Sunday, September 4, 2011


over the course of about a week, to use three different valuation methods to price all of its
remaining CDO warehouse assets and unsold securities from the Goldman-originated CDOs then
being marketed to clients.2088
A few days later, on May 14, 2007, while the CDO valuation project was underway, Mr.
Montag asked Mr. Sparks for an estimate of how much the firm would need to write down the value
of its CDO assets. Mr. Sparks responded that the “base case from traders is down [$]382
[million].” He also wrote:
“I think we should take the write-down, but market [the CDO securities] at much higher
levels. I’m a little concerned we are overly negative and ahead of the market, and that we
could end up leaving some money on the table.”2089
The valuation project’s results were summarized in a presentation dated Sunday, May 20,
2007, prepared for a 9:00 p.m. conference call that night with Mr. Viniar, in which Mr. Mullen, Mr.
Sparks, Mr. Lehman, and others also participated.2090 Using the three valuation methods, the
010787603. The final document, “Mortgages V4.ppt” was emailed to Mr. Sparks and Mr. Mullen, and also
messengered to Mr. Mullen’s home, at 8:31 p.m. on May 20, immediately before the scheduled call. 5/20/2007
email to Daniel Sparks and Donald Mullen, “Viniar Presentation – Updated,” GS MBS-E-010971156.
Goldman also produced a similar document prepared the day before, which may have been an earlier draft
of the final presentation. 5/19/2007 Goldman presentation, “Mortgages CDO Origination – Retained Positions &
Warehouse Collateral, May 2007,” GS MBS-E-010951926. This document is identified in the relevant
correspondence as “Mortgages CDO Origination,” and the file name is “Mortgages V3.ppt.” This presentation was
forwarded to Mr. Sparks for comment on May 19, 2007 at 12:32 a.m., and Mr. Sparks replied with comments at 5:57
p.m. Mr. Sparks forwarded the file “Mortgages V3.ppt” to himself at home on Sunday, May 20, 2007 at 8:07 a.m.
The writedowns were required, in part, because the assets 2091 in the CDO warehouses had generally been marked at
cost when purchased or at a value related to the final securitized structure, called “mark-to-securitization-exit.”
Those valuation methods generally resulted in values well above what the assets would bring if sold individually in a
declining mortgage market.
2092 Id.
2093 5/20/2007 email from Lee Alexander to Daniel Sparks, Donald Mullen, Lester Brafman, Michael Kaprelian,
“Viniar Presentation - Updated,” GS MBS-E-010965211 (attached file “Mortgages V4.ppt,” “Mortgages
Department, May 2007,” GS MBS-E-010965212). By May 2007, Goldman had ceased originating any new CDO
2094 Id. The four identified customers appear to be ones which the sales force felt it had the greatest likelihood of
success in selling the CDO assets. Two of the customers, Basis Capital and Polygon, had already made recent
purchases of Point Pleasant and Timberwolf securities, respectively, from Goldman. See Goldman Sachs response to
Subcommittee QFR at PSI_QFR_GS0226.
2095 The client list drawn up pursuant to the Gameplan was a stark example of actions taken by Goldman to target
specific clients for CDO sales, but different Mortgage Department desks maintained their own “target lists” that
focused on specific types of products, specific transactions, and specific types of cross-selling opportunities with
other Goldman departments. See, e.g., 3/1/2007 email from Michael Swenson, “names,” GS MBS-E-012504595
(SPG Trading target list tiered according to likelihood of purchasing); 2/14/2007 email to Matthew Bieber,
“Timberwolf I, Ltd. – Target Account List,” GS MBS-E-001996121 (list of U.S. accounts “we should be directly
targeting” for Timberwolf sales); 3/2/2007 email from David Lehman, “ABX/Mtg Credit Accts,” GS MBS-Epresentation
estimated that the loss in value and the total writedowns required for the firm’s CDO
assets were between $237 and $448 million.2091 The executive summary of the presentation also
expressed concern about Goldman-originated CDO securities, especially its two CDO2 transactions,
Timberwolf and Point Pleasant, since “[t]he complex structure of these positions makes them
difficult to value and distribute.”2092 The presentation estimated that the market value of those CDO
securities, plus the equity and super senior tranches that had been retained by Goldman, was $4.3
billion. The executive summary also estimated the market value of the remaining assets from the
CDO warehouse accounts at $1.5 billion, and expressed particular concern about selling $742
million in CDO securities from non Goldman originated CDOs due to “limited liquidity and price
transparency in this space.” The executive summary stated that since “securitization is no longer a
viable exit, the warehouse collateral will be marked to market on an individual basis.”2093
The presentation also presented “Next Steps.” It recommended that Goldman “unwind the
warehouses” and use “[i]ndependent teams to continue to value” the CDO securities, equity
tranches, and super senior tranches from the Goldman-originated securitizations. It also
recommended that sales of the Goldman-originated CDO securities be targeted, first, at four hedge
fund customers, Basis Capital, Fortress, Polygon, and Winchester Capital.2094 The presentation also
attached a list of 35 other target customers with notes regarding the status of efforts to sell them
CDO securities in the past.2095
011057632 (mortgage credit business shared with SPG Trading Desk “a fairly lengthy list of accounts that are
considered to be ‘key’”). In December 2006, the Correlation Trading Desk drew up a list of target customers for
2007: the “proposed top 20 correlation customer list.” 12/29/2006 email from Fabrice Tourre, “Last call–any other
comments on the proposed top 20 correlation customer list,” GS MBS-E-002527843, Hearing Exhibit 4/27-61.
Mr. Tourre issued a “last call” for comments on the list and suggested focusing on “buy-and-hold rating-base buyers”
who might be more profitable for the desk than more sophisticated and demanding hedge fund customers:
“[T]his list might be a little skewed towards sophisticated hedge funds with which we should not expect to
make too much money since (a) most of the time they will be on the same side of the trade as we will, and
(b) they know exactly how things work and will not let us work for too much $$$, vs. buy-and-hold ratingbased
buyers who we should be focused on a lot more to make incremental $$$ next year.”
The proposed top 20 list identified a number of European accounts, as well as customers who had purchased asset
backed security products from Goldman in the past.
