Daniel Sparks, “Subprime Mortgage Business,” GS MBS-E-002207710. The primary difference between the two
figures appears to be the inclusion in the final version of Goldman’s net long holdings of Alt A mortgages, even
though Alt A assets are not usually considered to be subprime mortgages. Subcommittee interview of David Viniar
(4/13/2010).
1733 Id. at 4.
1734 Id. at 8 [footnotes defining CDO and CDS omitted].
1735 9/17/2007 Presentation to Goldman Sachs Board of Directors, Residential Mortgage Business, at 5, GS MBS-E-
001793840, Hearing Exhibit 4/27-41.
1736 3/26/2007 Goldman Sachs presentation to Board of Directors, “Subprime Mortgage Business,” GS MBS-E-
005565527, Hearing Exhibit 4/27-22.
began contributing to high VAR levels for the Mortgage Department. It then drew the attention of
Goldman senior management which included the AAA ABX short in its directive to cover the
firm’s second big net short. Covering the AAA ABX net short contributed to the multi-billiondollar
profits realized by Goldman in the third and fourth quarters of 2007.
Report To Board. On March 26, 2007, Mr. Sparks and Goldman senior executives gave a
presentation to Goldman’s Board of Directors regarding the firm’s subprime mortgage business.1732
The presentation recapped for the Board the various steps the Mortgage Department had taken
since December 2006, in response to the deterioration of the subprime mortgage market.1733 The
presentation noted, among other measures, the following steps:
“– GS reduces CDO activity
– Residual assets marked down to reflect market deterioration
– GS reverses long market position through purchases of single name CDS and reductions
of ABX
– GS effectively halts new purchases of sub-prime loan pools through conservative bids
– Warehouse lending business reduced
– EPD [early payment default] claims continue to increase as market environment
continues to soften.”1734
By the time this presentation was given to the Board of Directors, Goldman’s Mortgage
Department had swung from a $6 billion net long position in December 2006, to a $10 billion net
short position in February 2007, and then acted to cover much of that net short. Despite having to
sell billions of dollars in RMBS and CDO securities and whole loans at low prices, and enter into
billions of dollars of offsetting long CDS contracts, Goldman’s mortgage business managed to
book net revenues for the first quarter totaling $368 million.1735
In a section entitled, “Lessons Learned,” the presentation stated: “Capital markets and
financial innovation spread and increase risk,”1736 an acknowledgment by Goldman that “financial
innovation,” which in this context included ABX, CDO, and CDS instruments, had magnified the
risk in the U.S. mortgage market.
425
1737 See, e.g., Salem 2007 Self-Review.
1738 See, e.g. 4/5/2007 email from Deeb Salem, “let’s sell ~200mm in Baa2 protection . . .,” GS MBS-E-004516519
(Mr. Swenson’s reply: “Make that 500mm”).
1739 Deeb Salem 2007 Self-Review [emphasis in original].
1740 Subcommittee interview of Deeb Salem (10/6/2010).
1741 Id.
(c) Attempted Short Squeeze
In May 2007, Goldman’s Structured Product Group (SPG) continued to work to cover the
Mortgage Department’s short position by offering to take the long side of CDS contracts
referencing RMBS and CDO securities, but found few buyers. Many market participants had
already shorted subprime mortgage assets, driving the price relatively high, and few wanted to buy
additional short positions at the prevailing price. In order to turn the situation to its benefit, SPG’s
traders attempted to carry out a “short squeeze” of the subprime CDS market in May 2007.1737
The ABS Desk’s traders were already offering single name CDS contracts in which
Goldman would take the long position, in order to cover the Mortgage Department’s short
position.1738 To effectuate a short squeeze, they appear to have decided to offer the short positions
on those contracts at lower and lower prices, in order to drive down the market price of subprime
CDS shorts to artificially low levels. Once prices fell below what the existing CDS holders had
paid for their short positions, the CDS holders would have to record a loss on their holdings and
might have to post additional cash collateral with their opposing long parties. Goldman hoped the
CDS holders would react by selling their short positions at the lower market price. When the sell
off was large enough and the price low enough, Goldman planned to move in and buy more shorts
for itself at the artificially low price.
This short-squeeze strategy was later laid out in a 2007 performance self-evaluation by one
of the traders on Goldman’s ABS Desk who participated in the activity, Deeb Salem. In the selfevaluation
he provided to senior management, Mr. Salem wrote:
“In May, while we were remain[ing] as negative as ever on the fundamentals in sub-prime,
the market was trading VERY SHORT, and susceptible to a squeeze. We began to
encourage this squeeze, with plans of getting very short again, after the short squeezed [sic]
cause[d] capitulation of these shorts. This strategy seemed do-able and brilliant, but once
the negative fundamental news kept coming in at a tremendous rate, we stopped waiting for
the shorts to capitulate, and instead just reinitiated shorts ourselves immediately.”1739
When interviewed by the Subcommittee, Mr. Salem denied that the ABS Desk ever intended to
squeeze the market, and claimed that he had wrongly worded his self-evaluation.1740 He said that
reading his self-evaluation as a description of an intended short squeeze put too much emphasis on
“words.”1741
426
5/25/2007 email from Michael Swenson 1742 to Edwin Chin and Deeb Salem, GS MBS-E-012443115.
1743 5/29/2007 email from Michael Swenson to Deeb Salem, “they want to think about doing this again,” GS MBSE-
012561798.
1744 Subcommittee interview of Michael Swenson (10/8/2010).
1745 Goldman’s CDS collateral agreements were usually bilateral, meaning collateral could flow either way, to the
short or long party, depending upon price movements in the underlying assets. Subcommittee interview of Michael
Swenson (10/18/2010). Clients wrote emails to Goldman questioning how they could owe collateral on CDS
contracts they had only recently purchased from Goldman.
1746 5/21/2007 email from Deeb Salem to Michael Swenson and Edwin Chin, “A few things pain-related,” GS MBSE-
021887795 [ellipses in original].
Mr. Salem’s description of an attempted short squeeze by Goldman’s Structured Product
Group (SPG) is supported by other evidence. In May 2007, Michael Swenson, the head of both
SPG and ABS Desks and Mr. Salem’s supervisor, wrote emails that appear to confirm the
attempted short squeeze. In the first email, dated May 25, 2007, Mr. Swenson wrote:
“We should be offering sn [single name] protection down on the offer side to the street on
tier one stuff to cause maximum pain.”1742
Four days later, on May 29, 2007, Mr. Swenson followed up with another email:
“We should start killing the sn [single name] shorts in the street – let’s pick some high
quality stuff that guys are hoping is wider today and offer protection tight – this will have
people totally demoralized.”1743
When asked about these emails, Mr. Swenson also denied that Goldman had attempted to squeeze
the CDS short market. He claimed that the cost of single name CDS shorts had gone too high, and
the purpose behind Goldman’s actions was to restore balance to the market.1744 Mr. Swenson could
not explain, however, why in an effort to restore balance to the market, he used the phrases “cause
maximum pain,” and “this will have people totally demoralized.”
