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Questions from Sense on Cents for Goldman Sachs

Posted by Larry Doyle on April 27, 2010 8:55 AM |

Goldman Sachs’ executives, including CEO Lloyd Blankfein and structured finance VP Fabrice Tourre, will come front and center in Washington today to supposedly face the music and address what truly was going on within the mortgage operations of Goldman Sachs.

Will the music which Lloyd and team face be merely of the background variety? Will today’s hearing be nothing more than another sideshow to the ongoing three ring circus in Washington pretending to serve as real investigations? What has America truly learned throughout the ongoing Congressional investigations into our financial and economic crisis that we did not already know eighteen months ago?

The American public has been largely served a dish of stale bread and chopped meat with little substance or sizzle. Will today be different? I am not optimistic. Why?

I believe the Senate subcommittee should be increasingly focused on the collateral inputs in the Goldman transactions to a much greater extent than the deal outputs. If America wants to truly understand how and why the markets and economy  cratered in 2008, the extent to which fraudulently underwritten mortgages were originated, securitized, and distributed must be thoroughly explored and exposed.Or is that line of questioning too aggressive for the Goldman team and potentially too damaging to the Wall Street-Washington incestuous relationship?

If I were on the Senate subcommittee questioning the present and former Goldman executives today, I would ask them the following questions. In fact, I would address this line of questioning not only to executives from Goldman but to every major Wall Street bank.

1. Who and where are your mortgage finance representatives who covered the largest originators of sub-prime and alt-A mortgage collateral?

2. What information, including e-mails, can be gleaned from these individuals regarding the quality of mortgage underwritings, especially in the 2006-2007 calendar years?

3. Was there evidence of fraud in the mortgages underwritten during this period? How was it handled? Were loans purchased without sufficient and proper reps and warranties and were these loans, in turn, securitized and distributed?

4. Let’s get more specific. Why and how did a Goldman structured transaction known as Timberwolf lose 80% of its value within five months of issuance? The Financial Times highlights this deal this morning in writing, Goldman ‘Criticised $1B Loan Product’:

Goldman Sachs officials privately disparaged a complex $1bn mortgage security that the Wall Street bank sold to investors, according to e-mails released by Senate investigators on the eve of hearings on Tuesday on the bank’s role in the financial crisis.

The disclosure of the e-mails by the Senate subcommittee on investigations, which is conducting the hearing, opens up a new front in Goldman’s battle to defend itself against accusations that it put its interests ahead of its clients.

The Goldman communications released on Monday involve Timberwolf, another so-called collateralised debt obligation, or CDO, which was structured by the bank to give investors a chance to bet on subprime mortgages.

Tom Montag, then a senior Goldman executive and now head of corporate and investment banking at Bank of America, was quoted as describing the deal in an e-mail as follows: “Boy that timeberwof (sic) was one shi**y (sic) deal,” according to the Senate subcommittee.

The subcommittee said that Matthew Bieber, the Goldman trader responsible for managing the deal, later described the day that the Timberwolf security was issued as “a day that will live in infamy”, recalling the language President Franklin Roosevelt used for the Japanese attack against Pearl Harbor.

Within five months of issuance, Timberwolf lost 80 per cent of its value. The security was liquidated in 2008.

A deal does not lose 80% of its value within five months of issuance merely because the market backed up. Based on my experience, I would strongly suspect that the mortgage collateral backing the Timberwolf transaction had a significant percentage of fraudulently underwritten loans.

If the Senate subcommittee truly wants to run a legitimate hearing instead of a circus, it will require Goldman to produce all of the pertinent evidence and documents behind this specific deal. They should start by bringing Goldman’s mortgage finance bankers to town. Then they should do the same with every other Wall Street bank. At this point, America may start to learn the nature of the mortgage garbage going into these deals and where and when the frauds were truly perpetrated.

Comments, color, questions always encouraged and appreciated.


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  • LD

    I am a contributing author at SeekingAlpha. I posted my commentary there this morning. A comment was left at SA that I would like to share with readers here at Sense on Cents. The reader writes:

    First person I’ve seen raise what I believe are the true areas of concern that our gov’t should be focused on. The structures aren’t the problem, they were sold to sophisticated investors who were fully capable of analyzing and understanding the risks in what they were buying.