The reference to “buy and hold, ratings-based buyers” was to conservative financial institutions, often
insurance companies or pension funds, that tended to hold their investments indefinitely or until maturity, some of
which were limited to holding investments with AAA or other investment grade credit ratings. Many of these buyers
tended to rely on the AAA rating as a “seal of approval” signaling that the rated instrument offered predictable, safe
returns. Many viewed the AAA rating as, in effect, all these buyers thought they needed to know about the CDO
securities they were purchasing. See, e.g.,11/13/2007 Goldman email, GS MBS-E-010023525 (attachment,
11/14/2007 “Tri-Lateral Combined Comments,” GS MBS-E-010135693-715 at 713) (“Investors in subprime related
securities, especially higher rated bonds, have historically relied significantly on bond ratings particularly when
securities are purchased by structured investing vehicles.”). But as one press article explained: “CDO ratings may
mislead investors because they can obscure the risk of default, especially compared with similar ratings for bonds,
says Darrell Duffie, a professor of finance at Stanford Graduate School of Business in California, who’s paid by
Moody’s to advise the company on credit risk. ‘You can’t compare these CDO ratings with corporate bond ratings,’
Duffie says. ‘These ratings mean something else – entirely.’” See 5/31/2007 email to David Lehman and others,
“CDO Boom Masks Subprime Losses,” GS MBS-E-001865723 at 733. The article pointed out that the lowest grade
of corporate bonds rated by Moody’s had a default rate of 2.2%, while the default rate for CDOs with the same rating
was 24%. Id.
5/19/2007 Goldman presentation, “Mortgages CDO Origination – Retained 2096 Positions & Warehouse Collateral,
May 2007,” GS MBS-E-010951926.
2097 5/19/2007 email from Daniel Sparks, “Mortgages CDO Origination Presentation,” GS MBS-E-010973174 (Mr.
Sparks: “p. 5 again ‘marked to securitization exit’ [re marked to model language]. . . some A and BBB were sold on
the deals [re demand only for the supersenior tranche language]”).
The CDO valuation project undertaken in May provided clear notice to Goldman senior
management at the highest levels that its CDO assets had fallen sharply in value, and that despite
their lower value, the Mortgage Department planned to aggressively market them to customers. In
an earlier draft of the presentation, the Mortgage Department had also stated that it expected
Goldman’s CDO and CDO2 securities “to underperform”:
“The complexity of the CDO^2 product and the poor demand for CDOs in general has made
this risk difficult to sell and the desk expects it to underperform.”2096
Mr. Sparks reviewed that draft language and made comments about other items on the same page,
but did not change the phrase, “the desk expects it to underperform.”2097 The same phrase appeared
See 5/19/2007 email from Dan Sparks to Lee Alexander, others, GS 2098 MBS-E-010973174 (attached file
“Mortgages V3.ppt,” GS MBS-E-010973175); and 5/20/2007 9:52 a.m. draft “Mortgages V4.ppt,” GS MBS-E-
010952331; compared to final version, 5/20/2007 email from Lee Alexander to Daniel Sparks, Donald Mullen,
Lester Brafman, and Michael Kaprelian, “Viniar Presentation - Updated,” GS MBS-E-010965211 (attached file
“Mortgages V4.ppt,” “Mortgages Department, May 2007,” GS MBS-E-010965212).
2099 5/17/2007 email from Daniel Sparks to Tom Montag, “Ostrem is resigning,” GS MBS-E-019654926.
2100 5/11/2007 email from Daniel Sparks, “You okay?,” GS MBS-E-019659221 (“I’m going to make a change in the
responsibility of the business away from Ostrem to david lehman (with Swenson helping).”).
2101 5/19/2007 email to David Lehman, “congratulations, but seems like you have a lot of work ahead of you,” GS
2102 Id.
2103 5/19/2007 email from Jon Egol to Daniel Sparks, GS MBS-E-018921924.
in several earlier versions of the presentation as well, but was removed from the final version sent to
Mr. Viniar.2098
CDO Desk Shutdown. In May 2007, Goldman decided to stop issuing new CDOs, and the
head of its CDO Origination Desk, Peter Ostrem, left the firm.2099 Mr. Sparks named as his
replacement David Lehman, who was a senior member of the Structured Product Group (SPG) and
head of its CMBS Trading Desk, but had little experience in either underwriting or CDOs.2100 On
May 19, 2007, Mr. Lehman received an email from a former Goldman managing director who
wrote: “Congratulations, but seems like you have a lot ofwork [sic] ahead of you.”2101 Mr. Lehman
asked Mr. Egol: “What do u th[in]k he means by ‘lot of work to do?’”2102 Mr. Egol responded:
“I know what he means. If you talk to people knowledgeable about cdos, you will find that
external perception of GS franchise in this space is much lower than Sparks and Sobel
believed. Over the last 2 years, GS [Goldman Sachs] is perceived to be a bottom quartile
abs [asset-backed security] cdo underwriter and to have done several poor deals. There is a
reason [the CDO desk] didn’t sell much paper. The fact that [the CDO desk] was basically
giving money away in these no-fee principal deals and could still only get TCW, GSC (both
street wh—e managers) and some start up managers to work with GS is a stain that will take
time to remove. The HG [high-grade] deals in particular are very poor. I thought the alladin
deals had some potential but fortius 2 is going to be a real mess.
“These are not just my views – they are from customers whose views resonate in the market.
Sales people have just been too timid internally or not engaged enough with their accounts
to provide accurate feedback. It pains me to say it but citi, ubs, db [Deutsche Bank], lehman
and ms [Morgan Stanley] have much stronger franchises – among large dealers only ML
[Merrill Lynch] is more reviled than [Goldman’s] business. ...
“I should add altius 3 is a doozy as well. I’ll spare you the detailed list.”2103
That May 19, 2007 email provided Mr. Lehman with additional notice of the poor quality of the
CDO securities he was charged with selling.
5/20/2007 email from David Lehman, “ABX hedges – Buy order,” GS M 2104 BS-E-011106690 (“begin unwinding
certain ABX hedges vs. the CDO WH [warehouse] and transition book”); 6/1/2007 email from Mr. Lehman, “CDO
Update,” GS MBS-E-001866889 (“liquidated warehouses and the trading books”).
2105 Subcommittee interview of David Lehman (9/27/2010).
2106 5/24/2007 email from Yusuf Aliredha to Mr. Sparks, Mr. Lehman, and others, “Priority Axes,” GS MBS-E-
2107 Id.
2108 4/27/2007 email from George Maltezos, Goldman Australia sales, to Jon Egol, “utopia,” GS MBS-E-
2109 5/20/2007 email from George Maltezos to David Lehman, “T/wolf and Basis,” GS MBS-E-001863555.