Goldman documents show there was a plan and an attempt to conduct a short squeeze,
despite the harm that might be caused to Goldman’s clients. Contemporaneous emails further
show that clients were complaining about a sudden markdown by Goldman in the value of their
short positions, especially compared to prevailing market prices and the worsening of the subprime
market itself.1745
On May 18, 2007, a Friday, the ABS Desk marked down the value of many of its clients’
CDS short positions. On Monday, May 21, Mr. Salem sent an email to Mr. Swenson and Edwin
Chin entitled, “A few things . . . pain-related.”1746
“Guys r gonna complain about their marks [hedge fund] already emailed me. I would talk
about the recent flow of OWICS [offers] and the levels ... they have been trading as the
427
1747 Id.
1748 5/21/2007 email to Edwin Chin, “Edwin–Important–Stanfield levels,” GS MBS-E-012570169.
1749 Id.
reason we moved marks on Friday. ... [Another customer] lost 6 pct based on fridays
moves.”1747
That same day, a Goldman sales representative sent Mr. Chin a complaint from a hedge
fund customer named Stanfield Capital regarding the lower values assigned to its CDS short
positions. The sales representative wrote:
“Stanfield feels we are marking them tighter than other dealers with whom they have
similar protection. ...
“In addition, 14 of the 25 names below were marked over 100 bps [basis points] tighter
week-on-week. That is a massive move and is creating major stress at the clients, as we
can’t see a similar move in the broader market. ...
“Finally, be aware that Stanfield may look for you to offer protection very close to your
mark. ... I’m hoping your attention to the marks below will defuse a situation in which they
think we’re messing with them via our marks on their protection.”1748
Mr. Chin forwarded the email to Mr. Swenson and Mr. Salem. Mr. Swenson replied: “We are ok
with that they do not have much more gun powder.”1749 Mr. Swenson’s response suggested that
Goldman did not have to be concerned about Stanfield’s threat to buy CDS shorts at the same low
price Goldman had applied to his CDS holdings, since Stanfield did not have the financial
resources – the “gun powder” – to make a large purchase.
On May 24, 2007, the Stanfield trader wrote to Goldman that he had thought the purchase
of the CDS contract signaled the beginning of a partnership between Stanfield and Goldman, but
he had lost credibility with his company because of the CDS contracts and expressed concern that
he may have been “naive to trust the pitch” from Goldman:
“When we put on the Single A protection trade the underlying names were suppose[d] to
have a large similarity to the index. ... The indexes are up only a couple of points since we
did the trade. Looking at the mid’s on our Single A trades we have tightened roughly 33%.
... I’m just trying to figure out how we can reverse some of the losses we have incurred.
Also, from where our BBB trade was marked last Friday ...[t]his trade is tighter by 35% as
well. ...
I had always thought that these trades were meant to be the start of a partnership building of
future business between Stanfield and Goldman Sachs. I know we are big boys and we did
the trade there is no doubt of that. What I am attempting to do is either cut our losses and
428
5/24/2007 email from Stanfield, “Our thoughts 1750 on single-name RMBS CDS,” GS MBS-E-012891722.
1751 5/31/2007 email from sales to Edwin Chin and Deeb Salem, “Stark CDO CDS potential trade 5/31,” GS MBSE-
012443662.
1752 Id.; see also, e.g., “Valuation & Pricing Related to Transactions with AIG,” prepared by Goldman in response to
inquiry by the Financial Crisis Inquiry Commission, GS MBS 0000039096.
1753 5/31/2007 Goldman email chain, “Stark CDO CDS potential trade 5/31,” GS MBS-E-012443675. Mr. Swenson
made no mention of his email from two days earlier in which he recommended lowering CDS values to “have people
totally demoralized.” 5/29/2007 email from Michael Swenson to Deeb Salem, GS MBS-E-012561798.
1754 6/7/2007 Goldman internal email chain, “BSAM Post,” GS MBS-E-011184213.
get out or determine what I can say to keep this trade on .... I’ve lost a lot of credi[b]ility on
the desk with this trade. Maybe I was naive to trust the pitch on the trade. It has cost me a
lot.”1750
A week later, on May 31, 2007, Stark Investments indicated interest in buying a short on
certain RMBS securities backed by home equity loans. The Goldman sales representative trying to
close the sale emailed SPG personnel that the client was hesitating due to Goldman’s valuations
which were “drastically different” from other dealers:
“Stark has an interest in looking at this trade; but there is an obstacle we need to address:
They feel Goldman is very inconsistent in the single name HEL [Home Equity Loan] CDS
marks that we provide them. We are drastically different in marking positions versus other
dealers. It is an annoyance that would potentially limit their interest in putting on
incremental CDS trades. I can name specific examples if you would like. Please
advise.”1751
Mr. Salem replied: “you couldn’t be more wrong,” while Mr. Swenson replied:
“Frankly, we believe we are best in class and have numerous data from controllers,
collateral posting and markit (the company, not market) that reflect upon this. This process
is thoroughly reviewed by all levels of senior management at GS. ...
“Unlike other dealers we stand by our marks and are willing to transact in the context of
our marks. ...
We also don’t mark our book wide if we are long protection and tight if we are short. we
mark to market.”1752
When the salesman replied: “I am trying to work with you guys,” Mr. Swenson chided him: “You
need to manage their opinions on marks – that has been fully vetted over here.”1753
On June 7, 2007, Mortgage Department personnel learned that two Bear Stearns hedge
funds specializing in subprime mortgage assets were in financial distress.1754 In response, the ABS
Desk immediately decided to buy more shorts at the prevailing market price to take advantage of
the possible collapse of the Bear Stearns hedge funds, which would send subprime mortgage prices
429
6/7/2007 email from Deeb Salem to Michael 1755 Swenson and Edwin Chin, GS MBS-E-012444252.
1756 Id.
1757 Id.
1758 Id.
1759 6/8/2007 email from Michael Swenson to Benjamin Case, Edwin Chin, and Deeb Salem, “CDO CDS protection
offers,” GS MBS-E-012551726.
1760 6/10/2007 email from Michael Swenson to Deeb Salem, Edwin Chin, and salesman, “CDSs on CDOs,” GS
MBS-E-012551460.
