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Blankfein, Cohn And Viniar Were All Closely Supervising Goldman's Mortgage Unit Operations

Tyler Durden's picture




 

One of the most ludicrous claims over the past few days has been that the shady aspect of Goldman's mortgage unit operations began and ended with Fabrice Tourre, as per the SEC's complaint. The NYT's Louise Story has just disclosed the far too obvious: "By early 2007, Goldman’s mortgage unit had become a hive of intense activity. By then, the business had captured the attention of senior management. In addition to Mr. Blankfein, Gary D. Cohn, Goldman’s president, and David A. Viniar, the chief financial officer, visited the mortgage unit frequently, often for hours at a time." Louise presents a comprehensive analysis of the chronological shift in mood over US real estate among Goldman's ranks, in which it become obvious that the very heads of Goldman were instrumental in making the critical decision to part ways with Wall Street's optimistic groupthink, driven primarily by the input of Goldman salesmen who listened to hedge funds and advised the firm's executives and analysts (coupled with the input of Tourre and Egol) that some of the "smartest" money was turning bearish on real estate as early as 2006.

We also get some insight into the topology of Goldman's mortgage group:

At the heart of all of this is the mortgage trading unit that, at its peak, employed several hundred people. As recently as 2007, Goldman’s mortgage division was split into 11 subgroups, each with a specialty, according to an internal Goldman document that was provided to The New York Times by a former employee.

Together, these groups stood astride the nation’s real estate market. One group, for instance, handled actual home loans. Another provided mortgage advice. A third syndicated loans among banks. And still another handled commercial real estate.

During the boom, Goldman’s mortgage unit was a leader on Wall Street. In 2006 alone, the bank underwrote $26 billion of collateralized debt obligations, according to Dealogic, a financial data provider. Many C.D.O.’s have since turned out to be bad investments.

Furthermore, we learn that as expected it was Jonathan Egol who is truly the Abacus-man, not his then-28 year old underling:

A few desks away, Mr. Tourre and Mr. Egol were quietly working on the Abacus deals.

They were, former colleagues say, something of an odd couple. A slight man with a flair for salesmanship, Mr. Tourre joined Goldman in 2001, after coming to the United States to study business operations at Stanford. At Goldman, he courted investors like European banks and big hedge funds.

The taller Mr. Egol, a specialist in analytical finance with a quiet but sometimes intimidating demeanor, devised the Abacus investments. He came to Goldman after studying aerospace engineering at Princeton and finance at the Booth School of the University of Chicago.

The critical inflection point in the firm's point of view occurred in December 2006, a month before the Abacus CDO deal was created.

Goldman’s top ranks changed its stance on housing in December 2006. In a meeting in a windowless conference room on the executive floor, Mr. Viniar, the chief financial officer, and Mr. Cohn, the president, gathered about 10 executives for a briefing. Mr. Sparks, the head of the mortgage unit, walked them through the numbers. The group was unanimous: Goldman had to reduce its exposure to the increasingly troubled mortgage market.

A few months later, in February 2007, senior executives began turning up on the trading floor. The message, one former employee said, was clear: management was watching.

We also find out that the buck certainly did not stop with Egol:

Goldman managers instructed Mr. Egol in early 2007 to add insurance against mortgage bonds.

Thus it becomes clear that the reason why everyone is accusing the SEC of unbridled hypocrisy, is that should the regulator be interested in truly pursuing justice, it would not isolate a 31 year old underling whose only fault was being smart and charismatic. The chain of command ran all the way to the top. If the SEC finds wrongdoing in Tourre's conduct (and points 48 and 49 of the complaint are certainly compelling) it should pursue retribution not just from this relatively minor cog in the system, but proceed to the very top of the decision-making process, which as we now know, culminated with the firm'sEO, COO and CFO.

 

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Sun, 04/18/2010 - 22:56 | 307291 wallstreetnobody
wallstreetnobody's picture

Tourre is just going to be the current scapegoat and its smart strategy by the SEC.  Name him individually since he's the easiest single person to tie to everything but simply use him as a stepping stone to the real culprits higher up.  I'm sure the SEC has the same information the NYT has in terms of who was at Goldman's MCC meetings.  The key is going to be tying the Abacus deal directly to particular MCC meetings where the higher ups were involved.  That may be hard.  However we all know the Abacus deal is one of many that were fradulently marketed.  This entire lawsuit is just a stepping stone to a much bigger investigation of their entire CDO business and perhaps much more.