2110 See Goldman Sachs response to Subcommittee QFR at PSI_QFR_GS0226.
2111 5/30/2007 email from David Lehman, “Timberwolf – Order from Tokyo Star Bank,” GS MBS-E-001934058.
Tokyo Star Bank was not on the list of “targeted” customers, but had been solicited previously by the Japan sales
team pursuant to an earlier sales directive listing Timberwolf as a priority.
The CDO valuation project presentation given the next day, May 20, 2007, recommended
that all assets from the CDO warehouse accounts be transferred to the SPG Trading Desk for sale.
A CDO “transition book” was created to account for profits and losses from some of the assets, and
the transfer took place the following week.2104 In addition, by June 1, 2007, Goldman eliminated the
CDO Origination Desk as a separate entity, and moved all of the remaining Goldman-originated
CDO securities to the SPG Trading Desk, where Mr. Lehman was based.2105 As a result, the SPG
Trading Desk, which was a secondary trading desk and had little experience with the greater
disclosure obligations involved with selling newly minted securities, became solely responsible for
selling all Goldman-originated CDO securities.
Renewed Sales Efforts. After the transfer of the CDO assets, the SPG Trading Desk began
to work with the Goldman sales force to identify potential customers and sell the CDO products.
On May 24, 2007, a Goldman salesperson contacted Messrs. Sparks and Lehman regarding two
potential customers interested in Timberwolf and Point Pleasant securities.2106 With respect to one
customer, the salesman wrote that it was “[n]ot experts in this space at all but [I] made them a lot of
money in correlation dislocation and will do as I suggest.” With respect to the second customer, the
Goldman salesperson wrote that the customer had “just raised another $1bln for their ABS [asset
backed security] fund and they are very short the ABX so are natural buyers of our axe.”2107
A couple of weeks before the CDO valuation project, Goldman’s Australia sales
representative, George Maltezos, announced he had found a potential Australian buyer for a
Goldman CDO being constructed by the Correlation Desk: “I think I found white elephant, flying
pig and unicorn all at once.”2108 On the same day the project identified Basis Capital as a primary
target for CDO sales, May 11, 2007, Mr. Maltezos sent Mr. Lehman an email saying he would
contact the Basis principals as soon as they returned from a business trip the following day.2109
On May 24, 2007, the CDO sales dry spell ended, when Paramax Capital Group, a U.S.
investment adviser, purchased $40 million in AA Timberwolf securities.2110 On May 30, Mr.
Lehman announced the sale of $20 million in AAA Timberwolf securities to Tokyo Star Bank in
6/11/2007 email from syndicate, “GS Syndicate Structured Product 2112 CDO Axes (INTERNAL USE ONLY),” GS
2113 Id.
2114 Id. See also “New Investors Board the Asian CDO Train,” Creditflux (6/1/2007) (noting that while non bank
investors had previously been barred from buying CDO assets in most Asian countries, regulators increasingly
allowed life insurance companies and other financial firms to buy them within prescribed limits).
2115 6/13/2007 email from Goldman Sachs Japan sales, “**GS SP CDO Axes** – Asia Trade Update (INTERNAL
USE ONLY),” GS MBS-E-010803888 [emphasis in original].
2116 6/13/2007 email from Goldman Sachs Japan sales, “**GS SP CDO Axes** – Asia Trade Update (INTERNAL
USE ONLY),” GS MBS-E-011212260.
2117 6/18/2007 email from David Lehman, “$20mm Point Pleasant trade w/ TK Star Bank,” GS MBS-E-011136832.
CDO Sales in Asia. On June 11, 2007, Mr. Lehman received a note from the Mortgage
Department’s sales syndicate desk asking whether the directive listing high priority CDO sales
could be sent to the Japan sales office, which oversaw sales throughout Asia:
“Know there was sensitivity w/ sending this out, but asia sales management is asking again.
Do you want to consider sending more broadly for asia sales or do you want to stick with the
more targeted approach?”2112
The Japan sales group wrote that the head of the Japan office “is saying that we need it to go more
broadly to all Sales at least in Japan. Given her request twice now and her help in getting focus,
think we should at least push this in Japan.”2113 Mr. Lehman responded: “Fine – let’s send to all
Japan sales then.”2114
The Japan sales office responded to the new directive with several quick sales. On June 13,
2007, the Japan sales office sent out this celebratory note:
We have moved over $250mm of SP CDO axes to account in Japan, Australia and
Korea over the past 2+ weeks. These are HUGE orders for the firm as they have helped
reduce balance sheet risk and further exhibits the importance of the Asia franchise to the
global Structured Products Group business. Note that in line with these trades we have
paid out over $14mm of gross credits – this is clearly the top focus for us now in SP
[Structured Product] CDO space. ... Call the SPG Asia desk in Tokyo for updated axes and
offer levels. We hope to trade another $20mm of CDO^2 risk with a Japanese account in
the coming week+. Thanks.”2115
Mr. Lehman replied: “Thx for sending this out.”2116
A few days later, Mr. Lehman reported to senior management that the Japan sales office had
been successful in selling another $20 million in CDO securities. Mr. Lehman wrote:
“Great job by [Japan sales] (again) on our CDO^2 axes. Tonight we will trade $20mm Point
Pleasant A1s @90.7 to Tokyo Star Bank .... We hope to trade another $20mm of these bonds
next week w/ this account.”2117
2118 Id.
2119 6/18/2007 email from Goldman Sachs Japan sales, “Point Pleasant 07-A1 // Tokyo Star Bank (internal use
only),” GS MBS-E-001920459 [emphasis in original].
2120 See Goldman Sachs response to Subcommittee QFR at PSI_QFR_GS0226; 7/24/2007 email from [Taiwan],
“7/23 CDO/RMBS requests from Taiwan,” GS MBS-E-011198375, Hearing Exhibit 4/27-67.
2121 Id.
2122 8/15/2007 email from Donald Mullen, “Post,” GS MBS-E-009740784, Hearing Exhibit 4/27-32.
2123 8/17/2007 email from Michael Swenson, “Twolf super seniors,” GS MBS-E-001927791.
2124 8/23/2007 email from Jon Egol, “*** SP CDO/Correlation Desk Super Senior Axes *** (INTERNAL USE
ONLY), GS MBS-E-011310717.