1761 Id.
1762 6/13/2007 email from sales, “CDO protection,” GS MBS-E-012445931.
still lower. To do so meant the ABS Desk had to sacrifice its “short squeeze” play. On June 7,
2007, Mr. Salem emailed Messrs. Swenson and Chin:
“We need to go to magnetar [a hedge fund] and see if we can buy a bunch of the cdo
protection. ... Can tell them we have a protection buyer, who is looking to get into this
trade now that spreads have tightened back in.”1755
Raising no concerns about the proposed deception, Mr. Swenson replied “Great idea.”1756 Mr.
Salem continued:
“Should we also send an email to select sales people in the mtg [mortgage] sales force
saying that we r looking to buy a block of single name protection vs a cdo OUT OF COMP
[in a private, off-market transaction]? It’s a no lose situation . . . either we get some sn
[single name] protection that we want or we gave these guys a chance and nobody can say
we aren’t working with them.”1757
Mr. Swenson responded: “We need to be careful.” Mr. Chin wrote that he knew of another CDO
collateral manager that might also be willing to sell some shorts: “I mentioned there was a hedge
fund on the side and he was very axed to do something.”1758
Having decided to start buying shorts outright, the ABS Desk also stopped offering to sell
CDS short positions to Goldman customers, effectively abandoning the attempted short squeeze.
On June 8, 2007, Mr. Swenson told his traders: “[w]ant to slow down on protection offers.”1759
On June 10, 2007, in response to a customer inquiry about a CDS short, Mr. Salem wrote: “Not
sure if we have any to offer any more.”1760 Mr. Swenson was less equivocal: “Really don’t want to
offer any.”1761 On June 13, 2007, a Goldman salesman emailed SPG personnel: “[Customer] is
looking to buy protection on cdos.”1762 Mr. Salem replied: “too late!”
Once it began buying CDS shorts, the SPG Desk immediately changed its CDS short
valuations and began increasing their value. Clients with long positions began to complain that the
marks were too high, and internal Goldman business units also raised questions. For example, on
June 11, 2007, a Goldman valuation specialist sent an email to Mr. Swenson, with copies to
Compliance and the Controller’s Office noting that “Client challenging marks,” followed by
430
6/11/2007 Goldman email chain, “Please advise – Client challenging 1763 marks,” GS MBS-E-018947548.
1764 6/12/2007 email from controllers, “CDS,” GS MBS-E-012445404.
1765 6/19/2007 email from controllers, “A3 subprime bonds in transition account,” GS MBS-E-012458169. Mr.
Swenson replied: “Tier 4 bonds talk to Deeb [Salem].”
1766 See Markowski v. SEC, 274 F.3d 525, 527-28 (D.C. Cir. 2001) (Congress determined that “‘manipulation’ may
be illegal solely because of the actor’s purpose”); In re IPO Litigation, 241 F. Supp. 2d 281, 391 (S.D.N.Y. 2003)
(no additional requirements aside from manipulative intent); H.R. Rep. No. 1383, 73rd Cong., 2d Sess. 20 (1934)
(under Securities Exchange Act, “if a person is merely trying to acquire a large block of stock for investment, or
desires to dispose of his holdings, his knowledge that in doing so he will affect the market price does not make his
actions unlawful. His transactions become unlawful only when they are made for the purpose of raising or
depressing the market price.”); but see GLF Advantage Fund, Ltd. v. Colkitt, 272 F.3d 189, 205 (3d Cir. 2001)
(requiring, in addition to manipulative intent, “that the alleged manipulator injected inaccurate information into the
market or created a false impression of market activity”). Single name CDS contracts referencing RMBS and CDO
securities appear to qualify as “security-based swap agreements” subject to anti-manipulation and anti-fraud
prohibitions under the federal securities laws.
1767 PSI Net Short Position Chart; 8/17/2007 Goldman chart, “RMBS Subprime Notional History (Mtg Dept.),” GS
MBS-E-012928391, Hearing Exhibit 4/27-56a.
1768 7/25/2007 email from Mr. Viniar to Mr. Cohn, “Private & Confidential: FICC Financial Package 07/25/07,” GS
MBS-E-009861799, Hearing Exhibit 4/27-26.
“Trading has agreed to change ... marks.”1763 The next day, June 12, 2007, a Goldman
representative from the Controller’s Office sent an email to Mr. Salem, asking: “Given recent
gyrations in the ABX and CDS markets, when can I come by to discuss how you are marking the
book tonight?”1764 The following week, on June 19, 2007, the Controller’s office sent an email to
Mr. Swenson raising questions about values assigned to certain CDS contracts: “These levels look
quite wide. Do you have any specific market color that points this direction?”1765
The May 2007 attempted short squeeze described in Mr. Salem’s performance selfevaluation
did not succeed in compelling existing CDS holders to sell their short positions. In
Subcommittee interviews, Mr. Salem and Mr. Swenson denied that an attempted short squeeze
even took place. Any attempt that did take place was apparently abandoned in June 2007, when
Goldman stopped offering to sell CDS short positions. Trading with the intent to manipulate
market prices, even if unsuccessful, is a violation of the federal securities laws.1766 Given the
novelty of credit default swaps and their use in the mortgage field, however, the Subcommittee is
unaware of any enforcement action or case applying an anti-manipulate prohibition to the CDS
market. Because Goldman is a registered broker-dealer subject to the supervision of the Financial
Industry Regulatory Authority (FINRA), the conduct of its ABS traders raises questions about their
compliance with FINRA’s Rule 2010, which provides: “A member, in the conduct of his or her
business, must observe high standards of commercial honor and just and equitable principles of
trade.”
(d) Building the Big Short
In the months of June and July 2007, Goldman’s Mortgage Department went short again.
This time, it built an even larger net short position than earlier in the year, reaching a peak of $13.9
billion in late June,1767 which Mr. Viniar later referred to as “the big short.”1768 This net short
431
See 6/7/2007 Goldman email chain, “BSAM 1769 Post,” GS MBS-E-011184213.
1770 Id. Some have suggested that the financial problems experienced by the Bear Stearns hedge funds were caused
in part by severe markdowns taken by Goldman on assets held in the funds’ portfolios, and that Goldman caused the
funds to collapse. In its final report, the Financial Crisis Inquiry Commission (“FCIC”) briefly addressed these
allegations. See The Financial Crisis Inquiry Report 2010 at 237-40, 244 (hereinafter “Final Report”). Goldman
denied the allegations with respect to its April and May 2007 marks in filings with the FCIC. See 11/1/2010 letter
from Goldman counsel Janet Broecke to FCIC, “FCIC Requests for Documents and Information” and Appendices AG,
available at www2.goldmansachs.com. The FCIC’s Final Report was critical of Goldman’s marks in general as
being significantly lower than those of other banks and noted in particular its collateral dispute with AIG. See Final
Report at 243-44, 265-71. With respect to the Bear Stearns hedge funds, however, the Final Report merely noted
that Bear Stearns had disputed marks from Goldman and three other banks and cited the testimony of the funds’
portfolio manager, Ralph Cioffi, that “a number of factors contributed to the April revision [in the hedge funds’
values, which ultimately led to the funds’ collapse], and Goldman’s marks were one factor.” Final Report at 240.
