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By Root 3588 0

it by the French bank Calyon, was trying to off-load its own bad deals onto others. In June 2007, IKB also created a structured investment vehicle called Rhinebridge. Rhinebridge, like other SIVs, issued debt that it then used to buy mortgage-backed securities and CDOs like Abacus. The debt issued by Rhinebridge, which was rated triple-A, was bought by, among others, King County, Washington, which managed money on behalf of one hundred other public agencies. This was money used to run schools and fix potholes and fund municipal budgets. Rhinebridge was wound down in the fall of 2008, with its investors getting fifty cents on the dollar. In a lawsuit, King County alleged that IKB created Rhinebridge “for the purpose of moving investment losses off of its own balance sheet.” For all of Goldman’s later claims that it dealt only with the most sophisticated of investors, the fact remained that those investors could be fiduciaries, investing on behalf of school districts, fire departments, pensioners, and municipalities all across the country. It was their money, at least in part, that was funding the CDO games Wall Street was playing.

There was another problem with the “sophisticated investor” defense. These deals were so complicated that in many cases nobody understood the risks, not even the underwriter. Yet investors—even sophisticated investors like IKB—were buying deals like Abacus for a simple reason: they didn’t want to lose money. Triple-A-rated securities were supposed to be the closest thing an investor could get to a risk-free investment. If Goldman knew that a triple-A rating no longer meant what it once had—and that these complex securities carried far more risk than their ratings implied—did it really have no responsibility to say anything? Shouldn’t there have been a point at which Goldman just said no? If Paulson’s bet paid off, it would happen because millions of Americans were losing their homes. Wasn’t that worth thinking about before deciding to go through with the Abacus deal? In 2004, Scott Kapnick, who had headed Goldman’s investment banking department, had said to Fortune, “The most powerful thing we can do is say no.” But by 2007, Kapnick, like many other senior bankers, had left the firm.

On March 7, 2007, Tourre sent an e-mail to his girlfriend. “I will give you more details in person on what we spoke about but the summary of the US subprime business situation is that it is not too brilliant... According to Sparks, that business is totally dead, and the poor little subprime borrowers will not last so long!!! All this is giving me ideas for my medium term future, insomuch as I do not intend to wait for the complete explosion of the industry.”

That same day, the Goldman Sachs Firmwide Risk Committee heard a presentation from the mortgage desk. According to a summary of the meeting, the first bullet point read, “Game Over—accelerating meltdown for subprime lenders such as Fremont and New Century.” The second bullet point: “The Street is highly vulnerable, potentially large exposures at Merrill and Lehman.”

On June 24, Gary Cohn, at the time Goldman’s co-chief operating officer, sent an e-mail to Viniar and several others, noting both the big losses Goldman was taking on the mortgage securities it had been unable to “distribute” and the even bigger gains it was booking from its short position. Viniar’s response: “Tells you what might be happening to people who don’t have the big short.”

Later, the Senate Permanent Subcommittee would charge Goldman with making a fortune—$3.7 billion—by betting against its customers when it knew the market was going to fall apart. But that’s not really what happened. The huge gains Goldman made from its short position in 2007 were offset by substantial losses from the securities it couldn’t get rid of. Indeed, the firm made less money than it might have, because at certain points during the meltdown, most notably in the spring of 2007, Goldman covered its short position. It didn’t envision the “wipeout scenario,” as Paulson had. Rather, it was trying to figure out