Tavakoli Structured Finance LLC

The Financial Report

By Janet Tavakoli

Goldman Sachs: Spinning Gold

Goldman Sachs claims great risk management skills, while it shirks responsibility for its role in the near collapse of the U.S. economy. The former is a myth, and the latter is a dodge. [1] As taxpayer wealth was destroyed, Goldman exploited the financial crisis it helped cause, while the U.S. was (and remains) at war.

Goldman Sachs released its 2009 annual report today showing it made net revenues of $45.17 billion with net earnings of $13.39 billion. In its shareholder letter, Goldman says it repaid TARP money, but did not mention the massive new taxpayer subsidies it continues to enjoy.

“Goldman did not and does not operate or manage our risk with any expectation of outside assistance.”

Yet due to the influence of highly placed Goldman Sachs former officers, Goldman received–and continues to receive–enormous assistance from taxpayers.

Goldman cleaned up at the expense of average citizens. For example, hard-working U.S. taxpayers bailed out Goldman Sachs, Goldman’s trading partners, and AIG. Goldman grabbed new status as a financial holding company, FDIC debt guarantees, access to near zero-cost taxpayer-subsidized borrowing, new lax accounting standards, and more. Now Goldman is making a killing as the Federal Reserve keeps interest rates near zero. Goldman reaped windfall profits to replenish its capital, and paid bonuses of over $16 billion to its employees.

Goldman as Underwriter Obliged to Perform Due Diligence

Goldman claims it did nothing wrong. (“Goldman Sachs: Don’t Blame Us,” BloombergBusinessweek cover story, April 14, 2010.) There is a lot to discuss about Goldman’s actions prior to the financial meltdown, but this commentary will focus only on the largest part of the U.S. economy, the housing market.

When Goldman created collateralized debt obligations (CDOs), it was obliged to perform thorough due diligence. Previous securities frauds (unrelated to Goldman) were public knowledge, and there were multiple multi-year reports of predatory lending and fraudulent loans (Ameriquest, FAMCO, and many more). Despite self-serving denials by former Fed Chairman Alan Greenspan, there were many studies in the public domain that showed that even new non-fraudulent loans had a higher likelihood of default when zero or slim down payments were made, including a March 2005 report from the St. Louis Fed. Separate from this, lending standards slid, which made the problem even worse. In addition to that, newly created loan products posed greater risk to borrowers, even when other factors such as lower lending standards and fraud were absent.

Goldman failed in its duties as a creator (underwriter) of these CDOs. Goldman’s excuses that others were doing it or that Goldman was only providing a “customer” service do not relieve Goldman of its own responsibility.

Goldman tries an evasive maneuver when it says it sold CDOs to “sophisticated,” investors. The damage was so pervasive that retail investors were caught in the web. Moreover, taxpayer money bailed out the financial system and bailed out investors in Goldman’s CDOs. Caveat emptor no longer apples. The unsophisticated public ended up being an unwilling investor

Built to Fail

There was fraud by borrowers and speculation, but there was also massive widespread predatory lending. Most victims were the least sophisticated borrowers. Mortgage lenders engaged in a variety of frauds including phony appraisals, altered documents, hidden fees, lies about the type of loan, and lies about the maximum payments. As for CDOs, the SEC dropped seminal investigations.

Many of Goldman’s “investments” crashed like an airplane made from faulty components. Some of the CDOs Goldman created–including some sold to French banks that traded with AIG–ended up in money market funds (as asset backed commercial paper) bought by retail investors.

Imagine that Goldman packaged a herd of cattle for sale. Industry standards require it to investigate the herd. (Rating agencies do not perform the inspections; it was Goldman’s responsibility.) Cattle had a history of health problems, so Goldman had all the more reason to perform thorough due diligence on each herd. A sample would have revealed that, say, 60% of the healthy-looking herd tested positive for hoof-and-mouth disease, and the disease could possibly infect the others.

Goldman Sachs’ Risk Management: A Sea of Red Flags

Goldman claims it did nothing wrong when it slapped good labels–via complicit rating agencies–on its loan packages, and then sold them. Goldman claims to be good at risk management, yet despite public red flags, it now claims it didn’t know any better.

Beyond the original problems with Goldman’s CDOs, some appear “built to fail.” (“Congress Exposes Potential Profiteering in AIG’s Deals” – TSF, January 28, 2010.) I wrote about the danger of these types of structures in a book published in 2003. Goldman cannot claim competence and also claim it didn’t know any better

Billions of Taxpayer Dollars for Corrupt Finance

The Fed abused the taxpayers’ trust when it bailed out AIG’s trades for 100 cents on the dollar. The Fed claims its loan for purchases of the CDOs may be paid back, but that is only 40% of what taxpayers are owed. The loan was only for the 40 cents on the dollar that remained after Goldman (and others) already took billions out of AIG. The purchases should be reversed, and taxpayers should be paid 100 cents on the dollar–the original principal amount (less interim principal payments). [2] The proceeds can be used to pay down AIG’s public debt.

Goldman’s CEO, Lloyd Blankfein, quipped to a reporter that he is doing “God’s work,” yet Goldman participated in the transfer of wealth from hard-working taxpayers to fee-seeking agents of corrupt finance. Then Goldman accessed taxpayers’ funds to protect and enrich itself, as did other banks. That’s not only a self-serving interpretation of “God’s work,” it’s a perversion of capitalism. Goldman Sachs has become a symbol of the aristocratic tyranny from which our Founding Fathers sought to protect our Republic.