In addition to the markdowns in April and May, Goldman also marked down certain CDO securities held by
the Bear Stearns funds in June 2007, but it appears those June markdowns did not play a significant role in the hedge
funds’ collapse. That month, Goldman marked down their positions in four Goldman CDOs by two points each. See,
e.g., 6/8/2007 email from Jonathan Egol to Daniel Sparks, “BSAM mark recap,” GS MBS-E-001920339 (Mr. Egol
emailed Mr. Sparks a recap of the Bear Stearns markdowns and stated: “We lowered the marks on 4 bonds down 2
pts each.”).
Mr. Swenson had urged larger markdowns, but his advice was not followed. On June 7, 2007, Mr. Egol had
first marked down the funds’ holdings in a single Abacus CDO by 2 points, from 89 to 87. Mr. Egol emailed Mr.
Sparks a spreadsheet with a cover note: “GS exposure to BSAM [Bear Stearns Asset Management] as of today.
ABACUS mark corrected to 87 to handle.” 6/7/2007 email from Mr. Egol to Mr. Sparks GS MBS-E-003375593.
Since Abacus was only one of four Goldman CDOs in which the Bear Stearns funds held positions, Mr. Swenson
emailed Mr. Lehman recommending further markdowns:
Mr. Swenson: I am on the same page [as] egol we n[e]ed to mark him [Ralph Cioffi, Portfolio Manager of
the Bear Stearns funds]
position included the $9 billion AAA ABX short which had suddenly begun gaining value as the
subprime market worsened. In June, two Bear Stearns hedge funds specializing in subprime
mortgage assets collapsed. In July 2007, the credit rating agencies began downgrading ratings for
hundreds and then thousands of RMBS and CDO securities. Soon after, the subprime mortgage
backed securities market froze and then collapsed. Each of these events increased the value of
Goldman’s net short position.
Bear Stearns Hedge Fund Collapse. The collapse of the Bear Stearns hedge funds in
mid-June triggered Goldman’s effort to rebuild its net short position. On June 7, 2007, the
Mortgage Department learned that the Bear Stearns hedge funds were seeking quietly to sell some
of their subprime portfolio to meet client redemption requests, which Goldman interpreted as a
signal of serious financial distress.1769 After reviewing the hedge funds’ assets, one Goldman
employee remarked:
“In total these two portfolios add up to roughly $17bil in total exposure after leverage. It
goes without saying that if this portfolio were to be released into the market the
implications would be pretty severe.”1770
432
Mr. Lehman: Told Egol I’m comfortable w/ the prices, especially when u include the 5 pt [percent] HC
[haircut.] Don’t think mar[k]ing him down 1 or 2 pts makes sense or sends the right message .... I wud run it
by Dan [Sparks] and get his take ... [M]y opinion is that the Firm is appropriately protected w/ current HC
[haircut] and mark.
Mr. Swenson: We need to mark him he is the biggest elephant by far and it has an impact on the m$arket[.]
Mr. Lehman: How much do u [sic] want to mark him by?
Mr. Swenson: A lot[.]
Mr. Lehman: I disagree on this one . . . Let’s talk tomorrow[.]
Mr. Swenson: He is done[.]
6/7/2007 email exchange between Mr. Swenson and Mr. Lehman, “BSAM Post,” GS MBS-E-011184213.
The next day, Friday, June 8, 2007, Mr. Egol reported he had marked down all four CDO positions by two
points. 6/8/2007 email from Jon Egol to Daniel Sparks, “BSAM mark recap,” GS MBS-E-001920339. Upon
reviewing the marks the following Monday, Mr. Sparks wrote: “The marks look stale.” 6/11/2007 email from
Daniel Sparks, “BSAM Exposure Summary,” GS MBS-E-010798675. A Mortgage Department employee replied:
“Marks for everything but the correlation positions are taken from work egol did last thurs. Correlation marks are as
of friday’s cob [close of business].” Id.
On June 12, Bear Stearns announced that it would be changing the hedge funds’ Net Asset Valuations
(NAVs). 6/12/2007 email to Craig Broderick, “BSAM Bullet Points,” GS MBS-E-009967117 (“BSAM is currently
in the process of restating their performance figures for April, from down 5% to down 10%. This was due to many
dealers changing the way they are marking their Repo positions”). The Mortgage Department later marked down
two Timberwolf tranches owned by the Bear Stearns hedge funds by another 2 points and 5 points, respectively, to
95 and 89, before it bought them back from Bear Stearns at 96 and 90 on June 19, 2007, in a negotiated unwind of
the Bear funds’ positions with Goldman. See 6/22/2007 emails from Mr. Lehman, “BSAM Repo Summary,” GS
MBS-E-001916435. See also 6/18/2007 email from Mr. Lehman, “Today’s Bear Stearns Prices,” GS MBS-E-
001919600; 6/27/2007 email from Mr. Sparks to Mr. Viniar, “CDO^2s,” GS MBS-E-009747489.
6/8/2007 email to Daniel Sparks, “Heads Up – r 1771 ates market volatile,” GS MBS-E-010796702.
1772 Id.
1773 6/8/2007 email from Joshua Birnbaum, “* ABX Markets 07-1, 06-2, 06-1: 11:00 a.m.,” GS MBS-E-012900708.
1774 6/12/2007 email to Craig Broderick, “BSAM Bullet Points,” GS MBS-E-009967117.
1775 Id. A month later, on July 17, 2007, Mr. Sparks reported to Mr. Mullen and Mr. Montag that the Bear Stearns
funds were “returning 9 cents and 0 cents on the dollar in the less-levered and more-levered funds.” 7/17/2007 email
from Daniel Sparks, “Mortgages Estimate,” GS MBS-E-010857498.
On June 8, 2007, Mr. Sparks received an urgent early morning email from Goldman’s
Japan office regarding “unprecedented overnight [rates] market volatility,” suggesting that he call
in the ABX traders early.1771 “Given the recent correlation of risk assume this is not a good sign for
RMBS/ABS spreads.”1772 Later that day, when another trader complained about “getting crushed”
in the ABX market, Mr. Birnbaum replied: “Patience, patience. The CDO unwind has only
begun.”1773
Around June 12, 2007, public news accounts indicated that the two Bear Stearns funds
were unable to meet collateral calls on their subprime mortgage backed securities holdings.1774 The
funds also devalued their Net Asset Valuations (NAVs) to significantly lower levels, which
effectively triggered the funds’ total collapse.1775
433
6/12/2007 email to Craig Broderick, 1776 “BSAM Bullet Points,” GS MBS-E-009967117.
