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Low Road to High Finance: McClatchy Expose Reveals How Goldman Sachs Sold Off Billions in Mortgage Securities After Anticipating Housing Collapse

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A five-month investigation by McClatchy Newspapers has revealed that Goldman Sachs made secret bets against the housing market while simultaneously selling off billions in soon-to-be worthless securities. In 2006 and 2007, the bank reportedly peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in US housing prices would send the value of those securities plummeting. We speak to McClatchy reporter Greg Gordon. [includes rush transcript]

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This is a rush transcript. Copy may not be in its final form.

JUAN GONZALEZ: We turn now to the latest exposé on banking giant Goldman Sachs that explains how it survived the recession and came out on top of Wall Street. This year the bank is on course to surpass $50 billion in revenue and give out more than $20 billion in bonuses.

A five-month investigation by McClatchy Newspapers reveals that Goldman Sachs made secret bets against the housing market while simultaneously selling off billions in soon-to-be worthless securities.

In 2006 and 2007, the bank reportedly peddled more than [$40 billion] in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in US housing prices would send the value of those securities plummeting. It was only later that investors discovered what Goldman had promoted as triple-A investments were closer to junk.

AMY GOODMAN: This double dealing allowed Goldman to foist most of its potential losses onto other investors before a flood of mortgage defaults brought down the US and global economies. But Goldman’s failure to disclose that it made secret bets on an imminent housing crash may have violated securities laws.

The investigation also reveals Goldman Sachs used offshore tax havens to shuffle its mortgage-backed securities to institutions around the world, often in secret deals run through the Cayman Islands.

For more on the Goldman Sachs exposé, its role in the financial crisis, we’re joined by Greg Gordon, the McClatchy journalist behind this multi-part investigation, available at mcclatchydc.com.

Greg Gordon, welcome to Democracy Now! Just lay out your findings.

GREG GORDON: Thank you, Amy. Good morning.

Well, I think what we really wanted to know is how did Goldman Sachs get out when nobody else did? And so, we looked and tried to reconstruct what happened in 2006 and 2007, looking at the SEC filings that Goldman made, which is a trick in itself, because when these Wall Street firms bought mortgages from subprime lenders, they put them into trust accounts, but you can’t really find the trust accounts in the SEC files unless you know what the name of the trust accounts are, or you get very lucky kind of rummaging through the files. So, at any rate, we tried to reconstruct what happened.

And what we discovered is that Goldman sold $39 billion in securitized subprime mortgages and other risky mortgages that it had purchased itself, and it turned into bonds — and it turned them into bonds and sold them off to pension funds and insurance companies and foreign banks. And the question was, OK, so if Goldman — how did Goldman get out so safely?

And, of course, we all know that when the government bailed out the American International Group, the giant insurer, last fall, a year ago last — a year ago in September and then in the ensuing months, that there was a sort of a payoff to all of the firms that had pending insurance-like contracts known as credit default swaps. And these are sophisticated and complex bets that Wall Street firms and others have secretly made in a dark market for at least well over a decade, I believe, but certainly in escalating fashion in recent years.

So Goldman, in 2005 and 2006, began to place these swap bets that would, you know, make money for Goldman or hedge its risks if the housing market turned down. At the same time, Goldman was selling off these bonds to pension funds and others, and it did not disclose that it was betting the other way, not on the very same securities, but on very similar securities. Certainly, if its bets, secret bets, paid off, that meant that the value of these bonds was going to go down.

JUAN GONZALEZ: Well, Goldman could argue that it was basically hedging its investments and was being prudent in trying to reduce the risk it was exposed to.

GREG GORDON: Undoubtedly. And this happens. The big question here is, is this material — is this material information for an investor? If a big pension fund was looking at these bonds, and it knew that Goldman was betting the other way, would it buy the bonds? And this will be a question we’re wondering whether anybody is going to investigate to find out what Goldman knew at the time in 2006 and 2007, because in 2006, the default rates on home mortgages, particularly on subprime mortgages, were beginning to rise. And, of course, this led to downgrades of the bonds.

See, Goldman was selling these bonds as — most of the bonds, 80 percent or so, as triple-A securities, that being the highest grade that you could get. These were gold-plated investments. Yet it was — yet it was betting the other way. I asked Goldman Sachs if they could give me another example of a security that they sold that was rated triple-A, but they were hedging at the same time. And I didn’t get a specific example. I was told, “Yes, of course. We hedge in all of our markets.” But it would be interesting to know if there is another example that Goldman could provide.

AMY GOODMAN: Let’s turn to the story of the Beckers, who you write about, the couple in California who took on Goldman Sachs to keep their family home. California wildfires had destroyed their jewelry business, and they ended up with two subprime mortgages after refinancing their house. This is an excerpt of Greg Gordon’s video report posted at mcclatchydc.com.

    CELIA FABOS-BECKER: I wrote to Goldman Sachs. I said, “I understand you own our mortgage.” And I wrote directly to Henry Paulson, the chairman of the board, the CEO.

    GREG GORDON: But Goldman denied owning the mortgage. For three years, the couple was in limbo as they fell further and further behind on their rising payments. Then, on the same day in 2006, Goldman asked a court to throw out the claims over their investment losses, and their loan servicer filed court papers to seize their house. With nowhere to turn, the college-educated couple filed for bankruptcy protection.

    CELIA FABOS-BECKER: We were shopping at the flea market for canned goods, things like this.

    TONY BECKER: Trolling the Goodwills and selling antiques on Craigslist.

    CELIA FABOS-BECKER: Trolling Goodwills.

    TONY BECKER: Taking any job we can.

    CELIA FABOS-BECKER: Going in between.