Sun, 04/18/2010 - 23:09 | 307303 Mitchman
Mitchman's picture

As My Grandmother used to say: From your mouth to G-d's ear.  Let's hope that the SEC is as smart as you gve them credit for being.  And let's hope that the SEC doesn't stop with just Goldman.  That would be my definition of real "financial reform."

Thanks for an insightful post.

 

Mon, 04/19/2010 - 09:34 | 307700 Inspector Asset
Inspector Asset's picture

Quoting froim the "Partnership."

In December 2006, David Viniar, the firm's highly respected, long serving, and unflappable CFO, pressed for a more negative posture (nice way of putting it) on subprime mortgages. (Yet Paulson is at the Tresasury saying everything is fine in real estate!) He wanted the firm to offset its long position in collateralized debt obligations (CDO's) and other arcane securities that it had underwritten and was holding in inventory to trade for customers, and to do so by shorting parts of the ABX or buying credit-default swaps. When traders complained they did not know how to price their portfolios, Blankfein (above they say it was Viniar) it ordered them to sell 10 percent of every position. (That should get the avalanch started in the stock market).
page 675

Sun, 04/18/2010 - 23:06 | 307299 43 Steelie
43 Steelie's picture

TD, was Friday the highest traffic day in ZH's history? (so far at least)

 

 

Sun, 04/18/2010 - 23:07 | 307301 wallstreetnobody
wallstreetnobody's picture

By the way I'd just like to say kudos again to the New York Times for breaking this story months ago and for still getting a more complete story than any of their peers.  I don't remember if ZH was part of the blogosphere attacks on Gretchen Morgenson some months back because she wrote an article which displayed a relatively minor misunderstanding of credit-default swaps but I do recall several of the blogs I visited attacking her for that.  In the end that was a minor and meaningless misunderstanding, and now we see that a breaking story she wrote back in December which went largely untalked about has proven to be one of the biggest stories in Wall Street history.  Pretty refreshing when you still see good journalism, when is the last time you saw CNBC actually break some important financial news.  Their idea of breaking a story is getting information about a company a minute before the company hits the send button on their press release statement.  And never have they done any real investigative stories.

Sun, 04/18/2010 - 23:14 | 307311 Tyler Durden
Tyler Durden's picture

Zero Hedge has never had anything negative or disparaging to say about Gretchen. As for some other gray lady "reporters" whose  claim to fame is being scribes for the temporary criminal elite, and who are adept at intercepting press releases 5 minutes ahead of them breaking, well... we couldn't say the same.

Sun, 04/18/2010 - 23:25 | 307321 Nihilarian
Nihilarian's picture

*cough*Gasparino*cough*

Sun, 04/18/2010 - 23:33 | 307332 Pure Evil
Pure Evil's picture

Isn't reading the New York Times the equivalent of watching CNBC and Cramer? (And getting all tingly up and down your leg?)

Sun, 04/18/2010 - 23:12 | 307309 andy55
andy55's picture

The next two years are going to be one hell of a ride.

Sun, 04/18/2010 - 23:37 | 307334 SWRichmond
SWRichmond's picture

Popcorn is your friend.

Mon, 04/19/2010 - 01:41 | 307421 carbonmutant
carbonmutant's picture

 Good fiber content...

Sun, 04/18/2010 - 23:14 | 307313 sangell
sangell's picture

We didn't see much evidence of the SEC 'turning' any of the peons in the BAC/Merrill deal but then the SEC  doesn't have the leverage a Federal prosecutor does.

The specter of prison terms is what is needed. WSJ reports that that is on the horizon in the matter of CFC.

Mon, 04/19/2010 - 02:56 | 307459 Problem Is
Problem Is's picture

"SEC  doesn't have the leverage a Federal prosecutor does. The specter of prison terms is what is needed."

What is the chance of that after the DOJ tanked the Bear Stearns email case in the Eastern District of NY last November?

The DOJ took a dive in that case like a stiff in a Primo Carnera fight... I smell the same thing with the SEC. One fuck up and out. "Oh well tired our best, just couldn't prove the charges..."

Sun, 04/18/2010 - 23:26 | 307323 scofflaw
scofflaw's picture

This column makes no sense.  What am I missing... the CEO, CFO, and COO determined Goldman had too much exposure to real esate across all of its lines of business given their collective outlook on that market and set out to reduce it.  That's now criminal and should be investigated by the SEC?

Sun, 04/18/2010 - 23:37 | 307335 Pure Evil
Pure Evil's picture

I think it relates to everything Tyler has been blogging about since the inception of ZH.