1777 See 6/22/2007 emails from David Lehman, “BSAM Repo Summary,” GS MBS-E-001916435. See also
6/18/2007 email from David Lehman, “Today’s Bear Stearns Prices,” GS MBS-E-001919600; 6/27/2007 email from
Daniel Sparks to David Viniar, “CDO^2s,” GS MBS-E-009747489. The prices Goldman paid to Bear Stearns on
the A1B and A1C tranches of Timberwolf were approximately one cent (or 100 basis points) above its own internal
marks on the Timberwolf tranches in the week of June 18, which were then at 95 and 89 points, respectively. Id. In
May 2007, Goldman had completed a re-evaluation of its CDO assets, which suggested on a preliminary basis that
the AAA Timberwolf securities should be marked down dramatically in value. Accordingly, Goldman may have
been generous toward Bear Stearns in buying back the Timberwolf positions at 96 and 90. On the other hand,
repurchasing the Timberwolf securities near its own low internal marks might have reduced the price Goldman could
obtain in reselling the tranches, which it identified in a June 22 sales directive to its sales force and recommended
selling at 98.5 and 95, respectively. When asked about the buyback of the Timberwolf tranches, Mr. Viniar told the
Subcommittee that Goldman had financed the purchase of both tranches and may have been legally entitled to seize
them, but there are circumstances in which Goldman voluntarily settles a dispute on agreed terms, rather than going
through the legal process entailed in seizing and selling collateral. Subcommittee interview of David Viniar.
(4/13/2010).
1778 6/22/2007 email from Tom Montag to Daniel Sparks, “Few Trade Posts,” GS MBS-E-010849103 (Mr. Montag:
“Can I get a complete rundown on everything we bought from BSAM and what’s left?” Mr. Sparks: “Yes – main
thing left is 300mm timberwolfs Other large positions were tmts - gone, octan - gone, abacus - we will collapse
against short There were some small rmbs positions.”).
1779 At the time, a trader from another bank stated in a market update: “[T]he BSAM [Bear Stearns Asset
Managment] story will dictate the tone in the market in the short term, as a continued liquidation of their holdings
will put further downward price pressure on ... ABX trading.” 6/18/2007 email to Edwin Chin, “ABX Open,” GS
MBS-E-021890868.
The failure of the Bear Stearns hedge funds triggered another decline in the value of
subprime mortgage related assets. The ABX Index, which was already falling, began a steep, sharp
decline. The collapse had further negative effects when the hedge funds’ massive subprime
holdings were suddenly dumped on the market for sale, further depressing prices of subprime
RMBS and CDO assets.
The creditors of the Bear Stearns hedge funds met with Bear Stearns management in an
attempt to organize a “workout” solution to stabilize the funds.1776 While those efforts were
underway, Goldman and Bear Stearns agreed to an unwind in which Goldman bought back $300
million of two AAA CDO tranches of Goldman’s Timberwolf CDO, which the hedge funds had
purchased two months earlier in April 2007. Goldman paid Bear Stearns 96 and 90 cents on the
dollar, respectively, for the two Timberwolf tranches.1777 Goldman also bought a few other RMBS
and CDO assets, which it immediately sold.1778 The attempt to organize a workout solution for the
funds was ultimately unsuccessful. Large blocks of subprime assets from the Bear Stearns hedge
funds’ inventory began flooding the market, further depressing subprime asset values.1779
Goldman’s Structured Product Group (SPG) took the collapse of the Bear Stearns hedge
funds as the signal to begin rebuilding its net short position. As Joshua Birnbaum, the head ABX
trader on the SPG Desk, later wrote:
“[T]he Bear Stearns Asset Management (BSAM) situation changed everything. I felt that
this mark-to-market event for CDO risk would begin a further unraveling in mortgage
434
9/26/2007 2007 MD Reviews, Joshua Birnbaum Self-Review, GS-PSI-1780 01956, Hearing Exhibit 4/27-55c. The
SPG Desk’s ABX shorting efforts caught the attention of another Goldman trader who was apparently unaware of
Mr. Birnbaum’s strategy. The trader emailed: “yo-who the F- is getting short the ABX at these levels.” 6/21/2007
email to Deeb Salem, GS MBS-E-021905440.
1781 This presentation was drafted to support a proposal that the SPG traders be compensated in a manner similar to
hedge fund managers. 10/3/2007 “SPG Trading – 2007,” presentation by Joshua Birnbaum, GS MBS-E-015654036.
Mr. Birnbaum had drafted the presentation on behalf of the SPG Trading Desk as a whole. Mr. Swenson and Mr.
Lehman reviewed and commented upon the presentation, and Mr. Birnbaum revised it to make the changes they
suggested. See, e.g., 10/2/2007 email from David Lehman to Joshua Birnbaum, “SPG Trading - 2007.ppt,” GS
MBS-E-015653681 (providing comments and suggesting text for presentation). Mr. Birnbaum replied and copied
Mr. Swenson on the email chain as well: “I added your bullet and one more.” Id. See also 10/4/2007 email from
Joshua Birnbaum to Michael Swenson and David Lehman, “How’s this?,” GS MBS-E-015712249 (forwarding
another revised bullet point for presentation). Mr. Birnbaum told the Subcommittee, however, that the SPG Trading
Desk ultimately did not use the presentation. See Birnbaum responses to Subcommittee QFRs at PSI_QFR_GS0509.
1782 10/3/2007 “SPG Trading – 2007,” presentation by Joshua Birnbaum, GS MBS-E-015654036 [emphasis in
original]. See also Birnbaum responses to Subcommittee QFRs at PSI_QFR_GS0509.
1783 6/29/2007 emails between Michael Swenson and David Lehman, “ABS Update,” GS MBS-E-011154528.
1784 7/10/2007 Goldman internal email, “GS Cashflow/Abacus CDOs Mentioned in S&P Report on CDO Exposure
to Subprime RMBS,” GS MBS-E-001837256.
1785 See id.
credit. Again, when the prevailing opinion in the department was to remain close to home,
I pushed everyone on the [SPG] desk to sell risk aggressively and quickly. We sold billions
of index and single name risk.”1780
In a later internal presentation for Goldman senior executives which Mr. Birnbaum drafted
for another purpose,1781 Mr. Birnbaum wrote that, after the Bear Stearns funds collapsed, SPG’s
Trading Desks went net short outright and that the shorts were not a hedge for long positions:
“By June, all retained CDO and RMBS positions were identified already hedged. ... SPG
trading reinitiated shorts post BSAM [Bear Stearns Asset Management] unwind on an
outright basis with no accompanying CDO or RMBS retained position longs. In other
words, the shorts were not a hedge.”1782
On June 29, 2007, the ABX Index and the value of single name CDS contracts referencing
RMBS and CDO securities plummeted in value and continued dropping until mid-July. Mr.