Mr. Lehman sent an email to the head of the Japan sales office letting him know that Goldman’s
senior management was aware of the sales effort: “Montag ve[r]y involved in this fyi.” The Japan
sales manager responded: “Yes – he made that clear when he spent almost 20 minutes on the desk
with me in TKO [Tokyo] last week going through every potential lead.”2118 That same day, the
Japan sales manager sent out a new email urging the trading team to bring in another $20 million
from Tokyo Star Bank and promising them additional sales incentives:
“To reward your strong effort and in hopes of the follow on 20mm order from the client on
this deal, we plan on paying you a total bonus GC payment of $40 / bond (double our
$20/bond for AAA’s on our axes that are not lower mezz AAA). We look forward to
additional trades from Tokyo Star Bank on our CDO axes.”2119
During June and July, additional sales took place in Japan, Korea, Taiwan, and Australia.2120
Goldman also made sales to customers in Europe and the Middle East.2121
Despite the sales in June and July, Goldman continued to have a significant inventory of
unsold CDO securities. On August 15, 2007, Mr. Mullen even made a casual reference to “our cdo
business which remains unsaleable.”2122 If Goldman’s CDOs remained unsaleable, however, it was
not for lack of trying. In August and September 2007, Goldman switched from its targeted
customer approach to issuing broad directives to its entire sales force in the United States and
abroad urging them to concentrate on its CDO securities. On August 17, 2007, for example, the
SPG Trading Desk issued a new directive to certain salespersons asking them to place a priority on
selling interests in two Timberwolf super senior tranches.2123 These tranches were first in line to
receive payments within the CDO and so had the lowest risk. Super senior CDO positions were
often sold through CDS contracts, sometimes called super senior swaps, in which the customer took
the long side and the CDO originator took the short side, and that’s what Goldman wanted the sales
force to market. But the following week, on August 23, 2007, Goldman sent a new directive to the
sales force urging them to find customers willing to take the short side of the super senior tranches,
so the Mortgage Department could take the long side and cover some of its shorts.2124 When asked
his opinion of the directive, the head of Japan sales office expressed skepticism about sales to Asian
“The only question in my mind is that we have not seen many accounts pushing hard to find
ways to get short (typically they are long only). That being said, the reality of the current
Id. Around the same time, a Goldman managing director who 2125 ran Corporate / PWM [Private Wealth
Management] Sales in Japan and sold investments to wealthy individuals, inquired: “Do you have any cdo secondary
inventory.” 8/21/2007 email from PWM Managing Director, GS MBS-E-010619382. He was advised by the SPG
Trading Desk that Goldman was “prohibited from offering cdo paper to all pw [private wealth] clients, even
[qualified institutional] pw clients. ... To change this, we would have to petition the committee that oversees such
things [the Structured Investment Product Committee].” Id. Mr. Lehman added: “Spoke with Sparks about this.
Given the complexity of the product, we would like to handle this on a client by client basis.” Id. After receiving
information that potential clients had previously purchased ABS CDOs from other firms, Mr. Lehman asked
Goldman compliance: “What do we need to do on our end to get this approved.” 8/28/2007 email from David
Lehman, “Japan PWM Client Interest in ABS CDO (internal use only),” GS MBS-E-011090928. One of Mr.
Lehman’s team members in the Mortgage Department replied: “Ldl [let’s discuss live]. Have info on this.” Id. Mr.
Lehman replied “xoxo.” Id.
2126 9/5/2007 email from Michael Swenson, “Refresh of Axe Priorities,” GS MBS-E-010684858.
2127 Id.
2128 Id.
2129 9/6/2007 email from Daniel Sparks to syndicate desk, “Refresh of Axes Priorities,” GS MBS-E-010685200.
market may have finally sunk in and investors may be able to convince their boards [n]ow to
put on this sort of trade.”2125
On September 5, 2007, notwithstanding “the reality of the current market,” the SPG Trading
Desk issued a “Refresh of Axe Priorities” to its entire sales force.2126 The directive placed a priority
on selling Goldman’s residual CDO equity tranches as well as a variety of other assets to help
Goldman cover and lock in the profits from its big short. Mr. Sparks emailed senior sales
“Please let me know how these are going. I am personally going to work to do a better job
making sure you understand the things we are trying to achieve as a business. In addition to
this, the super-senior ABX trade [Jonathan] egol sent around and general securities
financing trades are priorities for us.”2127
Mr. Sparks forwarded this email to Mr. Cohn, who responded “Great to see.”2128 On September 6,
Mr. Sparks emailed the syndicate desk about the “Refresh of Axe Priorities”: “Want to get you to
send out daily 1-3 priority axes for department – let’s discuss.”2129
Goldman has at times suggested that many of its CDO sales were not the result of
affirmative client solicitations and recommendations made by the firm, but were in response to
client requests–generally known as “reverse inquiries.” In a letter to the Financial Crisis Inquiry
Commission, for example, Goldman’s General Counsel, Gregory Palm, made the following
statement about Goldman’s role as an underwriter of synthetic CDOs:
“Goldman Sachs’ CDOs containing primarily residential mortgage-related synthetic assets
were initially created in response to the request of a sophisticated institutional investor that
approached the firm specifically seeking that particular exposure. Reverse inquiries from
clients were a common feature of this market. ... These transactions often are initiated by
our clients, and when proposed by us are often in response to previously expressed
3/1/2010 letter from Goldman Sachs to the Financial Crisis 2130 Inquiry Commission, GS-PSI-01310 at 16.
2131 4/19/2007 email from Daniel Sparks, “*UPDATE* GS Syndicate Structured Product CDO Axes,” GS MBS-E-
010539324, Hearing Exhibit 4/27-102.
2132 Subcommittee interview of David Viniar (4/13/2010) and Craig Broderick (4/9/2010).
2133 See, e.g., 2/2007 Goldman email chain, “FYIs,” GS MBS-E-002339552 (regarding residential credit scratch &
dent loan book: “Has the biz agreed with controllers about how frequently each book is to be marked? Daily?
Weekly? Monthly?”; Mr. Sparks’ response: “For this book I think monthly is the right way as the data comes
monthly on performance. Dramatic mkt moves could change things.”). CDOs were often marked monthly, as hedge
fund clients generally needed month-end valuations of CDOs in their portfolios to enable them to report hedge fund
Net Asset Values (NAVs) to clients. See, e.g., 6/28/2007 email from Bear Stearns, “Missing Marks (15).xls,” GS
MBS-E-001965860 (portfolio manager requesting month-end marks: “I need the 4 bonds marked for 5/31/07 we
still need to report an NAV.”); 6/19/2007 email from Lester Brafman to Jon Egol, GS MBS-E-003373736 (regarding
Abacus CDO securities, Mr. Egol wrote: “We mark them monthly”).
