Goldman a Criminal? What's the Charge?

As of this writing there is no clarity as to what exactly the DOJ is looking at in the Goldman case.

The WSJ has this as the status:

Federal prosecutors are conducting a criminal investigation into whether Goldman Sachs Group Inc. or its employees committed securities fraud in connection with its mortgage trading, people familiar with the probe say.

What could a Federal prosecutor be looking at is a question to ask. I wish I knew. There is a lot riding on the outcome of this.

There are some things that are available to the public. I have some question about some it. Quite frankly it does not pass my smell test. Unfortunately I am not a lawyer, and therefore can’t really make any conclusions. Possibly those lawyers who read this well help us bloggers out.

We know from the Senate testimony by Josh Birnbaum that his unit, the Structured Products Group “SPG” shorted the common stock of public companies as part of their hedging strategy. Josh touted this in his annual review. The SPG made big money in a bad market. They made over three billion in revenues from shorts.

This from an Email from Josh in July of 2007:

Since 6/21, the SPG Trading group has paused in our equities trading while we work with management and market risk to come up with quantitative limits for these positions. It sounds like we are getting close to having something systematic in place, but in the meantime, we are looking for approval to opportunistically buy puts on certain mortgage originators, insurers, mortgage REITs, broker-dealers, and other related names exposed to RMBS, CMBS.


We also know from the testimony that Josh shorted the stock of Bear Sterns as part of his hedging strategy. He said that the SBG group used “mostly” puts in their activity. He described that he took a “macro view” of the market and hedged his risks accordingly. Josh made the link to his view of a declining sub prime/Alt-A market and the stocks of the financial companies who would be most impacted if things went south in high yield mortgage land.

Also in the testimony Josh stated that he had a number of names that he used in his short hedging strategy. That was an important statement.

From the public documents made available from the hearing is the following. I believe this is the trading/hedging positions for the SPG. My reading of this is that they were short Bear Stearns (via puts). They also were short WaMu.



Now consider this intro from a story in the WSJ. Clearly GS was doing big business with WaMu and their sub prime originator Long Beach Mortgage Corp.

Washington Mutual Inc. and its Long Beach Mortgage Co. subprime-lending unit rang up one of the worst failures in U.S. history. Left in the wake were billions of dollars of soured loans and questionable lending practices. But when times were better, the two companies had a powerful partner on Wall Street: Goldman Sachs Group Inc.

From the same WSJ article is this information:

May 10, 2007: Goldman and WaMu underwrite bonds backed by $532.6 million in mortgages.


So back in May of 07 GS puts a half-billion dollar deal together with WaMu and uses mortgages from Long Beach as part of the deal. Just as a guess GS had a pretty broad look at the quality of the mortgages at Long Beach and WaMu. The SPG traded these securities. They knew that the deal was a bomb, they probably connected the dots that WaMu should be on the “conviction short list”. A little help for Josh?

I am not sure how to describe that situation. I was looking for shorts in the summer of 2007. I wish that I had had the chance to look over the books of Long Beach before I made my choice. It would have made the job quite a bit easier.