Sunday, September 4, 2011


stated that the VAR levels were being driven by Goldman’s large net short positions.1914
For the most part, Goldman’s risk managers ignored the Mortgage Department’s VAR
violations and did not demand immediate compliance with the last applicable limit, as would
ordinarily be the case.1915 With notable exceptions in late February and late August 2007,
Goldman’s risk managers continually assigned the Mortgage Department new “temporary” VAR
limits large enough to accommodate whatever risk levels resulted from the Department’s trading.
Mr. Birnbaum later described this pattern as the risk area’s “policy to just keep increasing ou[r]
The first quarter of 2007 is illustrative of the pattern. During that quarter, the Mortgage
Department’s trading activities exceeded three new VAR limits in as many weeks. The Mortgage
Department received its new permanent VAR limit of $35 million on February 8, 2007.1917 Four
days later, on February 12, the Department’s VAR hit $49 million.1918 On February 14, the
2/14/2007 email, “MarketRisk: End of Day Summary - cob 02/1919 13/2007,” GS MBS-E-009763394 (“Mortgages
VAR is over its $35mm limit. Temporary $50mm limit was granted until cob 02/20/2007.”).
1920 2/20/2007 email, “MarketRisk: End of Day Summary - cob 02/16/2007,” GS MBS-E-009724779. 2/22/2007
email, “MarketRisk: End of Day Summary - cob 02/21/2007,” GS MBS-E-009762741 (Mortgages VAR on 2/20 was
63 million).
1921 Id. (“Mortgages VAR has a temporary $60mm limit until cob 2/27/2007.”).
1922 2/26/2007 email, “MarketRisk: End of Day Summary - cob 2/23/2007,” GS MBS-E-009720057; 2/27/2007
email, “MarketRisk: End of Day Summary - cob 2/26/2007,” GS MBS-E-009764685.
1923 2/27/2007 email, “MarketRisk: End of Day Summary - cob 2/26/2007,” GS MBS-E-009764685 (“Mortgages
VAR has a temporary $90mm limit until cob 03/06/07.”). 2/28/2007 email, “MarketRisk” End of Day Summary -
cob 2/27/2007,” GS MBS-E-009762239.
1924 2/27/2007 email from Richard Ruzika to Tom Montag, others, GS MBS-E-002204942.
1925 3/1/2007 email, “MarketRisk: End of Day Summary - cob 02/28/2007,” GS MBS-E-009757430.
1926 3/2007 Goldman “Quarterly Market Risk Review, Market Risk Management & Analysis,” GS MBS-E-
009685934, Hearing Exhibit 4/27-54c.
1927 4/2010 Goldman report, “Risk Management and the Residential Mortgage Market,” Hearing Exhibit 4/27-161.
1928 12/2006 Goldman “Quarterly Market Risk Review, Market Risk Management & Analysis,” GS MBS-E-
009583144, Hearing Exhibit 4/27-54b.
Department was assigned a new “temporary” limit of $50 million that would expire on February
20.1919 By February 20, however, the Department’s VAR was $63 million, well in excess of its
temporary limit of $50 million.1920 So the Department was assigned a new temporary limit of $60
million – a level it was already exceeding – until February 27.1921 Instead of dropping below the
new temporary limit of $60 million, the Mortgage Department’s VAR continued to rise until it hit
a quarter-high level of $85 million on February 23 and February 26.1922 In response, on February
27, the Department was given yet another temporary limit of $90 million through the end of the
month.1923 But the precipitous rise in VAR apparently alarmed Goldman’s Operating Committee,
which ordered the Department to reduce the size of its net short position to $4.5 billion.1924 The
Department responded immediately and, by February 28, had reduced its VAR to $81 million.1925
The pattern created by the Mortgage Department’s increasing VAR levels, and the lagged
reaction of Goldman’s risk managers in setting new “temporary” limits over the course of 2007 is
shown in the chart on the next page.
[SEE CHART NEXT PAGE: Goldman Sachs Mortgage Department
Value at Risk (VaR), prepared by Permanent Subcommittee on
The continual increases in the Mortgage Department’s VAR also had an impact on VAR
for all of Goldman’s trading activities, called “Trading VAR” or “Firmwide VAR.” Goldman
carefully tracked the amount of its trading VAR that was attributable to the activities of each of its
trading desks or units. During the first quarter of 2007, its records show that the firm’s Trading
VAR rose from $119 million in the prior quarter to $154 million.1926 Goldman has stated that its
Mortgage Department’s activities have historically resulted in only about 2% of the firm’s net
revenues.1927 At the end of 2006, the Mortgage Department’s VAR of $14 million contributed only
about 3% of the Firmwide Trading VAR of $119 million, which is roughly consistent with or
proportionate to the 2% contribution to firmwide net revenues that Goldman has reported.1928
Goldman Sachs Mortgage Department Value at Risk (VaR)
December 2006 - December 2007 (in $ Millions)
Derived from Goldman Sachs Firmwide Risk Committee Appendices and Market Risk End of Day Summaries provided by Goldman Sachs.
Prepared by the U.S. Senate Permanent Subcommittee on Investigations, April 2010.
Mortgage Department VaR
Mortgage Department Permanent VaR Limit
Mortgage Department Temporary VaR Limit
3/2007 Goldman Quarterly Risk Review, “Market Risk Management 1929 and Analysis,” GS MBS-E-009685958,
Hearing Exhibit 4/27-54.
1930 8/14/2007 Market Risk Report, Mortgage Portfolio Summary, GS MBS-E-012380294, Hearing Exhibit 4/27-35
(Mortgage Structured Products, VAR 110.1 on 8/14/07, Percentage Contribution to Firmwide VaR 53.8%).
1931 2/27/2007 email from Richard Ruzika to Tom Montag and Daniel Sparks, GS MBS-E-002204942; 8/15/2007
email from Gary Cohn, “Trading VaR $165mm,” GS MBS-E-016344758.
1932 8/16/2007 email from Jon Winkelried to Daniel Sparks, “Mort P&L Explanation,” GS MBS-E-010680327-330;
7/25/2007 email from David Viniar to Gary Cohn, “Private & Confidential: FICC Financial Package 07/25/07,” GS
MBS-E-009861799, Hearing Exhibit 4/27-26; 2/27/2007 email from Richard Ruzika to Tom Montag, others, GS
MBS-E-002204942; 8/15/2007 email from Gary Cohn, “Trading VaR $165mm,” GS MBS-E-016344758.