2134 See, e.g., 2/12/2007 email from Daniel Sparks, “Post today,” GS MBS-E-009763506 (New Century “claim[s]
we are the only ones being harsh. C-Bass claims we are the only one margin calling. Our marks are appropriate for
moves in the market. More margin calls going out today.”).
2135 Subcommittee interview of David Lehman (4/12/2010).
investment interests of the client. We are responding to our clients’ desires either to
establish, or to increase or decrease, their exposure to a position based on their own
investment views.”2130
Mr. Palm’s characterization of Goldman as playing only a passive, responsive role is at odds with
the firm’s documented and concerted efforts to market its CDO securities in the face of investor
disinterest and falling values. Throughout 2007, Goldman issued directives to its sales force to sell
specific CDO securities on a “first priority” basis. It expanded its selling efforts to “nontraditional
buyers” as well as to banks, hedge funds, and other clients in Asia, Europe, and the Middle East. It
offered its sales force substantial incentives, such as “ginormous” sales credits, to push the sales to
clients.2131 Under its CDO Gameplan, Goldman “targeted” four primary and 35 secondary clients
for CDO sales, and celebrated selling CDO securities to several of them. The weight of this
evidence demonstrates that Goldman was soliciting sales rather than responding solely to client
CC. CDO Marks
One issue that gained intensity as the mortgage market continued its decline was Goldman’s
practice of selling CDO securities to customers at one price only to mark down the value
substantially within days or weeks of the sale, where Goldman had an ongoing client relationship.
Goldman used a mark-to-market process to manage its risk, which required valuing its
holdings on a daily basis to reflect their current market value.2132 In practice, many of its mortgage
related assets were marked on a monthly rather than daily basis, including many of its CDO
securities.2133 Nonetheless, Goldman appears to have been more active in re-marking the value of
its mortgage related assets than other Wall Street firms and to have used lower marks than many of
its competitors.2134 Goldman also had a process for automatically marking down its internal value
of any asset held longer than a specified period of time, in order to encourage its trading desks to
sell their aged assets.2135
Mr. Broderick explained in his interview with the Subcommittee that because of the 2136 volatility in the subprime
market, Goldman had an unusually large number of disputes with customers over marks or collateral valuation
during 2007. Subcommittee interview of Craig Broderick (4/9/2010). See also 8/2/2007 email from Stacy Bash-
Polley, “Marks Summary,” GS MBS-E-013349723 (transmitting complaints from eight clients that Goldman’s marks
were far lower than those of other dealers); 2/12/2007 email from Daniel Sparks, “Post today,” GS MBS-E-
009763506 (New Century “claim[s] we are the only ones being harsh. C-Bass claims we are the only one margin
calling.”); 8/10/2007 Goldman memorandum, “Summary of German Bank US Sub Prime Exposure,” GS
MBS-E-009994305. This memorandum was generated by Goldman’s European Investment Banking Division, FICC
Sales and Credit. It highlighted losses incurred by many German banks due to markdowns in the value of U.S.
subprime assets, necessitating several European Central Bank bailouts. The memorandum stated: “We understand
from clients that valuation marks provided by Goldman Sachs on ABS are substantially lower than the competition’s
valuations. As a result, clients are irritated by the valuation difference.”
Goldman’s dispute with AIG FP is another example. The two companies disagreed over both the marks and
the amount of collateral and margin that AIG had to post with Goldman in connection with various mortgage
products. At one point in the dispute, Co-President Jon Winkelried wrote to his colleagues: “[O]ne thing we’re not
going to do is compromise on what we think the right marks are and our margin process.” 8/2/2007 email from Jon
Winkelried, “Aig collateral call,” GS MBS-E-010055302. Goldman’s dispute with AIG continued for over a year
until the Federal Reserve, through the Maiden Lane III transaction, ultimately ensured that Goldman and its
customers received 100 cents on the dollar on the bulk of their disputed claims against AIG. Subcommittee
interview of David Viniar (4/13/2010). Goldman later told regulators that it had more collateral disputes than
anticipated during the financial crisis. 11/13/2007 Goldman email, GS MBS-E-010023525 (attachment, 11/14/2007
“Tri-Lateral Combined Comments,” GS MBS-E-010135693-715 at 695). According to Goldman documents, as late
as October 30, 2007, its Mortgage Department generated approximately 66% of all derivative collateral disputes by
Goldman customers. 10/30/2007 Goldman presentation, “Derivative Collateral Dispute Summary,” GS MBS-E-
2137 See, e.g., 8/10/2007 Goldman memorandum, “Summary of German Bank US Sub Prime Exposure,” GS
MBS-E-009994305 (highlighting losses incurred by many German banks due to markdowns in the value of U.S.
subprime assets, necessitating several European Central Bank bailouts).
During 2007, Goldman’s markdowns of the value of its CDO securities became a source of
dispute with its customers.2136 Some clients were negatively affected in a variety of ways when
lower values were assigned to Goldman’s CDO securities. Some had purchased their CDO
securities through “repo” financing arrangements with Goldman; under those arrangements, a
decline in the value of the CDO securities being financed required the client to post more cash
margin with Goldman. In a few other instances, clients had invested in CDO securities through a
CDS contract with Goldman. If the CDO securities declined in value, the CDS contracts required
those clients to post more cash collateral with Goldman. In other cases, clients did not have to post
additional cash collateral, they simply incurred losses from the lower values.2137
Lower marks also had significance for Goldman internally, since a CDO security with a
marked down value might reduce the firm’s profits and reduce its long position. Alternatively, if
Goldman held the short side of an investment, a lower mark might increase the firm’s profits,
increase the value of its short position, and bring in more cash from the long parties. When the firm
held a proprietary position in opposition to the position held by a client, the fact that Goldman was
marking the value of its own position created a conflict of interest, since Goldman would benefit as
the client lost money.
5/11/2007 email from Craig Broderick, “CDOs - Mortgages,” 2138 Hearing Exhibit 4/27-84.
2139 Id. The reference to the “30th floor” was the floor on which Goldman’s most senior executives had office space
in its New York headquarters.
2140 5/11/2007 email from Harvey Schwartz to Daniel Sparks, Tom Montag, and others, GS MBS-E-010780864. As
explained earlier, some clients were affected by Goldman’s marks even after completing purchase of CDO securities,
due to repo financing margin requirements, CDS collateral requirements, or other arrangements.