    GREG GORDON: Finally, at a court hearing in 2007, an obscure Goldman subsidiary acknowledged holding the Beckers’ mortgage. The fight dragged on until this summer.

    TONY BECKER: It was hard to keep going, but we did.

    CELIA FABOS-BECKER: In the bankruptcy proceedings, they tried to portray us as incompetent or deadbeats.

    GREG GORDON: At last, with the bankruptcy judge threatening Goldman with sanctions, the Wall Street firm agreed to give the Beckers a new thirty-year mortgage at five percent interest. A spokesman for Goldman declined to comment on the case. Celia Fabos-Becker says she hopes the couple’s experience will lead to a change in the laws.

    CELIA FABOS-BECKER: Nowhere is it required that the lender tell the borrower who he is and how to contact that person, especially when you have disasters and hardships. That is outrageous, that we can’t even know who our lenders are?

    GREG GORDON: Tony Becker, once again fully employed, takes a certain pride over their brush with Goldman Sachs.

    TONY BECKER: I take solace in knowing that I was up against the worst possible opponent. They were very — the biggest, strongest investment bank in the world.

AMY GOODMAN: The Beckers of San Jose. Juan?

JUAN GONZALEZ: Well, what I was struck by, Greg Gordon, was not just your report of their betting against their own investments, but then also how Goldman really resisted trying to settle with any of the homeowners who were in default and also how they hid their actual participation. You talk about a company called MTGLQ and how difficult it was for Goldman even to admit in court that that was their own subsidiary that held a lot of these mortgages.

GREG GORDON: They weren’t volunteering it enthusiastically, that’s for certain. Here is Goldman Sachs. And let me just say, the reasons that we looked at Goldman Sachs — because Goldman Sachs was not the biggest player in the subprime market by any stretch, but neither were they small. And the reason we looked at Goldman Sachs is, one, they got out; two, they are the most prestigious investment bank in the world, and they got themselves into this subprime stuff, which has really backfired and turned out to be not the most upstanding side of the business that Goldman was engaging in. And then they had all these connections in Washington, and then they got a bailout from Uncle Sam, even though they only lost a billion-and-a-half dollars, which is far less than a lot of the firms that went up in flames last year.

So, now Goldman is in the muck. They’ve gotten into bankruptcy courts across the country, because as their subprime and other risky mortgages got into trouble, the mortgages that were the underlying assets for the bonds they sold, it was incumbent upon Goldman to go and recover what assets it could. And now it’s stuck, along with other Wall Street firms, chasing around people who are in bankruptcy or in financial trouble because of these loans with the escalating interest rates.

AMY GOODMAN: Let’s turn to the issue of how Goldman Sachs stopped scrutinizing the loans it bought. This is a clip of a video report by Greg Gordon featuring two risk analysts contracted by Goldman.

    GREG GORDON: Goldman and other Wall Street firms contracted with risk analysts, including Californians Irma Aninger and Melissa Toy, to review thousands of subprime mortgage files. Aninger said she was stunned as she saw from loan applications how much credit standards had deteriorated from 2004 through 2006.

    IRMA ANINGER: A gardener making $10,000 a month, a checker at Wal-Mart making $5,000 a month. What else was there? Oh, they were ridiculous.

    GREG GORDON: Aninger and Toy said they appealed to their superiors to reject shaky loans in which lenders had required no verification.

    MELISSA TOY: At times, I didn’t understand why we were even working, because they were overriding our decisions. Or if we question anything, if we tried to decline a loan, they were going beyond us and approving them.

    IRMA ANINGER: The whole thing didn’t make any sense to me. That’s why I said earlier I didn’t even know why I was there, because the stuff was going to get pushed through anyway.

    GREG GORDON: Yet, of all the Wall Street firms, Goldman was the only one that seemed to anticipate trouble ahead and safely exited the subprime market.

AMY GOODMAN: That’s Greg Gordon’s report at mcclatchydc.com. Greg Gordon has done this fascinating exposé on Goldman Sachs. Talk, Greg, about the Cayman Islands and the tax havens.

GREG GORDON: The Cayman Islands are a sort of a conduit by which Wall Street has been able to sell unregistered versions of these securities in more complex forms, so complex that we could use the rest of your show to try to explain them. And they —-

AMY GOODMAN: The only problem is we have twenty seconds.

GREG GORDON: No, and they’re selling them off -— OK. They’re selling them off to foreign investors and sophisticated US investors. And they didn’t have to disclose as much information, because they were outside the United States. And these securities contain some of the worst stuff, some of the riskiest subprime loans that were very low-grade in the pools sold in the United States. When they were sold in the Caymans, suddenly they were rated triple-A or investment-grade.

AMY GOODMAN: And finally, the just big question of the connection between Goldman Sachs and the Obama administration, all the people going in and out of government? And the Bush administration.

GREG GORDON: You know, there’s so much smoke there. So far, we haven’t seen any fire. Lloyd Blankfein, the chairman of Goldman, making twenty-one phone calls or having twenty-one phone conversations with former Treasury Secretary Paulson at the height of the meltdown, in the very week that the AIG bailout was occurring, and the AIG bailout brought $12.9 billion to Goldman. But nobody has proved that they were cooking something up to save Goldman. We’ll have to see if anything like that comes out. I don’t want to prejudge it, because, of course, Secretary Paulson did need to speak to the leaders of the big Wall Street firms.

AMY GOODMAN: Well, we will leave it there. And we thank you very much, Greg Gordon, for being with us.

GREG GORDON: Thanks for having me.

AMY GOODMAN: Investigative journalist with McClatchy Newspapers, doing what not a lot of these papers are doing these days, and that’s a multi-part investigation, this of Goldman Sachs and how it secretly bet against the housing market.

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