1933 8/16/2007 email from Jon Winkelried to Daniel Sparks, “Mort P&L Explanation,” GS MBS-E-010680327-330.
At the end of the first quarter in 2007, however, the Mortgage Department’s VAR of $85
million was contributing a total of 23% to the Firmwide VAR.1929 During the rest of 2007, the
Mortgage Department’s percentage contribution to Firmwide VAR continued to rise until it hit an
all-time high of 54% on August 14, 2007, when the Mortgage Department’s VAR reached $110
million on a Firmwide VAR of $165 million.1930
The 54% contribution rate to firmwide VAR means that the Mortgage Department’s trading
alone accounted for a 54% of total firmwide risk, while all of Goldman’s other trading activities
combined – including all equities, commodities, foreign exchange, and interest rate instruments –
accounted for the rest. Given the serious financial ramifications of such a large and highly
concentrated position, the decision to allow the Mortgage Department to incur such a high level of
firmwide risk would have required approval at the highest levels of firm management. Indeed, it
was Goldman’s Operating Committee and its Co-President, Mr. Cohn, who decided in February
and August 2007, respectively, that the Mortgage Department’s VAR had risen too high and had to
be brought down.1931
Because of the net short’s impact on the Mortgage Department and firmwide VAR levels,
Goldman’s senior executives not only knew about the “big short,” but made frequent inquiries and
exercised frequent control over the Mortgage Department’s activities.1932 On August 16, 2007, for
example, Jon Winkelried, who served as Co-President with Mr. Cohn, asked Mr. Sparks: “Do you
still feel we are being conservative with our marks .... Good time to make sure we’re
conservative.” Mr. Sparks replied:
“I try, but it is much harder than you think with all the things we are dealing with –
completely dislocated markets with little price transparency, systems/tools that are not
where they should be, focused controllers (who I think are doing a very good job in a tough
market) and many cooks in the kitchen who like to micro-manage. ... But I hear your
Mr. Winkelried replied: “I think you should drop the micro manage theme in this
8/21/2007 email from Joshua Birnbaum, “Potential large subprime trade and impact 1934 on firmwide VAR,” GS
MBS-E-016359332, Hearing Exhibit 4/27-34
1935 6/28/2007 email from David Lehman to Daniel Sparks, GS MBS-E-010623720.
1936 See 8/16/2007 email from Jon Winkelried to Daniel Sparks, “Mort P&L Explanation,” GS MBS-E-010680327-
330; 7/25/2007 email from David Viniar to Gary Cohn, “Private & Confidential: FICC Financial Package 07/25/07,”
GS MBS-E-009861799, Hearing Exhibit 4/27-26. 2/27/2007 email from Richard Ruzika to Tom Montag, others,
GS MBS-E-002204942; 8/15/2007 email from Gary Cohn, “Trading VaR $165mm,” GS MBS-E-016344758.
1937 2/26/2007 Market Risk Report, Mortgage Risk Portfolio Summary, GS MBS-E-010388177.
Mr. Mullen also expressed concern that the Mortgage Department’s practice of skirting the
normal decisionmaking channels and communicating directly with the Co-Presidents Gary Cohn
and Jon Winkelried, among other very senior officers, could create problems. When Mr. Birnbaum
drafted the Mortgage Department’s proposal to buy $10 billion in AAA RMBS securities, he sent it
directly to Mr. Cohn and Mr. Winkelried, as well to his more immediate superiors, Mr. Mullen,
Mr. Montag, and Mr. Sparks, among others. Mr. Mullen wrote to Mr. Cohn and Mr. Winkelried,
the Co-Presidents of Goldman: “It would help to manage these guys if u would not answer these
guys and keep bouncing them back to Tom and I.” Mr. Cohn replied: “Got that and am not
answering,” but then added: “I do like the idea but you[r] call.”1934
For his part, Mr. Montag was also aware that he and Mr. Mullen were taking a more active
role in the management of the Mortgage Department than they normally would. Mr. Montag, for
example, was Global Co-Head of Securities for the Americas, which encompassed both the FICC
Division and the Equities Division, and was responsible for numerous departments. Nonetheless,
he was involved in management decisions regarding the Mortgage Department on a near-daily
basis in 2007. In August of that year, Mr. Lehman reported to Mr. Sparks that Mr. Montag had
“how the desk thought about him and mullen being very involved. I told him we
understood the scrutiny on the business given the overall pressure on our market, large P+L
[profit and loss] and risk swings, etc.”1935
Given the scrutiny by senior executives, the fact that the Mortgage Department’s VAR was
permitted to reach over $113 million in mid-August 2007 – more than three times its permanent
limit – suggests that senior management knew and approved of the magnitude of the risk the
Department incurred. It also suggests that the net short positions the Mortgage Department took
were proprietary.1936 Goldman’s senior executives would have no reason to take such large risks if
they were seeking only the small spread arbitrage available from market-making activities for
On February 26, 2007, the Mortgage Department’s VAR reached a quarterly high of $85.4
million.1937 On February 22, Mr. Sparks had told Messrs. Swenson, Lehman, and Birnbaum that
they would have to cover $2 billion in subprime mortgage related net short positions that same
2/22/2007 email from Daniel Sparks, “FW: Block size tranche protection offers for [1938 redacted] or others,” GS
1939 2/27/2007 email from Richard Ruzika to Tom Montag, Justin Gmelich, and Daniel Sparks, GS MBS-E-
1940 Id.
1941 Subcommittee interview of Joshua Birnbaum (10/1/2010); see also 2/22/2007 email from Mr. Ruzika to Mr.
Montag and Mr. Sparks, GS MBS-E-010381967 (Mr. Ruzika: “covering the single name bbb and bbb- is prudent
because it cuts vol and var the most”).
1942 8/9/2007 email from Deeb Salem to Joshua Birnbaum, “MarketRisk: Mortgage Risk Report (cob 08/08/2007),”
GS MBS-E-012927200.
1943 Id.; Subcommittee interview of Joshua Birnbaum (10/1/2010).
1944 8/9/2007 email from Joshua Birnbaum to Deeb Salem, “MarketRisk: Mortgage Risk Report (cob 08/08/2007),”
GS MBS-E-012927200.