Of course if might be rather time consuming to go back and read everything written by TD and associates since day one, but it would be educational.

Sun, 04/18/2010 - 23:37 | 307336 SayTabserb
SayTabserb's picture

The essence of the SEC action does not concern Goldman's right to hedge their own positions in the mortgage market. It has to do with representations, express or implied, to customers of GS about the strength of CDOs sold to customers, and the method used to structure the CDO, which is very different from GS's own self-protection. I think this column is about the intimate knowledge of higher-ups at Goldman who were in a position to know about the 10b-5 violations involved in the Abacus deal, down to granular detail.

Sun, 04/18/2010 - 23:51 | 307348 Big Al
Big Al's picture

The implication is that Blankfiend et. al were involved in the selection of the mortages that were selected for inclusion in Abacus and knowingly approved of the disclosures that were made to the purchasers (or as Ben Dover eloquently called them "the head-up-their-asses European banks." )

Sun, 04/18/2010 - 23:57 | 307354 Pure Evil
Pure Evil's picture

In other words, the crooks at GS knew exactly the extent of their shady deals, saw the jig was up, made sure they saved their necks, but failed to mention anything to the pigeons they swindled.

Mon, 04/19/2010 - 00:17 | 307368 Fish Gone Bad
Fish Gone Bad's picture

+1

Sun, 04/18/2010 - 23:44 | 307339 tony bonn
tony bonn's picture

there is no doubt that the (auto)cad blankfein will throw anyone under the bus to save his own cowardly, pusilanimous, effeminate ass....there is no ownership of responsibility among bankster fratboys who expect american taxpayers to bail out their incompetently managed pig troughs...

and if the piece of shit ever did take responsibility he should step down - immaculate immutable golden parachute and all - and make way for new trash to fleece america....

i despise the ignorance defense...and for proof of regulatory capture, the sec is going after side shows like tourre....

as a veteran of corporate america i can assure you that no one acts as an island unto himself....what a crock the sec is shoving down our throats....someone should burn the whore running that den of thieves...

Sun, 04/18/2010 - 23:50 | 307346 GoinFawr
GoinFawr's picture

what tony said. +1

Sun, 04/18/2010 - 23:54 | 307351 laughing_swordfish
laughing_swordfish's picture

No, that's not the idea.

Blankfein, Cohn and Viniar determining that The Squid had too many of its tentacles in RE is OK - in fact, it was the proper call at that time and there were (and are) entirely legal ways to reduce, short or hedge the unwanted exposure.

No doubt those were covered at the meeting.

But that wasn't good enough. As long as there were "marks" and "pigeons" still available to be fleeced in the RMBS and CMBS markets, Goldman's intent was to squeeze out everything it could from its unsuspecting clientele while there were squeezings to be had.

If they had been merely greedy, they would have gotten away with it. But, being as much swine as squid, they overreached.

So Sad, Too Bad...

By the way, Lloyd, I hear the SEC lawyer in charge of the investigation has really close personal ties to the US Attorney's office, the NY Attorney General's office, and the IRS Criminal Enforcement division. His specialty is turning " Pin Stripes into Jail Stripes"...

 

KrvtKpt laughing swordfish

DKM Trading Division

Mon, 04/19/2010 - 00:44 | 307378 Fish Gone Bad
Fish Gone Bad's picture

My father's illegal alien neighbor had a unemployed friend who bought a house with no money down, then refinanced it and took out $60,000.  Then he moved back to Mexico.  Who on god's green earth would want to buy that loan?  I can't imagine this guy was the only one.  For those interested, take a look at http://www.irvinehousingblog.com/ to see all the stories about people using their houses as ATM's.

Sun, 04/18/2010 - 23:58 | 307355 b_thunder
b_thunder's picture

I am not a prosecutor, but one of the ways to nail top level executives at GS is to charge that peacock, Fabrice, because he will sing like a canarie! A witness, even if he gets reduce punishment for his testimony, in addition to the paper trail would make the case a lot more interesting

 

 

Mon, 04/19/2010 - 00:07 | 307364 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Cuz they do the devils work.

Metallica - Die Die My Darling:

http://www.youtube.com/watch?v=4GIisWJJG28

Mon, 04/19/2010 - 00:08 | 307367 doublethink
doublethink's picture

 

Fun!

 

Now we know the truth. The financial meltdown wasn't a mistake – it was a con

 

http://www.guardian.co.uk/business/2010/apr/18/goldman-sachs-regulators-...