Swenson, head of the SPG Trading Desk, exchanged emails with Mr. Lehman and other Goldman
executives about that day’s trading: “There is absolutely no support at the lower levels from the
street. CDOs are wider by 50 bps or more.” Mr. Lehman responded: “[W]e r in the middle of a
mkt meltdown.”1783
On July 10, 2007, the two primary ratings agencies, Standard & Poor’s and Moody’s, began
the first of many mass ratings downgrades for subprime RMBS and CDO securities.1784 The
downgrades sent another negative shockwave through the subprime mortgage market as investors
scrambled to assess the impact of the downgrades on their RMBS and CDO holdings.1785 On July
12, 2007, when still more RMBS and CDO ratings downgrades were announced, Mr. Birnbaum
435
7/12/2007 email from Joshua Birnbaum, “ABX Markets 1786 07-1, 06-2, 06-1: 12:00 p.m.,” GS MBS-E-012944742,
Hearing Exhibit 4/27-146.
1787 7/27/2007 email to Tom Montag, Daniel Sparks, and Donald Mullen, “Structured Products Weekly Update –
7/27/07,” GS MBS-E-010876357.
1788 7/20/2007 email from Gary Cohn to Lloyd Blankfein, “Private & Confidential: FICC Financial Package
07/20/07,” GS MBS-E-009648405, Hearing Exhibit 4/27-24.
1789 7/24/2007 email from David Viniar to Lloyd Blankfein, “Daily Estimate 07-24-07 – Net Revenues $74M,” GS
MBS-E-009690033, Hearing Exhibit 4/27-25.
1790 7/29/2007 email from Daniel Sparks to Tom Montag, “Correlation information you asked for,” GS MBS-E-
010876594, Hearing Exhibit 4/27-27.
1791 9/26/2007 2007 EMD Reviews, Joshua Birnbaum Self-Review, GS-PSI-01975, Hearing Exhibit 4/27-55c.
wrote to his colleagues: “Seen massive flows recently. Many accounts ‘throwing in the towel’.
Anybody who tried to call the bottom left in bodybags.”1786
On July 27, 2007, a Goldman senior sales executive summarized the state of the market:
“Whether you remember ‘94, ‘98, or ‘03, the general themes/patterns are consistent. An
initial dislocation to the market (in this instance a credit deterioration in sub prime
mortgages) acts as a tipping point and leads to spread widening in other sectors. This in
turn quickly becomes a liquidity crunch/crisis. It appears this is where the structured
product market is now – searching for liquidity. This has produced numerous
capitulation/liquidation situations and forced customers to trade. . . . The impact of this
week leaves the account base in three camps: The Paralyzed . . . The Wounded (some
fatally) . . . The Opportunistic.”1787
Although the July subprime market meltdown was a disaster for many investors, the value
of Goldman’s net short positions climbed rapidly. Senior management at all levels were aware of
the Mortgage Department’s net short and the profits it was generating. On July 20, 2007, CEO
Lloyd Blankfein and COO Gary Cohn received a profit and loss report showing that the Mortgage
Department was up $72.7 million for the day, across almost every mortgage trading desk. Mr.
Cohn wrote to Mr. Blankfein: “There is a net short.”1788 On July 24, 2007, the Mortgage
Department posted a profit of $83 million for the day, while the firm’s overall net revenue for the
day was only $74 million.1789 Mr. Viniar forwarded the report to Mr. Blankfein with a note saying:
“Mergers, overnight asia and especially short mortgages saved the day.” On July 29, 2007, Mr.
Sparks reported to Messrs. Montag and Mullen:
“Department-wide P&L [Profit & Loss] for the week was $375mm (this is after adjusting
for the $100mm [error] discussed today). Correlation P&L on the week was $234mm, with
CMBS, CDOs, and RMBS/ABX shorts all contributing.”1790
Mr. Birnbaum later recapped the SPG Trading Desk’s profits during this period: “[W]hen the
[ABX] index dropped 25 pts in July, we had a blow-out p&l month, making over $1Bln that
month.”1791
436
8/11/2007 email from David Lehman, “1792 Japan exposure to CDOs,” GS MBS-E-001929202.
1793 8/23/2007 email from Tom Montag to Gary Cohn and David Viniar, “Harbinger Post,” GS MBS-E-009739009.
See also 8/21/2007 email from Michael Swenson, “Mortgage Commentary for Firmwide Risk Committee,” GS
MBS-E-010619375 (“Current SPG Trading Desk Position Summary: – RMBS AAA – long $2.2bb”).
1794 The one short position the Mortgage Department did not attempt to cover was its $3 billion net short in BBB and
BBB- rated RMBS securities, as discussed below.
1795 8/5/2007 email from Michael Swenson, “great week,” GS MBS-E-012376888, Hearing Exhibit 4/27-28.
1796 Id.
1797 Id.
1798 8/8/2007 email from Tom Montag to Michael Swenson and David Lehman, GS MBS-E-011088957.
1799 8/9/2007 email from Tom Montag, GS MBS-E-009640293.
Covering the Big Short to Lock in Profits. Starting in July and throughout August 2007,
Goldman undertook an intensive effort to cover its $13.9 billion net short and lock in its profits.
To do so, the Mortgage Department bought long assets, offered CDS contracts in which it took the
long side, and even sold some short positions.
The Mortgage Department was particularly focused on purchasing long AAA assets to
cover Goldman’s $9 billion AAA ABX short, to lock in the unexpected profits on that position. In
August 2007, Mr. Lehman, co-head of the SPG Desk, wrote: “[A]s swenny/deeb/josh have done an
awesome job sourcing risk, the CDO transition book AAA ABX short decreased from 1.55bb to
250m over the past two weeks – we love covering that trade.”1792 On August 23, 2007, Mr.
Montag reported to Messrs. Cohn and Viniar: “We ... bought back almost 9 billion of aaa abx
over last two weeks.”1793
From mid-July through the end of August, the Mortgage Department also covered a range
of other shorts.1794 On August 5, 2007, Mr. Swenson reported a “phenomenal week”:
“In summary, a phenomenal week for covering our Index shorts on the week. The ABS
Desk bought $3.3bb of ABX Index across various vintages and ratings over the past week.
$1.5 billion was retained by the ABS desk to cover shorts in ABX ($900mm in ABX 06-1
As being the most significant) and $1.0 billion was sold to internal desks across the
mortgage department ($925mm in triple-As).”1795
Mr. Swenson also reported that the Mortgage Department was still $8.3 billion net short across all
subprime asset classes, including $4 billion of AAA ABX assets.1796
On August 8, the market rallied for a short period, and the Mortgage Department’s net short
position suffered a $100 million loss. Mr. Swenson explained: “Market rallied especially at the
top end of the capital structure – AAA (up 2 pts), AA (up 3 pts), and A (up 2 pt.).” He reported
that the Department still held a $3.1 billion net short in AAA rated subprime mortgage assets.1797
Mr. Montag replied: “now on to the 3 billion short.”1798 The next day, August 9, 2007, Mr.
