...Indeed, within a year, three of the country's storied top five investment banks – Bear Stearns, Merrill Lynch and Lehman Brothers – would be wiped out by the crisis, thanks mainly to their overinvestment in subprime.
One bank stood out as an exception: Goldman Sachs.
The legend on the street was that Goldman was somehow not only going to survive the crash, but prosper and make big profits. How did Goldman do so well during a financial hurricane?
The New York Times had an answer: its leaders were smart – and humble!
"Goldman's secret sauce, say executives, analysts and historians,"
the paper wrote, "is high-octane business acumen, tempered with paranoia and institutionally encouraged — though not always observed — humility."
Where did writers Jenny Anderson and Landon Thomas Jr. get the idea that Goldman's smarts saved them during the mortgage crisis? From Goldman, of course.
We know this because of an investigation conducted into the bank's a-little-too-miraculous performance that year
by the Senate Permanent Subcommittee on Investigations.
Chaired by Michigan Sen. Carl Levin, the PSI scrupulously detailed the efforts by Goldman to get out from under the mortgage crash by dumping its disastrous mortgage investments on its own clients as it simultaneously bet against them.
This maneuver, colloquially described since as the "Big Short" episode, was perhaps the most lurid example of Wall Street iniquity during the crash years. And Trump's new economic adviser, Cohn, played a central role.
In the run-up to the "Big Short" story – in the years leading up to 2007 – Goldman had joined other banks in helping cause the financial crisis. They'd done so by creating masses of toxic mortgage instruments and selling them to unsuspecting investors, who were (often falsely) told the loans met underwriting standards. Goldman, like
JPMorgan Chase,
Bank of America and
Citigroup, would later
pay billions to settle claims by its infuriated customers, which included state and federal housing authorities.
At the tail end of 2006, Goldman execs saw that a) the subprime mortgage market was in serious trouble, and b) the bank itself was dangerously overinvested in it. So they made a frenzied, often deceptive effort to induce their clients to eat what should naturally have been their own losses.
On December 14th, 2006, mortgage chief Daniel Sparks proposed: "Distribute as much as possible on bonds created from new loan securitizations and clean previous positions."
Translation: Let's create new mortgage-backed products to dump on others, and use them to "clean" our toxic portfolio.
In one mortgage-based deal called Hudson 1 securities, Goldman helped sell its toxic holdings by saying the bank's interests were "aligned" with those of potential clients, because it would own a tiny, $6 million slice of the deal.
The bank left out the fact that it had a $2
billion bet against the same deal.
In the same deal, Goldman told clients that the mortgage products in Hudson had been "sourced from the Street," i.e., that this stuff did not come from Goldman's own inventory. When Senate investigators later pressed Goldman executives on this question, they hilariously claimed this wasn't a lie, because Goldman
was part of "the Street."
"They were like, 'We are the Street,'" one investigator told me, laughing.
Through deals like this, Goldman within months went from having a $6 billion bet on mortgages to having a $10 billion bet against them – a "big short."
All of these moves were made with the
assent of the Firmwide Risk Committee, which included Goldman CFO David Viniar, Blankfein and Cohn.
They would go on to fleece other clients...
