 Goldman internal chart, “RMBS Subprime Notional History 1714 (Mtg Dept.),” GS MBS-E-012928391,
Hearing Exhibit 4/27-56a. The analyst’s cover email stated: “The attached spreadsheet covers the single name and
ABX positions of the entire mortgage department for the fiscal year 2007. I spot checked the numbers with risk
reports they tie out well.” See also 8/17/2007 email from Joshua Birnbaum, GS MBS-012928388, Hearing Exhibit
1715 When shown the chart during his interview, Mr. Sparks told the Subcommittee he was unfamiliar with it and
pointed what he believed to be an anomaly related to its depiction of the Mortgage Department’s short position
involving BBB rated RMBS securities. He also indicated that he could not confirm its depiction of the AAA ABX
short position. Since multiple Goldman email messages confirm the existence of the AAA ABX short position
during most of Goldman’s fiscal year 2007, however, the chart’s depiction of that position as a nearly flat line at
about $9 billion short until July 2007 appears consistent with the other evidence.
The most comprehensive description of the AAA ABX short position located by the
Subcommittee was a chart prepared by a Mortgage Department analyst in August 2007. The
analyst sent the chart to Mr. Birnbaum at his request, to show the Mortgage Department’s overall
position in synthetic products, including CDS contracts referencing ABX, RMBS, and CDO
assets.1714 The chart includes the AAA ABX short position as a long, nearly flat line showing an
approximately $9 billion net short until early July 2007, when the value turned sharply upward.1715
The analyst wrote in an August email, after much of the AAA ABX net short position had been
covered: “M[ortgage] department is short ABX AAA [$]8.7b[illion], splitting among ABS/Alt
A/prime/conduit in the beginning of fiscal year 2007, and is now long [$]410m[illion].” While this
chart and the covering email do not reveal the origin of the AAA short, they indicate that, by early
2007, it was split between the ABS Trading Desk in the Structured Product Group and three desks
in Mr. Gasvoda’s Residential Whole Loan Trading area – the Alt A Trading Desk under Genevieve
Nestor, the Prime Trading Desk under Clay DeJacinto, and the Conduit for conducting subprime
loan pool securitizations under Matt Nichols.
Goldman emails provide additional information about the AAA ABX short. One series of
emails, from March 2007, indicates that about $8 billion of the $9 billion AAA short was then held
by the three desks in Mr. Gasvoda’s Residential Whole Loan Trading area, and that he favored
maintaining the short, because it provided billions of dollars in coverage and cost only $5 million
per quarter in premiums to maintain. On March 4, 2007, Mr. Gasvoda emailed Mr. Sparks with
“Quick Thoughts on ABX AAA risk”:
“I talked to [Matt] Nichols and Clay [DeJacinto] about the AAA ABX short. Think it
offers a good amount downside protection w/ relatively light pain if we’re wrong. Below is
a $8B ABX AAA short #s. It costs us $5mm/quarter to carry. On the downside, if the
market rallies to par ... we drop $50mm. Taking it to 0 spread we lose $80mm.
“On the upside front, we get good jump risk. If AAA’s widen to current AA levels ... we
gain $70mm and if spreads move up to super senior risk pricing in CDOs ... we’re up
3/4/2007 email from Kevin Gasvoda to Daniel Sparks, “Quick thoughts 1716 on ABX AAA risk,” GS MBS-E-
1717 Id. Despite Mr. Gasvoda’s suggestion that he might try to cover a portion of the $8 billion net short, the AAA
ABX short position in Mr. Gasvoda’s area appears to have remained unchanged until around July 2007. 8/17/2007
Goldman internal chart, “RMBS Subprime Notional History (Mtg Dept.),” GS MBS-E-012928391, Hearing Exhibit
1718 Goldman’s hedging practice was that each desk was responsible for its own hedges. Accordingly, different
desks would not necessarily share information about their respective hedges, even if both were hedging with the
same product, such as an ABX short.
1719 3/5/2007 email from Cyrus Pouraghabagher, “ABX hedges for Resi businesses,” GS MBS-E-012085546.
1720 Id.
1721 2/28/2007 email from Jonathan Egol to Fabrice Tourre, “Hedges Status Report,” GS MBS-E-002628642.
1722 The report from Mr. Gasvoda’s group may have inadvertently omitted a particular loan book that was holding
the additional $1 billion in hedges, the figure may be a typographical error, or the group may have chosen not to
disclose some of its hedges. The Goldman personnel interviewed by the Subcommittee were unable to explain the
1723 3/8/2007 email from Daniel Sparks, “Mortgage Risk,” GS MBS-E-002206279, Hearing Exhibit 4/27-75.
“Net, think this is a good position to have on given downside protection and relatively light
upside pain. If we get an opportunity to buy some back next week, think we should but I’m
thinking buy back $1-2B, not $8B.”1716
Mr. Sparks replied to Mr. Gasvoda: “Good trading response and thought process. We need to
consider daily.”1717
The next day, March 5, 2007, the Residential Whole Loan Trading Desk under Mr.
