Goldman Sachs manipulated the subprime mortgage derivative market in 2007 for its own benefit, to the disadvantage of its clients, according to a Bloomberg article by Christine Harper and Joshua Gallu entitled “Goldman Traders Tried to Manipulate Market in 2007, Report Says,” which cites a U.S. Senate report.
Company documents show Goldman traders engineered a “short squeeze” (later reversed) by pricing credit default swaps artificially low with the purpose of driving holders to panic sell them to Goldman at those artificially low prices, according to the article, citing a report by the Permanent Subcommittee on Investigations.
“We began to encourage this squeeze, with plans of getting very short again,” Deeb Salem, a trader in the structured product group, was quoted as saying in a 2007 self-evaluation. In furtherance of the scheme, Salem’s supervisor urged traders to “cause maximum pain” and “have people totally demoralized.”
A Senate subcommittee found that Goldman placed the firm’s interests ahead of its clients’ as the value of mortgage-linked investments tumbled in 2007. “Conflicts of interests related to proprietary investments led Goldman to conceal its adverse financial interests from potential investors, sell investors poor quality investments, and place its financial interests before those of its clients,” according to the subcommittee.
As Citigroup and Merrill Lynch reported big losses on mortgage-backed securities during 2007, Goldman reported record earnings, in part from bets against mortgage-backed securities, while acting as a “market maker” in selling such investments to clients as it was betting against them, according to the article.
One Goldman executive instructed personnel “not to provide written information to investors about how Goldman was valuing” a CDO called Timberwolf, according to the Senate report.
Goldman has tried to characterize its activities as just normal business hedging, but that is belied by an internal presentation by Joshua S. Birnbaum, who ran a Goldman unit called the ABX Trading Desk, in which he stated that a short position established by the structured product group after the collapse of two Bear Stearns hedge funds was not a hedge: “By June, all retained CDO and RMBS positions were identified already hedged’ In other words, the shorts were not a hedge.” Stated differently, Goldman was speculating against some clients’ interests, in some cases seeking out buyers who were inexperienced with the securities, according to the article.
Citing the Senate report, the article discloses that Goldman’s mortgage desk changed how it marked derivatives values based on its position in the market. At first, Goldman undervalued those bets during the short squeeze attempt. After abandoning the short squeeze and shorting credit default swaps, Goldman “immediately changed its CDS short valuations and began increasing their value,” the Senate report said.
J. Boyd Page, the senior partner at investors’ law firm Page Perry said: “The manipulation described by the subcommittee report is an egregious conduct that is deserving of severe sanctions. These are the same people who have fought tooth and nail against meaningful financial reform and want to just continue doing business as usual. As someone said, we have seen this movie before, but the crazy thing is that some people expect a different ending this time.”
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 45 occasions. Page Perry’s attorneys have extensive experience in representing investors in securities matters. For further information, please contact us.