Real Estate & Mortgage Insights

Goldman Sachs: Scoundrel or Scapegoat?

Securities firm Goldman Sachs became the subject of heavy government fire this month, as an investigation indicated that the company purposely advised its clients to buy up toxic assets even as Goldman Sachs bet against the U.S. mortgage market.

The company and one of its traders specifically, 31-year old Frenchman Fabrice Tourre have been sued by the Securities and Exchange Commission, claiming Goldman Sachs sold their customers securities that they themselves were betting would fail.

During its own investigation of the issue, the Permanent Subcommittee on Investigation turned up some rather incriminating emails from several key Goldman players.

"The whole building is about to collapse anytime now," wrote Fabrice, who calls himself Fabulous Fab, in one email. "Only potential survivor, the fabulous Fab . . . standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!"

And from an April 27 Washington Post article:
"Fabulous, in an e-mail from 2007, described the mortgage business as 'totally dead, and the poor little subprime borrowers will not last too long!!!' Yet two months later, he boasted that he had managed to dump some more of the worthless mortgage securities on 'widows and orphans that I ran into at the airport.'"

Goldman says it didn't escape the mortgage mess, reporting recently that it lost $1.2 billion on mortgage-backed securities between 2007 and 2008, but the Senate committee estimates that the company also made $3.7 billion in 2007 by its short bets against the struggling housing market.

"In a number of ways they contributed to the collapse of this economy," said committee chair Senator Carl Levin, D-Mich.. "The toxins that Goldman Sachs and others helped inject into our financial system has done incalculable harm."

Just the Scapegoat?

All the Goldman Sachs executives that testified before the committee maintained the company's innocence.

"We did not cause the financial crisis," said Michael Swenson, a Goldman managing director. "I do not think that we did anything wrong."

Many, including Goldman itself, believe the company is being scapegoated by the government. According to Bloomberg, Annemarie McAvoy, a former inside counsel at Citigroup Inc. and Morgan Stanley, said, "Goldman is being used as the fall-guy here, being vilified and accused of things that they were not even involved with, such as causing the fall of the housing market and giving unreasonable loans to investors."

While the company emails are certainly suspicious, even Senator Levin made it clear he wants to make an example out of Goldman Sachs.

"To sell to customers at the same time you're betting against what you're selling -- we think it's not uncommon and we think it ought to end," he told reporters a day before the April 27 hearing. "We think there are a number of banks engaged in similar conduct but we had to focus on one."

So is Goldman solely responsible for the bursting of the housing bubble and the resulting high unemployment rate? Certainly not. Did they have a hand in it? Most likely. Are they being singled out because they actually made money and weathered the financial crises well? Probably. Does targeting a company for causing the economic meltdown and prosecuting its executives make Senators look good? Absolutely. Will it change anything in the future? Maybe, if it introduces stricter Wall Street oversight, but maybe not, because Wall Street always seems to find a new path to its profits.