Goldman Sachs denies betting against mortgage clients
Wednesday, April 7, 2010; 4:34 PM
NEW YORK -- Goldman Sachs, the investment bank that has emerged as a Wall Street leader and the target of public ire in the aftermath of the financial crisis, said Wednesday it did not unfairly bet against clients in the mortgage securities market and defended its relationship with American International Group.
It was "grateful" for the government assistance during the market turmoil, Goldman chief executive officer Lloyd Blankfein and chief operating officer Gary Cohn said in the firm's annual letter to shareholders.
"The firm did not generate enormous net revenues or profits by betting against residential mortgage-related products, as some have speculated," the executives wrote. "Rather, our relatively early risk reduction resulted in our losing less money than we otherwise would have when the residential housing market began to deteriorate rapidly."
The eight-page letter was made public Wednesday ahead of the firm's May 7 annual meeting with shareholders and comes after more than a year of withering attacks of its business practices, including multibillion-dollar bonuses, from lawmakers in Washington.
In the letter, the company reiterated many of the arguments it has made to deflect that negative publicity. But reaction from Goldman critics indicated the letter did little to improve its public image.
"Its shareholders letter is just evasive action," said Janet Tavakoli of Tavakoli Structured Finance. Goldman executives "are distracting people from their own duties and responsibilities. When they created a lot of these packages of loans, it was their responsibility, their duty as an underwriter to investigate the character of the underlying loans . . . not their customers, not their clients."
Earlier this year, Blankfein faced pointed questioning by the Financial Crisis Inquiry Commission established by Congress. Philip Angelides, the commission's chairman, accused the firm of selling of subprime mortgage-backed securities and then taking bets that they would default, likening Goldman to a car salesman who sells vehicles with "faulty brakes, and then [takes out] an insurance policy on the buyer of those cars."
Goldman was among the first on Wall Street to reduce its exposure to the housing market before the crash, and it did so by taking short positions on subprime mortgage securities that would benefit the firm if the securities declined in value.
"Our short positions were not a 'bet against' our clients," the executives said in the letter, adding that the positions "served to offset our long positions."
"Our goal was, and is, to be in a position to make markets for our clients while managing our risk within prescribed limits," they said.
Regarding the federal government's $182 billion rescue of AIG, the executives said that Goldman Sachs and "every other financial institution and company" benefited from the insurance giant's continued viability.
The controversial rescue of AIG in the fall of 2008 resulted in Goldman and other counterparties being repaid in full on what the insurer owed on its faulty bets. Goldman received $12.9 billion.
The executives repeated their claim, opposed by many critics, that Goldman had limited its risk against AIG through hedges and by demanding collateral, and "thus, if AIG had failed, we . . . would not have incurred any material economic loss."