All the Devils Are Here [171]
In the coming months, the Goldman team would do all of the above and more. Birnbaum bought all the short positions he could in the ABX. Goldman demanded collateral from hedge fund clients that had bought mortgage-backed securities on margin, earning it the enmity of many fund managers. It also followed Viniar’s directive to be “aggressive” about “distributing things.” And the firm was able to “amass large amounts of cheap single name protection,” as Birnbaum later wrote in a self-review, because “CDO managers were in denial.” Goldman, however, wasn’t, which is why it was so anxious to reduce its risks as quickly as possible. As another Goldman trader wrote on February 11, “The cdo biz is dead we don’t have a lot of time left.”
Among Goldman’s deals:
• Because it did business with New Century, Goldman was carrying New Century mortgages and securities on its balance sheet. But a CDO it sold in late February 2007 served to reduce that exposure. This was a CDO called Anderson Mezzanine Funding, which consisted of sixty-one credit default swaps totaling $305 million on mostly triple-B-rated securities backed by mortgages produced by New Century and other subprime lenders. Although 70 percent of the CDO was rated triple-A, buyers were so reluctant to invest that Sparks, at one point, suggested liquidating the transaction. To get the deal done, Goldman ended up with a chunk of the equity and the lower-rated securities. On the deal itself, Goldman contends it lost money, something the firm says it did on many such deals. But the Senate Permanent Subcommittee says that Goldman kept a large chunk of the short position for itself, which created a hedge against its New Century exposure.
The subcommittee would also allege that buyers weren’t told that Goldman would profit if the securities tanked; some of the e-mails that were exchanged as Anderson was being marketed certainly suggest that was the case. One potential client asked, “How did you get comfortable with all the New Century collateral in particular the New Century serviced deals—considering you are holding the equity and their servicing may not be around... ?” And a Goldman salesperson asked for additional ammunition so that he could “position the trade as an opportunity to get exposure to a good pool of assets” and not “as a risk reduction/position cleanup trade.” Which is exactly what it was. At the time the deal was done, the underlying mortgages in some of the securitizations were already close to double-digit default rates. Buyers of the triple-A-rated piece clearly believed that the rating meant that their investment was sufficiently insulated from those losses. They were wrong.
Within seven months, the deal was downgraded to junk.
• In May 2006, Goldman helped underwrite $495 million of bonds backed by second-lien mortgages made by Long Beach. It was a terrible deal. Although two-thirds of the tranches had been rated triple-A, the loans in the securitization were some of the worst subprime mortgages imaginable, and the default rate was very high. According to an analysis later done by a research firm called Amherst Holdings, only 32 percent of the loans had full documentation, and the weighted average loan to value was almost 100 percent. As early as 2007, Goldman was demanding that Long Beach buy back defaulted loans; within two years, the triple-A tranches had been downgraded to default status. Didn’t Goldman have a responsibility to investigate the loans before selling them? Of course: as Goldman’s general counsel later wrote in a letter to the Financial Crisis Inquiry Commission, “the federal securities laws effectively impose a ‘gatekeeper’ role on the underwriter.” Goldman claimed that it did due diligence on both the mortgage originators it did business with and the loans themselves. But the quality of both has to make you wonder about how closely Goldman—or for that matter any of the Wall Street underwriters—looked. In any event, the advent of credit