How Goldman Sachs Bagged Clients (via McClatchy)

I keep finding these gems I missed while out for the holiday week. Here’s another fascinating reads — its a nice takedown of Goldman Sachs via McClatchy.

The article implies that GS and others knew they were selling paper that was going to create a giant loss to the buyer.

McClatchy:

“When financial titan Goldman Sachs joined some of its Wall Street rivals in late 2005 in secretly packaging a new breed of offshore securities, it gave prospective investors little hint that many of the deals were so risky that they could end up losing hundreds of millions of dollars on them.

McClatchy has obtained previously undisclosed documents that provide a closer look at the shadowy $1.3 trillion market since 2002 for complex offshore deals, which Chicago financial consultant and frequent Goldman critic Janet Tavakoli said at times met “every definition of a Ponzi scheme.”

The documents include the offering circulars for 40 of Goldman’s estimated 148 deals in the Cayman Islands over a seven-year period, including a dozen of its more exotic transactions tied to mortgages and consumer loans that it marketed in 2006 and 2007, at the crest of the booming market for subprime mortgages to marginally qualified borrowers.

In some of these transactions, investors not only bought shaky securities backed by residential mortgages, but also took on the role of insurers by agreeing to pay Goldman and others massive sums if risky home loans nose-dived in value — as Goldman was effectively betting they would.”

Note that the implication in the full piece is not that these were possible losses, but rather, based upon what GS understood about the ways these papers were structured and then hedged (insured with the client), it was a sure loss. So rather than hold on to the money losing mortgage based securities, GS devised a way to sell it to clients!

The entire piece and accompanying video are worth spending time with on a Sunday afternoon…

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Source:
Goldman’s offshore deals deepened global financial crisis
Greg Gordon
McClatchy Newspapers, December 30, 2009
http://www.mcclatchydc.com/227/story/81465.html

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