1945 Id.
1946 Id.
day.1938 On February 27, 2007, Mr. Ruzika wrote Mr. Sparks and others: “I want to see us getting
the short down to 4.5 bil[lion] net.”1939 Later that day, Mr. Ruzika forwarded the “OpCom
Directive” to Mr. Sparks: “Dan. Directly from the opcom we need to step up the pace of buying
back single names even if it costs us some money.”1940 Mr. Birnbaum told the Subcommittee that
the SPG Trading Desk’s actions in February were taken to reduce the level of VAR.1941
On August 9, 2007, Mr. Birnbaum received a note from the Department’s risk managers
indicating that the Department’s temporary VAR limit might not be extended, which would reverse
the prior policy of continually extending temporary limits:
“–Temporary MTG [Mortgage Department] SPG VaR limit of $110mm expired on
–MTG SPG is over its permanent VaR limit of $35mm.”1942
Mr. Birnbaum told the Subcommittee that he read the note as an indication that the temporary
trading limit would not be renewed, and he was being directed to reduce his net short positions to
bring VAR under the permanent limit of $35 million.1943 On the same day, August 9, Mr.
Birnbaum sent an email to the ABS Desk trader, Mr. Salem:
“Are you getting any more heat to cut/cover risk? These VAR numbers are ludicrous, btw.
Completely overestimated for SPG trading, underestimated for other mortgage desks.”1944
Mr. Salem replied that he had “waved in ~120mm in bbb and bbb- protection in the last 2 days,”
which covered shorts, so he felt no heat about covering.1945 Mr. Birnbaum said:
“I just asked b/c I saw the note about mortgages dropping back down to a permanent limit
of 35mm (which we are way over). This would mark a change of their recent policy to just
keep increasing ou[r] limit. Makes me a little nervous that we may be told to do something
1947 Id.
1948 Subcommittee interview of Joshua Birnbaum (10/1/2007).
1949 Id.
1950 8/15/2007 email from Daniel Sparks, “Trading VaR $165mm,” GS MBS-E-016344758; See, e.g., 8/15/2007
email from Michael Dinias, “Hedge Analysis cob 8/13/07,” GS MBS-E-010678553 (analyzing 6 potential VARreducing
trading scenarios featuring different proposed transactions); 8/21/2007 email from Mr. Dinias, “Trading
VaR Analysis,” GS MBS-E-009993267 (analyzing the VAR-reducing impact of going long in various classes of
assets); 8/22/2007 email from Daniel Sparks to Tom Montag and Donald Mullen, “VAR reduction possibilities,” GS
MBS-E-010619824 (proposed transactions in single name CDS protection to reduce VAR).
1951 See, e.g., 8/14/2007 Goldman Market Risk Report, GS MBS-E-010679220; 8/21/2007 email from
MarketRisk,“MarketRisk: End of Day Summary - cob 8/20/07,” GS MBS-E-009740158.
1952 8/21/2007 email from MarketRisk, “MarketRisk: End of Day Summary - cob 8/20/07,” GS MBS-E-009740158.
1953 8/15/2007 email from Gary Cohn, “Trading VaR $165mm,” GS MBS-E-016344758.
1954 See, e.g, 8/28/2007 email from MarketRisk, “MarketRisk: End of Day Summary - cob 8/28/07," GS MBS-E-
009716460 (Mortgages temporary VAR limit was $110 million); 9/14/2007 email from MarketRisk, “MarketRisk:
End of Day Summary - cob 9/13/07,” GS MBS-E-009714807 (Mortgages temporary VAR limit was $90 million);
9/27/2007 email from MarketRisk, “MarketRisk: End of Day Summary - cob 9/27/07,” GS MBS-E-009708872
(Mortgages temporary VAR limit was $90 million); 10/3/2007 email from MarketRisk, “MarketRisk: End of Day
Summary - cob 10/2/07,” GS MBS-E-009717721 (Mortgages temporary VAR limit was $85 million); 10/19/2007
email from MarketRisk, “MarketRisk: End of Day Summary - cob 10/18/07,” GS MBS-E-009724040 (Mortgages
temporary VAR limit was $85 million); 12/13/2007 email from MarketRisk, “MarketRisk: End of Day Summary -
cob 12/12/07,” GS MBS-E-009707379 (Mortgages temporary VAR limit was $80 million).
1955 Subcommittee interview of Craig Broderick (4/9/2010).
Mr. Birnbaum continued: “I do think it is a real concern. How quickly can you work with strats to
get them to revise our VAR to a more realistic number?”1947
Mr. Birnbaum explained to the Subcommittee that by the phrase, “be told to do something
stupid,” he meant being ordered by senior Goldman leadership to cover all of the desk’s lucrative
BBB and BBB- short positions immediately.1948 Mr. Birnbaum and others were reluctant to cover
all of SPG Trading’s BBB/BBB- shorts, because they believed the ABX Index for BBB and BBBrated
RMBS securities would fall further in coming months, so covering the entire short
immediately would amount to leaving significant money on the table.1949 The Department’s
traders, analysts, and risk managers designed and executed specific transactions over the month of
August to lower VAR, but they were unsuccessful.1950
For a week between August 14 and August 21, 2007, the Mortgage Department’s VAR
hovered around $100 million.1951 The Department’s record-high VAR contributed to a record
Firmwide VAR of $167 million on August 17, 20, and 21, all of which exceeded the firmwide
VAR limit of $150 million.1952 On August 15, 2007, Goldman’s Co-President Gary Cohn issued
his order: “[G]et down now.”1953 In response, the Mortgage Department began selling and covering
a portion of its BBB/BBB- net short position, and its VAR quickly dropped to $68 million by
August 31. The Mortgage Department was allowed to keep a substantial net short in certain assets,
and was granted renewed “temporary” VAR limits at levels between $80 and $110 million through
the end of Goldman’s fiscal year 2007.1954 The Risk Reports recording these VAR levels
throughout 2007 further demonstrate Goldman’s net short position. By 2010, the Mortgage
Department’s permanent VAR limit had increased from $35 million to only $40 million.1955
1956 9/28/2007 Goldman Market Risk Report, GS MBS-E-009926240.