 

Mon, 04/19/2010 - 00:36 | 307370 TimmyM
TimmyM's picture

http://www.huffingtonpost.com/vicky-ward/senior-goldman-exec-is-ma_b_542...

 

Vicky Ward over at Huffpo says the head of ACA was shacking up with a senior female exec at Goldman. This connects some dots as to why Goldman would stoop to associate with ACA. It also blows the impression of ACA as independent operator.

FYI the Soma adds are "painless" to click on.

Mon, 04/19/2010 - 01:44 | 307427 Troy Ounce
Troy Ounce's picture

Interesting, a apparently a few hundred egg-heads working at the

mortgage department of Goldman Sachs and not one whistle blower?

Aber.....aber...wir haben es nicht gewusst.....!

 

Mon, 04/19/2010 - 02:48 | 307456 M.B. Drapier
M.B. Drapier's picture

A little smartness is a dangerous thing.

Mon, 04/19/2010 - 04:49 | 307483 Kina
Kina's picture

especially in prison, not good to have an arse that looks smart.

Mon, 04/19/2010 - 06:34 | 307497 HEHEHE
HEHEHE's picture

Yeah, it began and ended with Fabulous Fab, puh-leaze!  They loved Fab btw, promoted him to ED didn't they.  Lloyd is so f-d.

Mon, 04/19/2010 - 08:17 | 307551 Mercury
Mercury's picture

...it become obvious that the very heads of Goldman were instrumental in making the critical decision to part ways with Wall Street's optimistic groupthink, driven primarily by the input of Goldman salesmen who listened to hedge funds and advised the firm's executives and analysts...

Let's please emphasize every once in a while that betting against groupthink isn't a crime all by itself.  Goldman (or at least part of Goldman) and a few others (like Paulson) arrived at the decision to bet against Wall St. groupthink largely as the result of having worked harder and paid closer attention to what was going on.  There really is no substitute for that nor should we legislate one.

Not all Goldman clients and not all investors fell for the subprime fairy dust despite the best efforts of CDO salesmen.  I think you'll find that these clients and investors did more work and paid closer attention than others.  Just a guess.

I'm all for prosecuting breach of contract, disclosure violations and fraud but should firms like Goldman really be required to bet house money with their client's money?  What happens if two different clients want to bet/invest opposite ways - you know, like one hedge fund manager wants to bet against RMBS while another bank thinks RMBS is the best of both (high ratings, high return) worlds?

The real lesson here is that custom, illiquid securities are inherently higher risk no matter what you put into them. And the party who designs them has an informational advantage over the party who buys them.  This isn't the case with uniform, liquid securities. Keep it simple stupid.

Here's a scoop for the newly fetchin' Gretchen:  The government and it's employees are betting one way while selling the crap out of the opposite side of that trade (the returns on an Un-Collateralized Debt Obligation!)  I don't have the benefit of hindsight yet but having done some homework and paid close attention I'm pretty sure that the vast majority of taxpayers and property owners will be left holding the bag when the bubble bursts. 

Get to work.

Mon, 04/19/2010 - 08:56 | 307644 HEHEHE
HEHEHE's picture

One more thing.  I don't know the specifics of the Abacus offering, all I've seen is a pitchbook, presumably if CDO's operate like other unregistered securities there's a private offering memorandum floating around somewhere that was given to investors.  In either event the pitchbook and/or offering memo were likely looked over by Goldman's compliance department and given the ok.  So to say that Fab was somehow acting on his own without Goldman approval is a joke.

Mon, 04/19/2010 - 11:23 | 308031 The Merchant of...
The Merchant of Venice's picture

The real power is not in corporate america.  The concentration of power is in the regulatory agencies such as the SEC, the Commerce Department, and the EPA.  These executive agencies have the power to create, rescind, and modify rules that affect trillions of dollars in asset prices.

Investment banks cannot run wild without the support of executive branch agencies.

Case in point, Jefferson County Alabama.  That whole story begins with one rule at the EPA that permits certified plaintiffs, aka the environmental lobby, to claim standing to file suit anywhere in the United States.  The plaintiffs do not need any exposure to the sewar system in Jefferson County.  The EPA rule gives them standing even if they live thousands of miles away from the sewar system itself.

The EPA rules rot the forest so it can burn to the ground with the slightest spark from an environmental group.  JPM and GS can swoop in later with the financial alchemy to put the low tax population into the poor house with decades of higher taxation to retire the debt.

Do NOT follow this link or you will be banned from the site!