Gasvoda and the CDO Origination Desk under Peter Ostrem exchanged information about the
“ABX hedges” that each business was carrying to reduce the risk associated with its respective
long assets.1718 The Residential Whole Loan Trading Desk reported: “[b]elow are all our ABX
hedges across our Resi Credit + Prime books,” which included approximately $7 billion in AAA
ABX holdings.1719 The CDO Origination Desk, in turn, reported holding another $2.25 billion in
AAA ABX “hedges.”1720 A few days earlier, with respect to the CDO Origination Desk’s holdings,
Mr. Egol had remarked: “Love that huge AAA abx short.”1721
Although the $7 billion figure reported by Mr. Gasvoda’s group on March 5 was $1 billion
less than the $8 billion reported the day before,1722 and the $2.25 billion reported by the CDO
Origination Desk was larger than the $1 billion that the August 2007 email later ascribed to the
Structured Product Group, all of the evidence indicates that Goldman had a massive AAA ABX
short position in 2007. A few days later, on March 8, 2007, in an email to senior management
entitled, “Mortgage Risk,” Mr. Sparks described the AAA ABX short as a hedge against long
positions in the Department’s loan books and CDO warehouse accounts:
“[O]verall the department has significant shorts against loan books and the CDO
warehouse. The bulk of these shorts ($9BB) are on the AAA index, so the downside is
limited as the index trades at 99.”1723
Id.; see also 8/23/2007 email from Tom Montag to Lloyd Blankfein, GS MBS-E 1724 -009585951, Hearing Exhibit
4/27-37 (Mortgage Department “bought back 9 billion of AAA abx index over last two weeks.” ); 8/23/2007 email
from Tom Montag to Gary Cohn and David Viniar, “Harbinger Post,” GS MBS-E-009739009.
1725 3/4/2007 email Kevin Gasvoda to Daniel Sparks, “Quick thoughts on ABX AAA risk,” GS MBS-E-010398072
(“ we get good jump risk . . . Net, think this is a good position to have on given downside protection and relatively
light upside pain.”).
1726 Subcommittee interview of Daniel Sparks (4/15/2010).
1727 Id.
1728 Id.
1729 See 8/17/2007 Goldman internal chart, “RMBS Subprime Notional History (Mtg Dept.),” GS MBS-E-
012928391, Hearing Exhibit 4/27-56a.
1730 The AAA ABX short appears to have served as a hedge for long assets in the Whole Loan and CDO Origination
areas in March 2007. Many of those assets were sold during the spring and summer of 2007. If a hedged asset is
sold, the hedge is ordinarily unwound commensurately. See, e.g., 5/30/2007 email from David Lehman, “ABX
hedges – Buy order,” GS MBS-E-011106690 (directing the unwinding of certain short ABX hedges held against the
CDO Origination Desk when the CDO positions were transferred to another desk).
1731 See 8/17/2007 Goldman internal chart, “RMBS Subprime Notional History (Mtg Dept.),” GS MBS-E-
012928391, Hearing Exhibit 4/27-56a.
In this email to senior executives, Mr. Sparks put the size of the AAA ABX short at $9 billion,
which seems to have been the amount most commonly cited for the short.1724
When asked about the Gasvoda email which described the AAA ABX short as an
inexpensive “jump risk,”1725 Mr. Sparks told the Subcommittee that the email was referring to
acquiring “jump insurance” against a sudden, huge loss arising from the total default of an asset.1726
In this context, the short was acquired as insurance against the unlikely event that a significant
portion of the AAA rated RMBS securities identified in the ABX Index defaulted
simultaneously.1727 Since AAA rated RMBS securities were typically the safest of the RMBS
securities offered for sale, it was widely believed in 2006 and 2007, that they would remain
untouched even if defaulting mortgages harmed riskier RMBS securities. By shorting AAA rated
RMBS securities, Goldman was insuring against a “tail risk” – the risk of an event that appeared to
have a very small probability of ever actually occurring, but which was likely to cause catastrophic
losses if it did occur. Mr. Sparks also explained that, since the subprime mortgage industry
considered losses in AAA rated RMBS securities to be exceedingly unlikely, the price of acquiring
and holding such a short position was relatively inexpensive.1728
From the time the $9 billion AAA ABX short was acquired in 2006 until July 2007, it was
not included in Goldman senior management’s directives to cover shorts, and it does not appear to
have been part of the Mortgage Department’s efforts to get “closer to home,” build a net short
position in early 2007, or cover that net short in February and March.1729 The $9 billion AAA ABX
short may have been left out of management’s directives on the first net short, because it was
serving as a hedge for long subprime mortgage assets held by several Mortgage Department
desks.1730 As those long assets were sold or written down, however, no apparent steps were taken
to unwind or remove the $9 billion AAA ABX hedge.1731 By June 2007, it remained almost
entirely intact as a net short. The value, cost, and risk associated with the AAA ABX short had
been monitored, but not acted upon, until the short suddenly began approaching profitability and
3/26/2007 Goldman presentation to Board of Directors, “Subprime Mortgage 1732 Business,” GS MBS-E-
005565527, Hearing Exhibit 4/27-22. While the final version of the presentation indicated Goldman had an overall
net long position in subprime assets by about $900 million, a near-final draft of the presentation indicated that
Goldman had an overall net short position of $2.8 billion. 3/16/2007 draft presentation to Board of Directors by

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