1957 See 4/3/2007 Goldman Sachs Group Inc. Form 10-Q at 79 (first quarter 2007 Average Daily VAR reported as
$127 million); 10/9/2007 Goldman Sachs Group, Inc. Form 10-Q at 86 (third quarter 2007 Average Daily VAR
reported as $139 million).
1958 See 10/9/2007 Goldman Sachs Group Inc. Form 10-Q at 66. See also, e.g., “How Goldman Sachs Defies
Gravity,” Fortune (9/20/2007).
1959 9/19/2007 Goldman internal document, “Third Quarter 2007 Earnings Call Script for David Viniar,” GS MBSE-
009779213, Hearing Exhibit 4/27-45.
1960 9/17/2009 email to Daniel Sparks, “Mortgage commentary on Q3 earnings call,” GS MBS-E-009853301,
Hearing Exhibit 4/27-44.
The dates on which Goldman senior executives ordered the Mortgage Department to reduce
its VAR – on February 21 and August 21 – were within two weeks before the end of Goldman’s
fiscal quarters. In each case, the result was an immediate drop in VAR through the end of the
quarter. In February 2007, the department’s VAR dropped from $92 million to $81 million by the
end of the quarter. In August 2007, the department’s VAR dropped even more sharply, from a
record high of over $110 million to $79.7 million by the end of the quarter.1956 The lower
Firmwide VAR figures that resulted from the Mortgage Department’s VAR reductions were
publicly reported in Goldman’s quarterly financial reports.1957
(h) Profiting From the Big Short
In the third quarter of 2007, Goldman posted financial results showing that it had shorted
the subprime mortgage market and profited from its net short position. After posting those third
quarter financial results, Goldman continued to trumpet its success, both inside and outside the
Third Quarter Financials. On September 20, 2007, Goldman announced record net
revenues of $12.3 billion for its third quarter.1958 On September 19, 2007, in a conference call with
financial analysts on Goldman’s third quarter results, Goldman’s CFO, David Viniar, highlighted
the performance of the Mortgage Department:
“Let me also address Mortgages specifically. The mortgage sector continues to be
challenged and there was a broad decline in the value of mortgage inventory during the
third quarter. As a result, we took significant markdowns on our long inventory positions
during the quarter, as we had in the previous two quarters. However, our risk bias in that
market was to be short and that net short position was profitable.”1959
Goldman also issued a press release about its third quarter earnings that mentioned mortgages:
“Net revenues in mortgages were also significantly higher, despite continued deterioration
in the market environment. Significant losses on non-prime loans and securities were more
than offset by gains on short mortgage positions.”1960
9/17/2007-9/18/2007 Goldman Sachs Board of Directors Meeting, 1961 “Financial Summary, Quarter Ended August
31, 2007,” GS MBS-E-009776900, Hearing Exhibit 4/27-42.
1962 10/5/2007 Goldman presentation, “Global Mortgages Business Unit Townhall Q3 2007,” GS MBS-E-
013703463, Hearing Exhibit 4/27-47.
1963 Id.
1964 Id.
1965 4/2010 “Goldman Sachs: Risk Management and the Residential Mortgage Market,” report prepared by Goldman
Sachs, Hearing Exhibit 4/27-161.
1966 10/5/2007 Goldman presentation, “Global Mortgages Business Unit Townhall Q3 2007,” GS MBS-E-
013703463, Hearing Exhibit 4/27-47.
Internal Statements. In September 2007, Goldman summarized its third quarter results
for its Board of Directors, highlighting the Mortgage Department’s record profits: “[W]e were
overall net short the mortgage market and thus had very strong results.”1961
In early October, the Mortgage Department held an internal Global Townhall to discuss its
third quarter profits in detail. In a draft of the presentation he prepared for the Townhall, Mortgage
Department head Daniel Sparks reported that global mortgages generated aggregate net revenues of
$741 million, a 152% increase over the same quarter in the prior year, while benefitting from a
“proprietary short.”1962 Under the heading of “Performance Drivers (Net Revenues),” Mr. Sparks
“SPG Trading: +2.04bn [up] $1.92bn vs. Q3 2006
– The desk benefited from a proprietary short in CDO and RMBS single names
– Additionally, we captured P&L [profit & loss] on spread widening [price
declines] in various indices”1963
To put the SPG Trading Desk’s performance in perspective, it had generated $80 million in
the third quarter of 2006, a big year for mortgage related products, but in the third quarter of 2007,
an exceptionally poor year for mortgage related products, Goldman’s SPG Trading Desk generated
$2.04 billion in net revenues – nearly 25 times more. SPG Trading’s $2.04 billion in net revenues
was offset by other mortgage related losses, including losses from the CDO Origination,
Residential Credit, and Residential Prime Desks, but left an aggregate net profit of $741 million for
the Mortgage Department as a whole – more than twice the comparable quarter net profit of $294
million in the prior year.1964 The $2.04 billion in net revenues from the SPG Desk accounted for
over 16% of Goldman’s overall net revenues of $12.3 billion in the third quarter of 2007. The
$741 million in net revenues for the Mortgage Department as a whole contributed about 6% of the
firm’s total net revenues of $12.3 billion for the third quarter, which was three times the
department’s historical average contribution of about 2% to net revenue.1965
In his draft presentation, Mr. Sparks wrote that the “desk benefited from a proprietary short
in CDO and RMBS single names.”1966 In industry parlance, a “proprietary” position is one
acquired with the firm’s own capital, solely for the benefit of the firm and not related to customer
orders or the firm’s role as a market maker. In a later version of the presentation, Mr. Sparks
“Global Mortgages Business Unit Townhall 1967 Q3 2007,” Final version, GS MBS-E-013668603.
1968 Subcommittee interview of Daniel Sparks (10/4/2010). In his subsequent responses to the Subcommittee’s
Questions for the Record, Mr. Sparks said: "The presentation should have used the words ‘net short position,’ not
‘proprietary position.’” Daniel L. Sparks responses to Subcommittee QFRs, PSI_QFR_GS0452 at 470 (Question 6).
Mr. Sparks’ response did not resolve the question of whether the position was proprietary or undertaken on behalf of
customers, as a “net short position” could be either.