    However, those investors didn’t have one piece of the puzzle that many (myself included) requested over and over and over. A request that was continually denied. A request for access, continued access, to loan level data tapes.

    The data was simply deemed too massive to distribute at the investor level.

    Were evidence to be found that the U/W’s knew of the failings in these loans (inability to pay, pure mortgage fraud, etc, etc, etc), and willfully withheld loan level data from investors because of knowledge that providing loan level data to investors would expose as the inherent problems, some very serious questions arise regarding the activites of the U/W’s during the recent (and even extended past).

    I, for one, as an active participant in the ABS market, hope the issues that have been raised lead to substantially improved transparancy, most especially on the asset level, loan level side of the market.

  • Fred

    The repeal of Glass Stegall by gov’t has created the current market dynamic. Market maker? Broker? Securities Originator? Only full and acurate discloser of any and all positions even remotely related to a transaction must be made to “cover your ass”.

    The repeal has made full disclosure the center-piece of any transaction and any criminal action. Are banks capable of living up to the inherent responsibility that the repeal imposes on an organization and all its divisions, departments and traders?

    Is a bank vulnerable any time a customer suffers a loss?
    If you thought the fine print on credit card was bad, wait til you see the “soon to be revised” client agreement at GS.

  • Fred

    Every parent is familiar with the game of “cat and mouse” that you must play to stay one step ahead of a child and keep him or her from harms way. (stairs, cabinets, traffic, etc.) As long as we continue to send our best and brightest to wall street and into financial engineering vocations it will continue to be a game of “cat and mouse” with the full faith and credit of the government at risk.

    The gov’t hearings haven’t even gotten into the inherent conflicts of interest involved in high frequency trading yet.

    We need to get our kids interested in the management training program at PG not GS.

  • George

    It was obvious none of the senators have a clue of what they are talking about. Levin obviously did no homework and was lost. He continued to make GS look like they were trading with Mom and Pop rather than institutions. I have said it before and saying it again. This crap was started the day Barney Spanky with Clinton’s help passed legislation that opened the door that allowed people who did not qualify for a mortgage loan the ability to get one. Goldman did exactly what I and most others would do and that is to short something that’s going down. I am long the double inverse Euro ETF. I believe with Greece, Portugal, Ireland having problems the EURO has a good chance to go down. They can’t just print money like we can (currently).Does that mean I wouldn’t sell a client EURO’s or EURO ETF’s if asked? I’ll sell it to them. All they want. I am not under obligation to tell them I am short their long position. We need regulations but mostly on the very regulatory bodies that supposedely regulate us. Larry continues to bring up SEC and FINRA. Someone else mentioned bringing back the Glass Stegal Act. We must get government out of everything or liberal policies such as the everyone can buy a home. This thinking that everyone deserves this and that will ruin us.

  • LD

    Another very interesting comment was left on my commentary at Seeking Alpha. I would like to share it with readers,

    You were right not to be optimistic about the hearing. Most of the senators seemed unaware of the distinction between underwriting securities and market-making in previously issued securities and only touched on the key issue you raise: did Goldman and other firms know that many of the mortgages they were packaging were fraudulent? It was the securitization of bad loans that enabled so many unqualified buyers to purchase homes, thus contributing to the bubble in both house prices and construction. One senator (I think McCaskill) did bring up an e-mail discussing poor loan quality, but couldn’t tie it to a particular securitization, letting the witnesses off the hook. As you suggest, the subcommittee should take the time to follow an awful deal all the way up the chain to see who knew about the rampant mortgage fraud that was necessary to keep securitization fees flowing. You might call the committee and offer your help in doing this (I’ve referred some of the committee staff to your post).

    Instead, the senators spent hours implying that getting short is inherently unethical or illegal. There’s surely plenty of unethical and criminal behavior in mortgage market-making (I traded U.S. Treasuries for J.P. Morgan for 12 years and that market is rife with front-running–see –so I’d be amazed if the mortgage market isn’t also), but the senators had no information about it.

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