The facts: This statement is misleading and mischaracterizes how we positioned ourselves at the start of 2007. Goldman Sachs, like most other financial firms, was long the mortgage market at the end of 2006. In order to bring our exposure closer to flat, we began hedging our mortgage holdings in the first quarter of 2007. Those hedges certainly limited our exposure to the declining housing market, but we also recorded substantial writedowns on our residential mortgage holdings. Moreover, in most of the trades with AIG described in the article, Goldman Sachs was hedged by an offsetting position and did not have a short directional bet on the mortgage market.
Here the Times wisely says Goldman “had begun” to make the trades. Now, it’s a matter of record that its trades would soon “pay off”; that’s the premise of this important December 2007 WSJ story by Kate Kelly.
How Goldman Won Big On Mortgage Meltdown
The subprime-mortgage crisis has been a financial catastrophe for much of Wall Street. At Goldman Sachs Group Inc., thanks to a tiny group of traders, it has generated one of the biggest windfalls the securities industry has seen in years.
A caveat: Because two competing news organizations say it’s so doesn’t make it so. But at a minimum, the uncorrected Journal story supports the Times here.
Conceivably, Goldman’s response—that it limited its exposure but also recorded writedowns—could be squared with the idea that it made “huge trades” that would “pay off”—and just happened to lose money elsewhere.
Still, that’s a stretch. The fact is, the Times/Journal version of reality—that Goldman made out big shorting housing—is at odds with Goldman’s.
Leaning on the Journal, I side with the Times.
NYT assertion: “A November 2008 analysis by BlackRock, a leading asset management firm, noted that Goldman’s valuations of the securities that AIG insured were consistently lower than third-party prices.”The facts: We believe that the marks we supplied to AIG represented fair market value for the underlying securities. We understand that the marks supplied by other AIG counterparties ultimately moved closer to ours, proving that we were at the forefront of taking realistic marks on our positions. Subsequent events in the housing market proved our marks to be correct.
Van Praag doesn’t directly address the Times assertion here—this is what Blackrock noted. Nor does the Times say that Goldman’s marks were wrong, just that it was aggressively pursuing its collateral, which is not unfair.
Okay, we’re almost done.
NYT assertion: “Perhaps the most intriguing aspect of the relationship between Goldman and AIG was that without the insurer to provide credit insurance, the investment banks could not have generated some of its enormous profits betting against the mortgage market. And when the market went south, AIG became its biggest casualty — and Goldman became one of the biggest beneficiaries.”The facts: As we’ve already said, we were far from the biggest beneficiaries of the mortgage market’s decline. Through prudent hedging, we limited our losses, rather than generating “enormous profits.” AIG was only one of many counterparties with whom we had hedging arrangements.
The Times says Goldman was “one of” the biggest beneficiaries. This is a continuation of the dispute over whether Goldman made out well or broke even on the housing bust.
Last two points:
NYT assertion: “…the insurer’s executives believed that Goldman Sachs pressed Societe Generale to also demand payments.”
The facts: That’s not correct. We did not encourage other counterparties to issue collateral calls.
You can see van Praag’s complaint here: AIG’s executives may have believed it, and Goldman may have had incentive to do so, but the insurer’s executives had no way of knowing one way or another. Still, I find no problem with reporting AIG’s suspicions in this case. Perhaps others do.
Finally:
NYT assertion: “Mr. Sherwood [Goldman vice chairman] said he did not want to ask other firms to value the securities because it would be embarrassing if we brought the market into our disagreement, according to an e-mail message from Mr. Cassano [now-fallen AIGFP chief] that described the call.”