1969 10/29/2007 “Contagion and Crowded Trades,” Goldman Sachs Tax Department Presentation, GS MBS-E-
010018511, Hearing Exhibit 4/27-48 [emphasis in original].
1970 Joshua Birnbaum Self-Review, Hearing Exhibit 4/27-55c. The figures cited for ABS synthetics and ABS (both
cash and synthetics) are apparently both included within the total of $3 billion profit cited for the SPG Trading Desk
as a whole.
1971 Id. Mr. Birnbaum also wrote: “During this period, I would also add that the ABS team contributed significantly
to the Correlation desk[’]s $800+mm in YTD p&l by dissuading that desk from externalizing their shorting
opportunities to the likes of Paulson Partners, even when significant risk-free p&l was available at the time.” Id.
revised the line to read that the desk benefitted from “strong results from trading long correlation
and net short bias.”1967 When asked why he had originally written that “the desk benefitted from a
proprietary short,” Mr. Sparks told the Subcommittee that the language was inaccurate.1968
Later in October 2007, Goldman’s Chief Risk Officer, Craig Broderick, discussed the
Mortgage Department’s performance before an internal Goldman audience:
“So what happened to us? A quick word on our own market and credit risk performance in
this regard. In market risk – you saw in our 2nd and 3rd qtr results that we made money
despite our inherently long positions. – because starting early in ‘07 our mortgage trading
desk started putting on big short positions, mostly using the ABX index, which is a family
of indices designed to replicate cash bonds. And did so in enough quantity that we were net
short, and made money (substantial money in the 3rd quarter) as the subprime market
weakened. (This remains our position today).”1969
Goldman’s net short positions were also featured in the internal self-evaluations that
Mortgage Department personnel were required to prepare and which they expected to be read by
their supervisors. In these self-evaluations, which were completed in September 2007, two months
before Goldman’s fiscal year end on November 30, 2007, several Mortgage Department traders who
were active in its shorting activities described the profits produced by the Department’s net shorts.
Mr. Birnbaum, the senior ABX trader, wrote:
“As a co-head of ABS and SPG trading, my performance in 2007 has been my best ever by
any objective measure: 1. P&L. YTD: ABS synthetics: $2.5Bln, ABS: $2.0Bln, SPG
Trading: $3.0Bln, all #1 on the street by a wide margin, #2 in the world trading subprime
risk (behind Paulson Partners).”1970
His self-evaluation showed that the SPG Trading Desk alone generated profits of $3 billion.1971
Michael Swenson Self-Review, Hearing Exhibit 4/27-55b. The $2 billion pro 1972 fit figure attributed to ABS trading
is apparently included within the $3 billion figure cited as the year-to-date profit for the SPG Trading Desk.
1973 Salem 2007 Self-Review.
1974 See description of Mr. Salem’s single name trading strategies, above.
1975 10/4/2007 letter from Goldman Sachs to the SEC, GS MB S-E-009758287, Hearing Exhibit 4/27-46 [emphasis
Mr. Swenson, the head of the SPG and ABS trading desks, wrote:
“It should not be a surprise to anyone that the 2007 year is the one that I am most proud of to
date. ... I ... [built] a number one franchise that was able to achieve extraordinary profits
(nearly $3bb to date). ... The contributions to the $3bb of SPG Trading profits and $2bb of
ABS trading p & l are spread out across various trades and strategies.”1972
Mr. Salem, one of the ABS traders, wrote:
“Obviously the most important aspect of my 2007 and my contribution to the firm has been
the desk’s P&L. Mike, Josh, 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.”1973
Mr. Salem went on to outline estimated profits from four specific trading strategies pursued by the
ABS Desk that generated profits totaling $3.75 billion.1974
In these three internal documents, key Mortgage Department personnel involved in
constructing the Department’s net short positions describe the profits generated by those net shorts
as “#1 on the street by a wide margin,” “extraordinary,” and “an enormous directional short” that
produced $3.7 billion in profits for the firm.
Statements to Regulators. Goldman also described its short positions and the profits they
produced to its regulators. In October 2007, Goldman sent a letter to the Securities and Exchange
Commission answering questions about its trading activities and reporting that it had been “net
short” during “most of 2007”:
“[W]e are active traders of mortgage securities and loans and . . . we may choose to take a
directional view of the market . . . . For example, during most of 2007, we maintained a net
short sub-prime position and therefore stood to benefit from declining prices in the mortgage
11/7/2007 letter from Goldman Sachs to the SEC, 1976 GS MBS-E-015713460, Hearing Exhibit 4/27-50.
1977 11/13/2007 Goldman email, GS MBS-E-010023525 (attachment, 11/14/2007 “Tri-Lateral Combined
Comments,” GS MBS-E-010135693-715 at 694).
1978 Id.
1979 “Goldman Doesn’t Plan Significant Mortgage Writedown,” Bloomberg (11/13/2007); see also 11/13/2007 email
to Lloyd Blankfein, GS MBS-E-009601759 (forwarding Bloomberg article regarding Mr. Blankfein’s remarks at
conference sponsored by Merrill Lynch & Co. in New York City on Nov. 13, 2007).
1980 “Goldman Sachs Rakes in Profit in Credit Crisis,” New York Times (11/19/2007).
1981 11/18/2007 email from Lloyd Blankfein, “RE: NYT,” GS MBS-E-009696333, Hearing Exhibit 4/27-52.
Goldman’s Co-President, Gary Cohn, replied to Mr. Blankfein’s message, adding, “We were just smaller in the toxic
products” Id.
1982 11/7/2007 Goldman document, “How Did GS Avoid the Mortgage Crisis?,” GS MBS-E-009713204, Hearing
Exhibit 4/27-51.
In November 2007, in another letter to the SEC, Goldman explained further:
“During most of 2007, we maintained a net short subprime position with the use of
derivatives, including ABX index contracts and single name CDS which hedged [our] long
cash exposure.”1976
Also in November 2007, in talking points prepared for a meeting with the Tri-Lateral
Review Group, which included the Federal Reserve Bank, the SEC, and the United Kingdom’s
Financial Services Authority, Goldman wrote: “[W]e were able to maintain a short throughout the
year.”1977 Goldman also wrote:
“The press and others have discussed an anticipated Q4 [2007 fourth quarter] write-down for
GS. Our remaining long subprime exposure totals $695 million, inclusive of whole loans
and CDO positions. However, we’re net short – as we have been throughout 2007.