1. Prior to AIG’s September 2008 collapse, Goldman had more than 22:1 leverage (it had less than $5 for every $100 it borrowed), and it increased its Level 3 accounting (black box) assets by 27% to more than $96 billion. That meant it could “mark-to-myth” or make up the prices of these hard-to-value assets. Yet in its just-released shareholder letter, Goldman states its “rigorous commitment to fair value accountings ” before the financial crisis. Goldman had more than any other investment bank in the black box ($18 billion more than troubled Merrill Lynch, which had just increased its “black box” assets by 70%). If the government hadn’t bailed out the financial system, Goldman would not have been able to get short term funding, and it would have collapsed.

Goldman Sachs CEO Lloyd Blankfein told the Wall Street Journal he “never had reason to suspectAIG was in trouble. That doesn’t seem plausible. I publicly challenged AIG’s accounting and brought AIG’s risk to the attention of Jamie Dimon and Warren Buffett in August 2007, as Goldman pressured AIG for billions. Goldman extracted $7.5 billion in collateral (of $10 billion Goldman sought) on trading positions of more than $22 billion from AIG for more than a year before AIG’s September 2008 meltdown. As of September 2008, Goldman demanded $2.5 billion more, which the bailout provided. [Of the original $22 billion plus trading positions, the Fed’s $5.6 billion loan for purchases of CDOs plus $8.4 billion only settled up $14 billion of the original $22 billion. Another $8.2 billion of Goldman’s deals–including synthetic Abacus deals–remained with AIG with $1.6 billion in collateral applied to them. Taxpayers also bailed out this remaining position of $8.2 billion of credit default swaps.] At the time of the September 2008 bailout, the CDOs’ market value was rapidly deteriorating

In addition, Goldman created deals that other banks, including French banks Calyon and SocGen, protected with AIG. Either through its own trading or its underwritten deals, Goldman Sachs was the largest contributor to AIG’s positions. If AIG had gone bankrupt, Goldman may have faced disputes with the banks to which it sold its products. In other words, the bailout of AIG, bailed out banks to which Goldman sold deteriorating CDOs. [Goldman also held $4.8 billion AIG’s “agency” securities that would have required funding in a difficult market, if taxpayers had not bailed out AIG. AIG had invested the cash owed to Goldman in deteriorating mortgage-backed assets (of unclear origin), and it was unlikely AIG would have had sufficient cash to buy back the securities.] If AIG had not been bailed out, a reasonable liquidator would have clawed back most of AIG’s collateral from Goldman Sachs (and others).

In January 2010, several bank CEOs expressed regret to Congress that they underestimated the steep fall in housing prices. They didn’t mention that banks were a key cause through excessive leverage, funding of widespread predatory lending, and phony securities. Bank CEOs expressed no regret when they thought the losses would be limited to “homeowners” and outside investors. To add insult to injury, banks now perpetrate what Elizabeth Warren calls the “myth of the immoral debtor,” and blame hard-working taxpayers, while most of the media covers-up for the banks.

Blankfein also told Congress that Goldman kept the equity (“first loss”) investments of some CDOs, as if this indicates Goldman assumed risk and had good intent, yet that is no evidence whatsoever. Structures can be gamed so that the “first loss” holder has little risk and can actually benefit due to the way the deal is set up. Based on information already in the public domain, Goldman’s deals had a lot of unusual features, so Blankfein’s testimony should not be accepted at face value. (“Goldman Pays Junior CDOs Before ‘Junk’ Senior Classes,” Bloomberg News, Nov 12, 2009.)

Goldman’s current and former officers were influential in varying degrees in AIG’s bailout. Hank Paulson was then Treasury Secretary. He was Goldman’s CEO at the time Goldman put on its trades with AIG and underwrote CDOs bought by some of AIG’s counterparties. Lloyd Blankfein was (and is) CEO of Goldman and was influential in the bailout discussions. Stephen Friedman, then Chairman of the NY Fed, concurrently served (and continues to serve) on Goldman’s board. Friedman was also the Chairman of the President’s (Bush) Foreign Intelligence Advisory Board.

2. The more than $22 billion of Goldman’s trading positions with AIG should be negated as follows. The $14 billion in Goldman’s sales to the Fed’s Maiden Lane III vehicle should be reversed. Goldman should buy back all the CDOs at original value (less interim principal payments). In addition, Goldman’s approximately $8.2 billion of synthetic CDOs that remain with AIG should be canceled and any collateral paid from AIG to Goldman should be returned. Other bond insurers cancelled similar contracts for a fraction of what the Fed cost taxpayers, often for as little as ten cents on the dollar, not the 100 cents on the dollar for which the Fed ultimately settled, and this can be rectified now by making a final payment of only ten cents on the dollar (unless further investigation is deemed necessary) after the transactions have been reversed.

Update: On April 16, 2010, the SEC charged Goldman Sachas with securities fraud for structuring and marketing Abacus 2007-AC1, a CDO tied to subprime mortgages. The SEC later settled with Goldman. In April 2014, James Kidney, an SEC lawyer speaking at his retirement party, said the SEC was too “timid and fearful,” high profile senior people made it clear they were just punching their ticket, and that Kidney had urged the SEC to go higher up the chain of command than Goldman salesman Fabrice Tourre; Kidney wanted to sue Tourre’s boss.

See also:

Goldman’s Undisclosed Role in AIG’s Distress,” TSF, November 10, 2009,

Wall Street Wizardry Amplified Credit Crisis December 27, 2007,” WSJ, December 27, 2007, and

Banks Bundled Bad Debt, Bet Against It and Won,” New York Times, December 23, 2009.

Senate’s Goldman Probe Shows Toxic Magnification,” Wall Street Journal, May 2, 2010

Read related finance articles by Janet Tavakoli.

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