2141 5/11/2007 chain of email exchanges among Messrs. Mullen, Schwartz, Montag, and Sparks, GS-MBS-E-
010780849, Hearing Exhibit 4/27-103.
2142 Id.
2143 See, e.g., discussion of Timberwolf CDO, below.
Gameplan Markdowns. When, on May 11, 2007, Goldman executives and the Mortgage
Department decided to embark upon a CDO valuation project, Goldman’s Chief Risk Officer, Craig
Broderick, sent an email to his team to discuss the consequences of lower CDO values for
Goldman’s clients. He wrote:
“Sparks and the Mtg [Mortgage] group are in the process of considering making significant
downward adjustment to the marks on their mortgage portfolios esp[ecially] CDOs and
CDO squared. This will potentially have a big P&L [profit and loss] impact on us, but also
on our clients due to the marks and associated margin calls on repos, derivatives and other
products. We need to survey our clients and take a shot at determining the most vulnerable
clients, knock on implications, etc.”2138
Mr. Broderick called for a client survey to identify which clients were “most vulnerable” to
financial difficulty if Goldman’s CDO securities were marked down in value, and they either
incurred losses or were required to post more cash margin or collateral. He also wrote: “This is
getting lots of 30th floor attention right now.”2139
Some Goldman managing directors also raised the issue of selling CDO securities to clients
at a price that would be marked down almost immediately. In a May 11 email to colleagues, for
example, Goldman senior executive, Harvey Schwartz, wrote: “[D]on’t think we can trade this with
our clients andf [sic] then mark them down dramatically the next day.”2140 Later that day, in an
exchange of emails with Mr. Schwartz, Mr. Montag, and Mr. Sparks, Don Mullen acknowledged
Mr. Schwartz’s concern “about the representations we may be making to clients as well as how we
will price assets once we sell them to clients.”2141 The Goldman executives also agreed, however,
not to “slow or delay” efforts to sell the CDO securities, if the sales force received “strong bids.”2142
The May 2007 CDO valuation project resulted in lower values for many of Goldman’s CDO
assets. While those internal markdowns were taken at month’s end, around May 25, 2007,
Goldman continued to price the CDO securities it was selling at much higher levels, creating the
potential for a rapid markdown after an asset was sold.2143
“Monster CDO Re-Mark.” Six weeks later, in mid-June, the Mortgage Department
learned that two Bear Stearns hedge funds with a $17 billion portfolio of subprime assets were in
2144 See Section (3)(a), above.
2145 4/2010 “Goldman Sachs Mortgage Department Total Net Short Position, February - December 2007 in $
Billions (including All Synthetic and Cash Positions in Mortgage Related Products),” Hearing Exhibit 4/27-162.
2146 See 7/25/2007 email from Arbind Jha to Kevin Kao, “Cash bonds,” GS MBS-E-011128623 (“huge changes in
marks today”).
2147 7/29/2007 email from Daniel Sparks to Tom Montag, “Problem,” GS MBS-E-010876595 (“[w]e probably
should have taken more time to put through the CDO monster remark”).
2148 7/29/2007 email from Daniel Sparks to Mr. Mullen, “Problem,” GS MBS-E-010876565.
2149 7/29/2007 email from Daniel Sparks to Tom Montag, “Problem,” GS MBS-E-010876595 (“we rushed it because
of Basis and a desire to protect ourselves against counter-parties”). See also 7/13/2007 email from John McHugh to
Michael Swenson and David Lehman, “Talking Points Needed for Gary Cohn,” GS MBS-E-010853931 (“BSAM
[Bear Stearns Asset Management] & other hedge fund managers (most recently Basis Capital) announced they were
halting fund redemptions and/or liquidating holdings, with some likely to fail.”).
2150 See 7/31/2007 email chain between Tom Montag and Lloyd Blankfein, “Mortgage Derivative Collateral
Disputes – 7/31 Update (COB 7/27 marks),” GS MBS-E-009691545.
financial distress. The Mortgage Department immediately initiated an effort to build a new, large
short position to take advantage of the expected drop in the value of subprime mortgage assets.2144
Within two weeks, Goldman had amassed a large number of CDS contracts shorting a variety of
subprime mortgage assets. By June 22, 2007, Goldman’s short position reached its peak size of
approximately $13.9 billion.2145
The Bear Stearns hedge funds failed in mid-June, subprime assets plummeted in value, and
Goldman established its big short by the end of the month. After its new net short was in place, the
Mortgage Department implemented a series of large markdowns in the value of its RMBS and CDO
assets. The markdowns had the dual effect of increasing the value of Goldman’s net short position,
while reducing the value of many of its customers’ holdings. Due to their financing arrangements
or CDS contracts, the lower values meant that some of the affected clients also had to post more
margin or cash collateral with the firm. Goldman issued broad and deep markdowns of its clients’
positions at month’s end in June, July and August 2007, as well as on intermittent dates in response
to mass ratings downgrades of specific RMBS securities in July and August or to individual
customer credit issues.
One of the markdowns took effect on July 25, 2007,2146 which Mr. Sparks called “the CDO
monster remark.”2147 In an email to Mr. Mullen, Mr. Sparks wrote: “We made massive mark
adjustments this week, pushed them through because of basis and counterparty exposure.”2148 In a
separate email to Mr. Montag, Mr. Sparks made clear that by “basis,” he meant Basis Capital, an
Australian hedge fund that had financed the purchase of Timberwolf and other CDO securities using
Goldman funds and defaulted on its margin and collateral obligations. Goldman then repurchased
those securities at a low price and adjusted its marks for other clients.2149
The CDO markdown drew an immediate negative reaction from Goldman’s customers. On
July 31, 2007, an internal report was sent to a dozen Goldman senior executives and Mortgage
Department personnel regarding pending “mortgage derivative collateral disputes,” meaning
customers who were disputing the lower valuations and resulting cash margin and collateral
calls.2150 The email identified the “10 largest disputes,” naming AIG Financial Products, Morgan
2151 Id.
2152 Id. By late August, Goldman had instituted a system that required senior management pre-approval for large
markdowns. On August 28, 2007, Mr. Lehman sent Mr. Sparks a list of “Mark changes which are greater than 5% /
greater than 10%” for his approval. 8/28/2007 email from David Lehman to Daniel Sparks, GS MBS-E-010623779.
Mr. Lehman asked whether he should ask Mr. Mullen for approval of the changes greater than 10%, and Mr. Sparks
told him to do so. Id.