Accordingly, we have nothing to write down.”1978
Public Statements. Goldman also discussed its net short and related profits in public
settings. In November 2007, the Bloomberg news service reported that Goldman’s CEO, Lloyd
Blankfein, told a public audience at a securities industry conference that Goldman was, and would
continue to be, net short the subprime markets:
“[Mr. Blankfein] said the firm is still betting that mortgage-backed assets and collateralized
debt obligations will drop. ... ‘Given that point of view, we continue to be net short in these
In reaction to another November 2007 news report on how Goldman “dodged the mortgage
mess,”1980 Mr. Blankfein sent an email to his colleagues stating: “Of course we didn’t dodge the
mortgage mess. We lost money, then made more than we lost because of shorts.”1981
Goldman also prepared for public use a corporate statement entitled, “How Did GS Avoid
the Mortgage Crisis? Our Response.”1982 The statement was prepared for Mr. Viniar’s use in
1983 Id.
1984 Id.
1985 See 11/30/2007 “SPG Trading Mortgages Weekly Metrics 30-November-2007,” GS MBS-E-015646485.
1986 See Goldman Sachs Form 10-K for the fiscal year ending Nov. 30, 2007, filed on 1/28/2008, at 64; see also
Goldman presentation, “Overview of Goldman Sachs,” at 5, available at
1987 April 27, 2010 Subcommittee Hearing at 96. See also 235, 252, 345.
1988 Id. at 98.
1989 11/30/2007 “SPG Trading Mortgages Weekly Metrics 30-November-2007,” GS MBS-E-015646485.
responding to questions about the Mortgage Department’s performance in a fourth quarter
conference call with analysts. Goldman’s public statement outlined the steps it took to reduce its
subprime mortgage inventory and related subprime risks in late 2006 and early 2007, characterizing
these “proactive” steps as part of its ordinary risk management efforts. Goldman went on to state:
“[O]ne should not be led to believe that we went through this period unscathed and somehow
significantly profited from a ‘bet’ on the downturn in mortgage markets.”1983 After noting that
significant writedowns in the value of its long mortgage inventory had resulted in a “weak” second
quarter for mortgages, Goldman wrote:
“[D]uring the third quarter we were able to make money on mortgages as a result of our net
short position. As a consequence, we believe that we are well-positioned to
opportunistically participate in the inevitable restructuring of the mortgage market.”1984
Despite denying earlier in its statement that it significantly profited from a “bet” against a downturn
in mortgage markets, Goldman wrote that, in the third quarter of 2007, it had profited from a “net
short position” on mortgages. A “net short position” is, in essence, a bet on a downturn in the
relevant market, and Goldman’s bet was “able to make money.”
2007 Year-End Results. The SPG Trading Desk’s net revenues for the full fiscal year 2007
were approximately $3.7 billion.1985 In fiscal year 2007, Goldman’s total net revenues were
approximately $46 billion, and its net earnings (after tax) were approximately $11.6 billion.1986
At the Subcommittee hearing, Goldman’s Chief Financial Officer, David Viniar, stated that
the Mortgage Department’s net revenue for 2007 was “less than $500 million, approximately 1
percent of Goldman Sachs’s overall net revenues.”1987 He insisted that its 2007 net short position in
the mortgage market “was not a large short,”1988 and was largely offset by its long positions,
omitting that, in 2007, the Mortgage Department’s SPG Trading Desk generated a record $3.7
billion in net revenues for the Department as a whole from its net shorts.1989 Those profits sustained
the Mortgage Department and Goldman through the harsh financial environment of the subprime
mortgage market meltdown and the global credit crisis in 2007. While much of those revenues
were offset by other losses, they were a bulwark of profitability in what would otherwise have been
a disastrous year for Goldman’s mortgage business.
In the third quarter of 2007, for example, Lehman Brothers had $700 1990 million in loan and mortgage writedowns.
9/23/2007 email to Lloyd Blankfein and others, “Weekly Competitor, EM and Regulatory News – Week Ending
9/21/07,” GS MBS-E-009653853. Morgan Stanley had $940 million in loan writedowns. Id. Bear Stearns had
$250 million in loan writedowns and $450 million in mortgage writedowns. Id. Citibank had approximately $1.6
billion in mortgage writedowns and a $636 million loss in credit trading. 10/21/2007 email to Lloyd Blankfein and
others, “Weekly Competitor, EM and Regulatory News – Week Ending 10/19/07,” GS MBS-E-009631348.
JPMorgan Chase had $1.3 billion in loan writedowns and $339 million in mortgage writedowns. Id.
1991 7/25/2007 email from David Viniar to Gary Cohn, “Private & Confidential: FICC Financial Package 07/25/07,”
GS MBS-E-009861799, Hearing Exhibit 4/27-26.
1992 10/3/2007 Goldman presentation, “SPG Trading – 2007,” GS MBS-E-015654036.
1993 Goldman also highlighted losses it suffered in 2008, related to its mortgage business, particularly mortgage
related products associated with prime and Alt A residential loans. The Subcommittee did not investigate
Goldman’s use of short positions in 2008, nor its involvement with prime and Alt A loan products.
1994 Gregory Zuckerman, The Greatest Trade Ever (2009); Michael Lewis, The Big Short (2010).
In contrast, other major Wall Street banks reported losses in the third quarter of 2007,
primarily due to multi-billion-dollar writedowns in the value of their subprime mortgage related
assets.1990 Goldman had not only profited from its net shorts, but had also sold off the bulk of its
subprime mortgage assets earlier and at higher prices than many other banks. After observing the
losses and writedowns suffered by other Wall Street banks, Mr. Viniar wrote: “Tells you what
might be happening to people without the big short.”1991
At one point, Mr. Birnbaum also contrasted Goldman’s performance with its competitors:
“Results out of DB, Citi, UBS, Bear, Lehman etc. all bear evidence that we were far ahead
of our competition in marking down positions and moving CDO risk before the market
cratered and came to a standstill post-BSAM [Bear Stearns Asset Management].”1992
All of these explanations point to actions taken by Goldman to transfer the risks of its own
subprime mortgage inventory to others, including many of its own customers, before they became
fully aware of the risks entailed in the products Goldman was marketing to them.
