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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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