2153 Id.
2154 8/16/2007 email from Daniel Sparks, “Mort P&L explanation,” GS MBS-E-010680327. Since Goldman took
the entire net short side in many of its Abacus CDOs, the customers’ losses translated directly into gains for
2155 Id. The Correlation Trading Desk reported $145 million in total profits, which were then offset by losses on
other mortgage desks.
2156 8/16/2007 email from Jon Egol to Michael Swenson, “Projected Corr Customers winners/losers from singlename
mark changes,” GS MBS-E-011092473, Hearing Exhibit 4/27-33.
Stanley, and Deutsche Bank, among others. It stated: “The overall derivative collateral dispute
amount is now $7.0 billion.”2151 The email also noted that the total in dispute from the prior week
had been $3 billion, which suggests that the July 25 markdowns had caused the amount in dispute to
more than double in a week. Mr. Montag immediately forwarded the report to Mr. Blankfein: “7
billion of collateral disputes!!!”2152
Mr. Blankfein responded: “Make sure they prioritize weaker credits where our risk is
threatening.”2153 In other words, Mr. Blankfein directed Goldman personnel to focus on disputes
with clients that had the weakest credit, and might have fewer resources to pay the amounts owed to
Goldman as a result of the downward marks. The same markdowns causing losses for those clients
were simultaneously increasing the profitability of Goldman’s net short.
Two weeks later, the Mortgage Department implemented another large markdown, this time
related to Goldman’s Abacus CDOs. This markdown took place on August 16, 2007, after the
Correlation Trading Desk adjusted its correlation assumptions in a way that resulted in steep
markdowns for Abacus CDO customers and a corresponding $94 million increase in the value of
the Correlation Trading Desk’s net short positions on the same CDOs.2154 The Mortgage
Department as a whole reported a $121 million profit that same day. Mr. Sparks reported to senior
management: “94mm ... is from correlation adjustment in ABX (from 50 to 70%) as market
observability better recently, rest is from outright shorts.”2155 Also on August 16, 2007, Mr. Egol
listed the Correlation Trading Desk’s Top Ten Winners and Losers due to Goldman’s markdowns
and calculated that “[t]he aggregate P&L in the book is $405mm (ie net markdown to customers),
much of this is scattered across a bunch of cashflow CDOs.”2156
DD. Customer Losses
Goldman’s internal marks demonstrate that, at the time it sold its CDO securities,
Goldman’s senior management knew its sales force was selling CDO securities at inflated prices
and that the CDO securities were also rapidly losing value. In addition, soon after selling the CDO
securities, Goldman marked down their value, causing some customers to incur substantial losses
See, e.g., 5/11/2007 email from Craig Broderick, “CDOs - Mortgages,” GS MBS-E 2157 -009976918, Hearing Exhibit
4/27-84; see also 8/10/2007 Goldman internal memorandum, “Summary of German Bank US Sub Prime Exposure,”
GS MBS-E-009994305.
2158 10/12/2007 email to Daniel Sparks, “US ABS SS Intermediation Trades,” GS MBS-E-013706095, Hearing
Exhibit 4/27-70.
2159 Id.
2160 7/24/2007 email from [Taiwan], “7/23 CDO/RMBS requests from Taiwan,” GS MBS-E-011198375, Hearing
Exhibit 4/27-67.
2161 8/2/2007 email from Stacy Bash-Polley to Messrs. Montag, Mullen, Schwartz, and Sparks, “Marks Summary,”
GS MBS-E-013349723.
within days or weeks of a purchase and undergo substantial margin and collateral calls that caused
additional financial distress.2157
One Goldman salesperson expressed remorse over the impact on their customers of CDO
sales followed by large markdowns within days or weeks of the client’s purchase:
“Real bad feeling across European sales about some of the trades we did with clients. The
damage this has done to our franchise is significant. Aggregate loss for our clients on just ...
5 trades alone is 1bln+.”2158
At the same time, the salesperson thought the sales force deserved a bigger share of the profits
generated for the firm:
“In addition team feels that recognition (sales credits and otherwise) they received for
getting this business done was not consistent with the money it ended up making/saving the
A Goldman salesperson in Taiwan sought help in explaining Goldman’s markdowns to a
bank whose CDO investment had been marked down from about 97 to about 45 cents on the dollar
in a matter of weeks:
“[B]ank just bought the altius deal from gs [Goldman Sachs] 5 weeks ago and the mtm
[mark-to-market] dropped over 50%. We understand the liquidity is thin, but I really need
some info to support this price. ... This is very important as this transaction has a lot to do
with our reputation in taiwan market. I understand all deals are down and spread is trading
wider now. Unless the principal is at risk now, the mtm is not supposed to drop so quickly
during such short period of time.”2160
On August 2, 2007, Stacy Bash-Polley, a Goldman senior sales executive, sent an email to
Messrs. Montag, Mullen, Schwartz, and Sparks outlining eight specific instances in which clients
had complained that Goldman’s marks were significantly lower that those of other dealers.2161 Her
summary of client concerns included the following:
2162 Id.
2163 6/21/2007 email from Mr. Sparks to Lester Brafman, “Repo,” GS MBS-E-010847490.
2164 The Subcommittee did identify at least one instance of a mark change. Goldman’s China sales representative
contacted the ABS Desk to request an increase in a mark on an RMBS security:
“[C]an we try our best to show ‘better’ indicative prices for [client]? ... [C]lient is under pressure of being
questioned that they bought something looks really bad. ... [W]e showed a price of LBMLT 06 A A1 as of
95-00 . . . this is something hard for client to believe .... [W]e need them to think of GS as the best firm, and
we need them to be our best client when next biz boom comes. ... We would highly appreciate if a slightly
aggressive price can be showed from trading desk.”
5/21/2007 email from China sales representative to Edwin Chin and others, “Mark to market prices,” GS MBS-E-
011068490. Mr. Chin moved the mark in question from 95 to 98, and wrote:
“–They have not agreed with our process and recently asked other dealers to analyze – say
that we are off significantly from where other dealers are modeling this ....
–We took their mark on Fort Denison from 93.16 to 40.00[.] They admit the AAA CDO
mkt is off substantially but feel that this particular bond [has objective characteristics that
should make it] ... perform better than the junior AAA market as a whole. Meanwhile, we
took Hudson Mezz ... AAA from 80.4 to 65. They would like our thoughts as to why Fort
Den[ison] was marked down so much more. ...
