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DOJ and SEC to Probe Goldman Sachs on Lying and Defrauding Customers

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May 9, 2011

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By Elizabeth MacDonald
Fox Business News
May 9, 2011

Two U.S. Senators have formally asked the Justice Department and the Securities and Exchange Commission to investigate whether Goldman Sachs’ executives defrauded clients and whether its executives, including CEO Lloyd Blankfein, committed perjury before Congress.

Democratic Sen. Carl Levin of Michigan and Republican Tom Coburn of Oklahoma jointly signed a letter asking Justice and the SEC to examine the panel’s report, which suggested Goldman Sachs CEO Blankfein lied under oath when he said the firm didn’t have a massive short position against the housing market, and that Goldman Sachs misled investors when it didn’t disclose to clients that it was betting against securities it was selling to them.

The letter comes less than a month after the senators recommended that Goldman Sachs officials be referred to the Justice Department and SEC for possible criminal and civil prosecution.

Senator Levin, chairman of the Senate Permanent Subcommittee’s, said last month that, after a two-year probe by the panel that included a deep dive into Goldman’s financial records, emails, internal memos and communications, the panel found that Goldman took a massive financial position against the mortgage market solely for its own profit.

Specifically, the report says Goldman made billions of dollars selling mortgage-backed securities deals to clients without telling these investors that Goldman was shorting these same deals, effectively betting the mortgages would default.

Goldman CEO Blankfein had denied under oath that the firm had what it calls a “big short” against the mortgage market. In April 2010 CEO Blankfein testified: “Much has been said about the supposedly massive short Goldman Sachs had on the U.S. housing market. The fact is we were not consistently or significantly net ‘short the market’ in residential mortgage-related products in 2007 and 2008…We didn’t have a massive short against the housing market and we certainly did not bet against our clients.”

Note the years Blankfein cites here–only 2007 and 2008, when deals at issue in the Senate report were done in prior years. Goldman did have a large short position against housing in 2006 and continuing through 2007, Senate documents show, and 2008 is a curious year to bring up, the year AIG collapsed and was bailed out. Goldman collected about $14 billion in the taxpayer bail out of AIG, an insurance firm it had used to short housing via credit default swaps.

Based on evidence in the Senate’s 635-page report, Senator Levin said:: “In my judgment, Goldman clearly misled their clients and they misled Congress.”

The report also cited numerous failures at Deutsche Bank (DB: 42.22, -0.96, -2.21%), including engaging in the sale of toxic real estate-backed securities. The senators’ referral to Justice and the SEC comes a day after the government sued Deutsche Bank and its MortgageIT unit for mortgage fraud.

The Senate report says Goldman aggressively shorted the mortgage market after the collapse in 2007 of two Bear Stearns’ hedge funds that made subprime bets. Goldman executives have repeatedly called its short bets “hedges” against long positions the firm was taking.

In its quarterly report ending August 2007, Goldman disclosed in the SEC filing that “although we recognized significant losses on such our non-prime mortgage loans securities, these losses were more than offset by gains on short mortgage positions.”

That helped drive its trading desk results to a boffo $7.6 billion profit for the quarter, up from $4.4 billion in August 2006.Top analyst Guy Moszkowski, then at Merrill Lynch, now part of Bank of America (BAC: 12.31, +0.01, +0.08%), found at the time that Goldman’s trading profits were $1.7 billion higher than Merrill had forecast because of these short bets.

Blankfein testified before the Senate that his firm did not have a massive short position against mortgage-backed securities.

A source close to the matter at the SEC told FOX Business the agency could bring more civil charges against Goldman Sachs if revelations out of the Senate report warrant them.

“The SEC is not inhibited from bringing any future action against Goldman Sachs,” the SEC official told FOX Business, adding, “Goldman is not fully absolved of its sins, if the information shows a case can be brought. The SEC can still come back to Goldman Sachs.”

Sources close to the matter add that the potential charges of lying to Congress may be buoyed by testimony given by Goldman Sachs on a deal dubbed “Timberwolf,” (See EMac’s Bottom Line, “Goldman Accused of Misleading Congress, Clients”.)

In that deal, Goldman had taken a short position on about 36% of the $1 billion in assets underlying its securities, and initially made $333 million in revenues and interest from that investment, but ultimately lost a net $455 million when it could not sell all of the Timberwolf securities, according to FOX Business Network’s earlier report.

Last April, Sen. Levin questioned Daniel Sparks, the Goldman executive who ran Goldman’s mortgage business at the time, on whether Goldman was misleading clients into buying investments its executives knew were steadily dropping into junk territory.

During the hearing, Sen. Levin pointed out an e-mail exchange that former Goldman executive Thomas Montag (now at Bank of America) had sent to Goldman executive Daniel Sparks on the Timberwolf deal.

“’Boy that Timberwolf was one sh—- deal,’ Montag wrote in his 2007 email. “How much of that sh—- deal did you sell?”

While Sparks was selling the deal as a positive investment to clients, according to emails the Senate received, Sparks was also emailing Goldman executives saying, “Game over,” “bad news everywhere,” and “the business is totally dead.”

The Senate subcommittee report had also accused Goldman of conflicts of interest in at least three other asset-backed securities deals. Specifically, the report said Goldman allegedly withheld material information from clients, notably in a deal dubbed Hudson Mezzanine-2006-1.

The Senate report says that Goldman executives self-selected the securities for the $2 billion deal, with no input from investors, which included Wall Street investment bank Morgan Stanley (MS: 25.24, +0.10, +0.40%).

The Levin-Coburn report alleged that Goldman didn’t disclose that it would also be shorting the same deal — betting on the default of the securities, even after a representative of one investor, the National Australia Bank, specifically asked questions about it.

The Senate report said Goldman manipulated the deal to funnel off, or “transfer the risks” of $1.2 billion in shoddy mortgage loans to unwitting investors, away from the firm.

The report also said Goldman reaped net profits of $1.35 billion on just this deal alone.

SOURCE: http://www.foxbusiness.com/markets/2011/05/04/doj-sec-asked-probe-goldman-lied-defrauded-clients/#ixzz1LrMxD0ra

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