Montag reported to his colleagues: “mortgages bought back 1 billion of 3 billion short in AAA
indices at ½ to 1 point better than yesterday.”1799
437
8/11/2007 emails between Donald Mullen and David Lehman, “Japan 1800 exposure to CDOs,” GS MBS-E-
001929202.
1801 Id. See also 8/11/2007 email from Daniel Sparks to Tom Montag and Donald Mullen, “GSC ms prop/Paulson
swap,” GS MBS-E-010673306 (“We need to keep buying AAA ABX, and now we can start looking to cover some
CDO CDS”).
1802 8/20/2007 email exchange between Daniel Sparks and Tim Montag, “Hsbc loans,” GS MBS-E-010681855.
1803 8/14/2007 email from Michael Swenson, “ABS Summary for Week Ended August 10th,” GS MBS-E-
010678428.
1804 Id.
1805 8/19/2007 email from Tom Montag, “Mtg Department Weekly Update,” GS MBS-E-010681647.
1806 Id.
1807 Id. Not everyone at Goldman agreed that the risk of loss on AAA was “remote.” On July 29, 2007, Mr.
Rosenblum circulated an email to Mortgage Department managers and research analysts with a series of questions
about how AAA subprime RMBS securities would be affected by other market developments. 6/29/2007 email from
David Rosenblum, GS MBS-E-010060183. The head of Goldman’s Structured Product Strategies area, Alan Brazil,
responded: “Well, as is becoming clearer to the market is [sic] that the subprime issue is really a triple-a issue, either
directly as a aaa subprime or indirectly in a aaa cdo. As a rough guide, over 90% of a subprime deal are in aaas. ...
And once you start downgrading bbb/bbb- you will ultimately be start [sic] downgrading aaas. And, in my view, that
On August 11, 2007, reports of firms having to sell CDO securities in Asia prompted Mr.
Mullen to ask: “Did we cover to[o] soon? Looks like more selling at the higher end of cap
stack”1800 Mr. Lehman replied: “Don’t th[in]k so – we haven’t covered any CDO risk (we have
gone the other way by 1.44bb since June 1st ) and that is where the market still has bad longs –
th[in]k AAA rmbs is a very different trade.”1801
On August 20, 2007, Mr. Sparks reported on the Mortgage Department’s progress in
covering its net short, telling Mr. Montag: “[L]oan books had been heavily net short (still are some
– especially ... in alt a) and I have been forcing them to cover over the past 2 weeks.” Mr. Montag
responded: “[H]eavily isn’t the half of it – we have bought back 4 - 5 billion and still short.”1802
Buying More AAA RMBS Securities. In August 2007, the Mortgage Department
proposed buying $10 billion in AAA rated RMBS securities, but did not receive permission to
initiate the investment.
By August 2007, AAA rated RMBS and CDO securities were available from many
financial firms at a very low price. On August 14, 2007, in summarizing the prior week’s trading
Mr. Swenson wrote: “Top of the capital structure is where all the action is. AAAs are extremely
cheap .... [W]ant to scale into a large long.”1803 Mr. Sparks agreed: “[T]he AAA ABX index is a
great opportunity and we continue to like it.”1804 On August 19, 2007, Mr. Lehman reported that
the Mortgage Department had purchased $1.6 billion of the long side of CDS contracts referencing
the ABX Index for AAA RMBS securities, and that its value had increased 1.5 percent over the
prior week. Given Goldman’s dominant market share and recent large purchases, however, Mr.
Montag was skeptical: “How much of the aaa outperforming was us buying?”1805 Mr. Birnbaum
responded: “On the AAA outperformance question, I think AAAs would have performed similarly
without our adding.”1806 He also wrote that the “likelihood of loss on ‘real’ RMBS AAAs (i.e., not
AAA CDOs),” was “remote.”1807
438
is a significant escalation of the subprime meltdown. ... At its heart, the main shoe to fall will be when the rating
agencies downgrade to the aaa level. I don’t see as they have much of a choice. Mez[zanine] aaa cdo trade in the 20
and 30s cannot be overlooked even by the agencies.” Id.
Subcommittee i 1808 nterview of Joshua Birnbaum (4/22/2010).
1809 Id.
1810 Id.
1811 8/14/2007 email from Daniel Sparks, “Fw: Post,” GS MBS-E-010678053, Hearing Exhibit 4/27-30.
1812 See 8/14/2007 email from Gary Cohn to Daniel Sparks, “Fw: Post,” GS MBS-E-010678053, Hearing Exhibit
4/27-30 (“Talk to me before you go long.”); 8/14/2007 email from Tom Montag, “Post,” GS MBS-E-
009741145(“We will not be going long billions. Lots of risk to clean up first imo”).
1813 8/15/2007 email from Daniel Sparks, “Post,” GS MBS-E-009740784, Hearing Exhibit 4/27-32.
1814 8/20/2007 email from Daniel Sparks to Gary Cohn, David Viniar, Jon Winkelried, Tom Montag, and Donald
Mullen, “Big Opportunity,” GS MBS-E-009739836. See also 8/20/2007 email exchange between Daniel Sparks and
Tom Montag, “Hsbc loans,” GS MBS-E-010681855 (Mr. Sparks pitched the plan again to Mr. Montag separately:
“As a overall business, we’re not short AAA’s anymore. We are putting on the long index (mostly AAA)/short
single name mezz trade on .... We are planning to continue to play offense. . . . Discussions on the up the quality
trade (top cap stack and top quality collateral) were had in various times with don [Mullen], gary [Cohn] and bill
According to Mr. Birnbaum, a key reason for buying the AAA rated assets was that Mr.