Goldman Denials. In late 2007, Goldman spoke openly of shorting the subprime mortgage
market and that its net short position was profitable. Afterward, as mortgage losses erupted into a
full blown financial crisis in the United States and abroad, Goldman began to downplay and even
deny the size of its short position, its proprietary nature, and the profits it generated for the firm.1993
Goldman had not been the only market participant to profit from a large net short position in
mortgage related products. Other investors also aggressively shorted the mortgage market and
profited from their short positions. A particularly large short position taken by one hedge fund –
Goldman’s customer, the Paulson Credit Opportunity Fund of Paulson & Co. Inc. – netted billions
of dollars in what was later characterized as “the greatest trade ever.”1994 Mr. Birnbaum, however,
had described Goldman’s own massive net short position as the “greatest trade ever” as early as July
7/20/2007 email from Joshua Birnbaum, “ABX Markets 07-02, 07-01, 06-2, 1995 06-1: 3:00 p.m.,” GS MBS-E-
012962076 (Mr. Birnbaum: “greatest trade ever . . . I have a huge short . . .”).
1996 7/12/2007 email from Joshua Birnbaum, “ABX Markets 07-1, 06-2, 06-1: 12:00 p.m.,” GS MBS-E-012944742,
Hearing Exhibit 4/27-146.
1997 10/3/2007 Goldman presentation, “SPG Trading – 2007,” GS MBS-E-015654036; Birnbaum Self-Review,
Hearing Exhibit 4/27-55c.
1998 See 9/17/2007 Goldman presentation to Board of Directors, “Residential Mortgage Business, Global Impact of
the Mortgage Crisis,” at 2, GS MBS-E-001793840, Hearing Exhibit 4/27-41 (noting bankruptcies of Goldman
clients IKB and Basis Capital). See also 8/10/2007 Goldman internal memorandum, “Summary of German Bank
US Sub Prime Exposure,” GS MBS-E-009994305; 11/27/2007 email from Mr. Lehman to Mr. Sparks, “ACA”
(discussing “what would happen upon an ACA bankruptcy (which is the most likely scenario in our opinion).”), GS
1999 See, e.g., April 27, 2010 Subcommittee Hearing, testimony of Lloyd Blankfein at 132 and David Viniar at 98.
2000 4/7/2010 Blankfein & Cohn, Letter to Shareholders (quoted in Hearing Exhibit 4/27-161 at 12).
2001 4/2010 Goldman report, “Risk Management and the Residential Mortgage Market,” Hearing Exhibit 4/27-161.
2002 Id.
2007.1995 Earlier in the year, Mr. Birnbaum had also described Goldman as the market leader in
shorting the housing market, but by July 2007, Mr. Birnbaum conceded that Paulson was “definitely
the man in this space, up 2-3 bil on this trade. We were giving him a run for his money for a while
but now are a definitive #2.”1996 When preparing his case for SPG traders to be paid additional
compensation for their 2007 efforts, Mr. Birnbaum again made a comparison to Paulson: “RMBSrelated
revenues: #1 on the street by a wide margin. #2 in the world behind Paulson Partners.”1997
In the aftermath of the financial crisis, however, Goldman no longer claimed credit for its
market-leading performance during the subprime meltdown. After many of its customers suffered
major losses, and several had declared bankruptcy during the financial crisis,1998 Goldman began to
downplay the size of its short position and the impact on its profits.1999 In particular, Goldman
attempted to dispel the perception that it sold its own customers CDOs it knew were destined to fail,
and then profited by betting against them, as discussed in the next section.2000
In April 2010, Goldman posted a statement on its website entitled, “Goldman Sachs: Risk
Management and the Residential Mortgage Market.”2001 In the statement’s Executive Summary,
Goldman made the following assertions, among others:
–“Goldman Sachs did not take a large directional ‘bet’ against the U.S. housing market, and
the firm was not consistently or significantly net ‘short the market’ in residential mortgagerelated
products in 2007 and 2008, as the performance of our residential mortgage-related
products business demonstrates.
– Goldman Sachs did not engage in some type of massive ‘bet’ against our clients. The risk
management of the firm’s exposures and the activities of our clients dictated the firm’s
overall action, not any view of what might or might not happen to any security or
4/7/2010 Blankfein & Cohn, Letter to Shareholders (quoted 2003 in 4/2010 Goldman report, “Risk Management and
the Residential Mortgage Market,” at 12, Hearing Exhibit 4/27-161).
2004 April 27, 2010 Subcommittee Hearing at 132.
2005 Id. at 98.
On April 7, 2010, Goldman CEO Lloyd Blankfein and Co-President Gary Cohn made
similar assertions in a letter to shareholders contained in Goldman’s Annual Report:
– “The firm did not generate enormous net revenues or profits by betting against residential
mortgage-related products, as some have speculated; rather our relatively early risk
reduction resulted in our losing less money that we otherwise would have when the
residential housing market began to deteriorate rapidly ....
–Although Goldman Sachs held various positions in residential mortgage-related products in
2007, our short positions were not a ‘bet against our clients.’ Rather, they served to offset
our long positions.”2003
At the Subcommittee hearing, Mr. Blankfein repeated the same claims. He testified:
“Much has been said about the supposedly massive short Goldman Sachs had on the U.S.
housing market. The fact is, we were not consistently or significantly net short the market in
residential mortgage-related products in 2007 and 2008. Our performance in our residential
market-related business confirms this. During the 2 years of the financial crisis, while
profitable overall, Goldman Sachs lost approximately $1.2 billion from our activities in the
residential housing market. We didn’t have a massive short against the housing market and
we certainly did not bet against our clients. Rather, we believe that we managed our risk as
our shareholders and our regulators would expect.”2004
Mr. Viniar, Goldman’s Chief Financial Officer, testified:
“[A]cross 2007, we were primarily, although not consistently short, and it was not a large
short. ... The short positions themselves made a lot of money in 2007, but they offset long
positions that lost a lot of money in 2007.”2005
Goldman’s denials of its net short positions in the subprime mortgage market, and the large
profits produced by those net short positions, are directly contradicted by its own financial records
and internal communications, as well as its own public statements in 2007, and are not credible.