–The Alt-A marks were particularly punitive. ... Our offerings are still 10-20 points higher
than the marks. Look at GSAMP 2007-7. On financing, [customer] said our HC [haircuts]
... were by far the most onerous of all dealers. ...
–They bought AAA cdos .... They have communicated to sales that GS is by far an outlier
and they will never be able to buy another cdo from us based on their lack of confidence in
understanding how we are coming up with marks. ...
–Issues with their CDO marks. Said we were many many points behind where other dealers
were marking similar positions.”2162
Even before this email, Goldman’s sales force had been vocal in its criticism of Goldman’s
low marks which were making their sales job more difficult. On June 21, 2007, Mr. Sparks stated
in an email: “sales is making significant noise about gs notable conservatism in marking and
haircuts.”2163 Mortgage Department personnel dismissed such criticisms out of hand. One
managing director responded: “Would have tho[ugh]t that bsam event [failure of Bear Stearns
Asset Management hedge funds] would provide reasonable explanation as to why our marking and
haircuts r ok.” Mr. Sparks replied: “Kind of stunning – but we are hearing it.”
Goldman generally declined to offer any written explanations of its marks to clients, and
rarely offered any financial accommodation or compromise regarding the marks or related collateral
calls.2164 On one occasion, when a sales representative asked about providing information about the
“After much discussion internally, we will improve our bid to 98-00 given the market color we have
observed in the past two days. The markdown was mostly a reaction to rating agency downgrade and partly
reflected the illiquidity of the position, but upon further analysis we have gotten more comfortable with the
risk position and agree it should be marked at a higher price.”
8/6/2007 email from David Lehman to Japan 2165 sales, “RE: Tokyo Star,” GS MBS-E-001927891.
2166 Id.
2167 6/6/2007 email from David Lehman to Japan sales, “Point Pleasant Marks – request from Tokyo Star Bank,” GS
MBS-E-001912408-10 at 9.
2168 9/26/2007 Goldman Sachs 2007 Performance Review for Michael Swenson, “Reviewee’s Feedback,” GS-PSI-
02399, Hearing Exhibit 4/27-55b.
2169 11/20/2007 email from Thomson IFR - ABS, “ABS: Market Tense as Goldman Predicts RMBS CDO Problems
to Drag On,” GS MBS-E-013782989.
2170 Id.
2171 Id.
2172 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 David Lehman to Daniel Sparks, “ACA,”
firm’s CDO marks to a customer, Mr. Lehman wrote: “We cannot put this on paper - It concerns
me they want something specifically in writing.”2165 When told that other dealers had provided the
customer with marks and a written description of their CDO pricing methodologies, Mr. Lehman
responded: “Our marking policy is a market price (bid and/or offer) – We do not have a written
methodology for pricing and we should tell them that.”2166 In another instance, when a client asked
for marks for the two prior months related to a CDO it was considering buying, Mr. Lehman wrote:
“Verbal only .... Want to give them our tho[ugh]ts on market levels, not ‘marks.’”2167 In his 2007
performance self-evaluation, the head of the SPG Trading Desk, Michael Swenson, wrote:
“I spent numerous hours on conference calls with clients discussing valuation methodologies
for GS issued transactions in the subprime and second lien space .... I said ‘no’ to clients
who demanded that GS should ‘support the GSAMP’ program [Goldman RMBS securities]
as clients tried to gain leverage over us. Those were unpopular decisions but they saved the
firm hundreds of millions of dollars.”2168
In November 2007, Goldman analysts issued a research report to clients about the crisis in
the mortgage market.2169 Goldman predicted that the mortgage market crisis was likely to continue
and would have serious implications for a significant number of financial institutions: “Writedowns
and losses will continue to mount . . . . [M]anagements will need to repair some seriously
damaged balance sheets.”2170 Goldman estimated that industry-wide losses reflecting markdowns in
subprime mortgage CDOs would approach $150 billion, of which about $40 billion would be taken
in the third and fourth quarters of 2007.2171
Customers who purchased CDO assets from Goldman in 2007 generally suffered substantial
losses from those investments, and several went bankrupt, including IKB, a German bank, and Basis
Capital, the Australian hedge fund.2172 Goldman was not only aware of its clients’ predicaments,
GS MBS-E-013746511 (discussing “what would happen upon an ACA bankruptcy (which is the most likely scenario
in our opinion).”).
See 6/21/2007 email from Fabrice Tourre, “Post on ACA,” GS M 2173 BS-E-002562148. See also ACA Financial
Guaranty Corp. v. Goldman, Sachs & Co., Complaint (filed 1/6/2011, Sup. Ct. N.Y) at ¶ 7 (ACA now “operates as a
run-off insurance company.”), available at
2174 April 27, 2010 Subcommittee Hearing at 66.
2175 Id.
2176 Id.
but in some cases, Goldman purchased CDS protection or equity puts on its clients’ stock,
essentially betting that the stock price would fall or the company would lose value. For example,
after ACA Financial Guaranty Corp., the parent company of ACA Management which acted as the
collateral manager of Abacus 2007-AC1, purchased Abacus securities, Goldman purchased the
short side of a CDS contract that referenced ACA Financial Guaranty. ACA Financial Guaranty
encountered extreme financial distress in late 2007.2173
At the Subcommittee hearing, Goldman executives were asked about the four Goldmanoriginated
CDOs highlighted in this Report, Hudson 1, Anderson, Timberwolf, and Abacus 2007-
AC1.2174 Senator John Tester noted Mr. Birnbaum’s testimony that, in 2007, Goldman could “see
some things happening,”2175 and that Goldman itself was betting against the mortgage market.
Senator Tester asked Mr. Sparks, in light of those developments, “how [he] got comfortable with
sales,” and how he “in good faith” sold the CDO securities to Goldman’s customers – how he could
“sell them out and collect the fees and make the dough?”2176 Senator Tester and Mr. Sparks then
had the following exchange:
Senator Tester: Every one of these [CDOs] were – it looks like a wreck waiting to happen
because they were all downgraded to junk in very short order.
Mr. Sparks: Well, Senator, at the time we did those deals, we expected those deals to
Senator Tester: Perform in what way?
Mr. Sparks: To not be downgraded–
Senator Tester: Perform to go to junk, so that the shorts made out?
Mr. Sparks: To not be downgraded to junk in that short a time frame. In fact, to not be
downgraded to junk.” ...
Senator Tester: Do you feel confident that the information about each one of these [CDOs]

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