Birnbaum and others in the Mortgage Department wanted to maintain a large short position in
ABX assets referencing BBB and BBB- rated RMBS securities, because they believed the ABX
Index for those securities would fall even further.1808 Mr. Birnbaum told the Subcommittee that
covering the BBB/BBB- net short position in August would have amounted to leaving money on
the table.1809 He explained that the Mortgage Department thought that buying a proportionate
amount of AAA ABX long positions could be used to offset the risks of continuing to hold the
BBB/BBB- short until the ABX Index bottomed out.1810
On August 14, 2007, Mr. Sparks updated Goldman senior executives on the success of the
Mortgage Department’s efforts to cover its shorts and added that the Department was interested in
increasing its purchase of AAA rated RMBS securities: “we will likely come to you soon and say
we’d like to get long billions[.]”1811 Senior executives reacted with skepticism.1812 Mr. Sparks
responded: “We’re continuing to cover some shorts and we may cover some BBB with AAA, but
I got the message clearly that we shouldn’t get long without Gary [Cohn]/Tom [Montag]/Don
[Mullen] all saying OK.”1813
On August 20, 2007, Mr. Sparks pitched the idea again to Mr. Montag and other senior
executives in an email entitled, “Big Opportunity”:
“We are seeing large liquidations - we bought $350mm AAA subprime RMBS from ... SIV
unwinds today. ... We think it is now time to start using balance sheet and it is a unique
opportunity with real upside - specifically for AAA RMBS. We’ve sold over $100mm of
what we bought today – most up 1-2 points.
That’s a great trade – buy and flip up 1-2 points, however, we’re not always going to be
able to do that - and there’s the opportunity for us to make 5-10 points if we have a longer
term hold.”1814
439
[McMahon]. We aren’t going crazy with it, just being opportunistic. Before we get large, we are going to lay out a
strategy for the four of you.”).
8/21/2007 email from Joshua Birnbaum, “Potential large subprime trade and impact 1815 on firmwide VAR,” GS
MBS-E-016359332, Hearing Exhibit 4/27-34; 8/21/2007 email from Joshua Birnbaum, “For 2 p.m. meeting,” GS
MBS-E-010608145 (graphs in support of plan to go long up to $10 billion in AAA ABX index).
1816 Id.
1817 See 8/21/2007 email from Mr. Montag to Mr. Birnbaum, GS MBS-E-010682736 (“FYI. I think it would be
much better for all concerned that we all discuss this and any strategy and have agreem[e]nt before we go to the
presidents and cfo .... Secondly, I think we should be reducing our basis trades to reduce var as is .... Let’s sit
down”).
1818 8/21/2007 email from Bill McMahon, “Potential large subprime trade and impact on Firmwide VAR,” GS MBSE-
012606879.
1819 8/21/2007 email from Joshua Birnbaum, “Potential large subprime trade and impact on firmwide VAR,” GS
MBS-E-016359332, Hearing Exhibit 4/27-34
On August 21, 2007, Mr. Birnbaum presented the Mortgage Department’s plan to buy up to
$10 billion in AAA rated RMBS securities.1815 The plan had dual objectives, to profit from the
intrinsic financial value of the proposed assets and to use those assets to preserve, rather than
cover, the Department’s existing $3.5 billion BBB/BBB- net short:
“– The mortgage department thinks there is currently an extraordinary opportunity for those
with dry powder to add AAA subprime risk in either cash or synthetic form.
– We would like to be opportunistic buyers of up to $10Bln subprime AAAs in either cash
or synthetic (ABX) form and run that long against our $3.5Bln in mezzanine subprime
shorts.
– Mortgage dept VAR would be reduced by $75mm and Firmwide VAR would be reduced
by $25mm.
– At current dollar prices, the implied losses at the AAA level are 2.5x higher than the
implied losses at the BBB level where we have our shorts (the ratio is even cheaper for cash
due to technicals). If AAAs were priced consistent with BBB implied loss levels, they
would be trading 5-10pts higher in synthetics and 10-15 points higher in cash. ...
– On the demand side, we plan to share this trade quietly with selected risk partners. We
began doing so yesterday when we sold 1/3 of the AAAs purchased off the [seller] list to
[customer] and 100% of the AAAs from [seller] to [customer] and [customer].”1816
Mr. Montag responded that he wanted to discuss the concept further.1817 Mr. McMahon wrote:
“What are we holding against the 3.5b mezz shorts right now? Why don’t we just cover the
shorts?”1818 Co-President Gary Cohn emailed Messrs. Mullen, Winkelried, and Montag: “I do like
the idea but you[r] call.”1819 Before any further discussion took place, however, events overtook
the debate.
440
8/15/2007 email from Gary Cohn, “Trading VaR $165mm,” 1820 GS MBS-E-009778573.
1821 7/21/2007 email from Daniel Sparks to Donald Mullen, Tom Montag, and others, “Mortgages Estimate,” GS
MBS-E-009640287.
1822 See id. (noting $50 million down trading day, followed by a day in which the AAA index accounted for half of
the day’s profit).
1823 Id.
1824 8/9/2007 email from Joshua Birnbaum to Deeb Salem, GS MBS-E-012927140.
1825 8/8/2007 email from Tom Montag to Michael Swenson and David Lehman, GS MBS-E-011311633. Mr.
Swenson explained that the approximately $100 million loss was split between the Residential Whole Loan Trading
Desk, the SPG Trading Desk, and the CDO Origination Desk. Id.
1826 8/9/2007 email from Joshua Birnbaum to Deeb Salem, GS MBS-E-012927140.
(e) “Get Down Now”
Despite direction from senior management to cover its $13.9 billion net short position, the
Mortgage Department continued to maintain several large net shorts, including at least $3 billion in
single name CDS contracts referencing BBB and BBB- rated RMBS securities that it expected to
gain in profits. In August 2007, Co-President Gary Cohn finally issued an order to “get down
now.”1820
Excessive VAR. By late August, a combination of the large net short and volatility in the
subprime mortgage market had driven the Mortgage Department’s VAR to an all-time high. When
the AAA ABX short position was far out-of-the-money, it entailed little market risk, as it was not
actively traded and had little likelihood of ever paying off. Once the AAA ABX short became
profitable, however, the $9 billion position was so large that it had a major impact on the firm’s
risk measurements. Even a small percentage change in $9 billion can cause substantial changes in
a profit and loss statement. As Mr. Sparks explained: “The combination of our large AAA ABX
index shorts and the relatively new volatility in the AAA part of the index will result in much
larger daily swings in P&L [profit and loss] both ways.”1821
As predicted, due to the $9 billion short, the Mortgage Department’s daily profit and loss
reports began to show much larger swings.1822 For example, while the Mortgage Department
showed a profit of $71 million on July 21,1823 it showed a loss of $100 million on August 8.1824
Upon hearing of that loss, Mr. Montag asked “so who lost the hundy?”1825 Mr. Birnbaum wrote to
a colleague: “I’m sure the AAA ABX is being blamed as the reason the dept was down 100
yest[erday].”1826 While some in the Mortgage Department disagreed with the use of VAR as a
441
8/9/2007 email from Joshua Birnbaum to Deeb Salem, “MarketRisk: Mortgage 1827 Risk Report (cob 08/08/2007),”
GS MBS-E-012927200 (“These VAR numbers are ludicrous, btw. Completely overestimated for SPG trading,
underestimated for other mortgage desks.”). See also 8/21/2007 email from Joshua Birnbaum to Bill McMahon,
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