(5) How Goldman Created and Failed to Manage Conflicts of Interest
in its Securitization Activities
In the years leading up to the financial crisis, Goldman was an active trader in the mortgage
market, buying and selling a variety of mortgage related assets, including RMBS, CDO, ABX, and
The 27 CDOs securitized about $28 billion in assets. 2006 See undated chart prepared for Subcommittee by Goldman
Sachs, GS MBS 0000004276. The 93 RMBS securitized about $72 billion in home loans. See undated chart
prepared for Subcommittee by Goldman Sachs, GS-PSI-00172.
CDS instruments, as described in the prior section. In addition, Goldman was one of the leaders in
mortgage related securitizations, helping to originate both CDO and RMBS securities. Goldman’s
2006 and 2007 securitization activities are the focus of this section.
In 2006 and 2007, Goldman originated 27 CDOs and 93 RMBS securitizations with a total
value of about $100 billion.2006 Goldman designed the structure of each securitization, including the
number of tranches, how the payments would be allocated, and the projected rate of return or
“coupon rate” that would be paid to investors. In some, Goldman selected the assets to be
securitized; in others, it hired a portfolio selection agent or collateral manager to help select the
assets and manage the portfolio. For each securitization, Goldman typically housed all of the assets
to be securitized in a “warehouse” account until the transaction was ready to go to market. The
assets in the warehouse accounts were then included in Goldman’s balance sheet. Goldman also
typically worked with one or more credit rating agencies to obtain favorable credit ratings for the
proposed securities.
In addition, Goldman typically established a domestic and an offshore corporation to act as
the nominal owners of the securitization’s incoming cash, assets, and collateral securities; to serve
as the actual issuers of the securities; and to perform certain administrative services. Goldman also
established arrangements for the servicing of any underlying mortgages. In some CDOs, Goldman
or its affiliate provided additional services as well, acting in such roles as the collateral securities
selection agent, the collateral put provider, or the liquidation agent charged with selling impaired
assets. Goldman also used its global sales force to market its securities to investors around the
world, typically selling Goldman-issued CDO securities through a private placement and RMBS
securities through a public offering.
In late 2006, when subprime residential mortgages began to incur higher than expected rates
of delinquency, fraud, and default, and its inventory of mortgage related assets began to lose value,
Goldman took a number of actions. It sold the mortgage related assets in its inventory; returned
poor quality loans to the lenders from which they were purchased and demanded repayment; limited
new RMBS securitizations; sold or securitized the assets in its RMBS warehouse accounts; limited
new CDO securitizations to transactions already in the pipeline; and sold assets from discontinued
Throughout this process, Goldman made a concerted effort to sell securities from the CDO
and RMBS securitizations it had originated, even when those securities included or referenced poor
quality assets and began losing value. Many of the CDO and RMBS securities that Goldman sold to
its clients incurred substantial losses. The widespread losses caused by CDO and RMBS securities
originated by investment banks are a key cause of the financial crisis that affected the global
financial system in 2007 and 2008.
See Goldman Sachs 2007 response to Subcommittee QFR at PSI_QFR_GS0252, at 0262.
2008 For a detailed discussion of these obligations under federal securities laws, see Section (6)(a), below.
This section of the Report examines how Goldman originated, marketed, and sold its
mortgage related securities, in particular CDO securities, during late 2006 and in 2007, as the
mortgage market deteriorated and as Goldman was profiting from its own net short positions. The
section begins with general information about Goldman’s securitization activities, followed by
detailed case studies of four Goldman-originated CDOs: Hudson 1, Anderson, Timberwolf I, and
Abacus 2007-AC1.
The evidence discloses troubling and sometimes abusive practices which show, first, that
Goldman knowingly sold high risk, poor quality mortgage products to clients around the world,
saturating financial markets with complex, financially engineered instruments that magnified risk
and losses when their underlying assets began to fail. Second, it shows multiple conflicts of interest
surrounding Goldman’s securitization activities, including its use of CDOs to transfer billions of
dollars of risk to investors, assist a favored client make a $1 billion gain at the expense of other
clients, and produce its own proprietary gains at the expense of the clients to whom Goldman sold
its CDO securities.
Under Goldman’s sales policies and procedures, an affirmative action by Goldman
personnel to sell a specific investment to a specific customer constituted a recommendation of that
investment.2007 Under federal securities law, when acting as an underwriter, placement agent, or
broker-dealer recommending an investment to a customer, Goldman had an obligation to sell
investments that were suitable for any investor and were not designed to fail. When acting in those
roles and affirmatively soliciting clients to buy securities, Goldman also had an obligation to
disclose material information that a reasonable investor would want to know, including material
conflicts of interest or adverse interests in connection with its sale of a security.2008
In 2006 and 2007, when selling subprime CDO securities to customers, Goldman did not
always disclose that the securities contained or referenced assets Goldman believed would perform
poorly, and that the securities themselves were rapidly losing value. Goldman also did not disclose
that the firm had built a large net short position betting that CDO and RMBS securities similar to
the ones it was selling would lose value. In the case of the Hudson, Anderson, and Timberwolf
CDOs, Goldman failed to disclose to potential investors that it was shorting the very securities
Goldman was selling to them. In the case of the Abacus CDO, Goldman failed to disclose to
potential investors that it had allowed an interested party to help select the CDO assets and act as
the sole short party, with the expectation that the selected assets would lose value and that party
would make money at the expense of the long investors to whom Goldman had sold the securities.
Goldman created these and other conflicts of interest with its clients in connection with its CDO
(a) Background
To understand Goldman’s securitization activities, this section provides general background
about its CDO and RMBS business and how Goldman changed its securitization activities when the
mortgage market began to deteriorate in late 2006.
(i) Goldman’s Securitization Business
The Goldman Mortgage Department originated CDOs through two different desks within
the Department. Approximately half of Goldman’s CDOs were originated by its CDO Origination
Desk, which assembled the assets, structured the CDOs, and worked with the Goldman sales force
to market the resulting securities to a broad range of investors. The CDO Origination Desk was
headed by Peter Ostrem from 2006 until May 2007, after which all remaining Goldman-originated
CDOs were transferred to the Structured Product Group (SPG) Trading Desk and were overseen by
David Lehman.
Goldman’s other CDOs, which were part of a series issued under the name of Abacus, were

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