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⁸ Glass-Steagall Act, Section 16.
⁴⁷ 3/11/2008 compliance letter from Moody's to SEC, SEC_OCIE_CRA_011212 and SEC_OCIE_CRA_011214. The 2002 figure does not include gross revenue from CDO ratings as this figure was not readily available due to the transition of Moody's accounting systems. (See Chapter V below.) c. c; Subcommittee interview of David Beck (3/2/2010).
⁵⁷ Securities Act of 1933, 15 U.S.C. § 77a (1933).
⁶¹ See, e.g., 12 CFR part 3, Appendix A (for the Office of the Comptroller of the Currency), 12 CFR part 208, Appendix A and 12 CFR part 225, Appendix A (for the Federal Reserve Board of Governors) and 12 CFR part 325, Appendix A (for the Federal Deposit Insurance Corporation).
¹³⁰ See 2/27/2008 letter from Kerry Killinger to Washington Mutual Board of Directors, Hearing Exhibit 4/16-41.
¹⁴⁰ "Securitizations of Washington Mutual Subprime Home Loans," chart prepared by the Subcommittee, Hearing Exhibit 4/13-1c.
¹⁷¹ Id. at 894 [formatting as in the original].
²¹⁶ 2004. An internal WaMu memorandum, later prepared by a WaMu risk officer who had been asked to review Long Beach in 2004, recalled significant problems: "You've asked for a chronological recap of ERM [Enterprise Risk Management] market risk involvement with Longbeach and the sub prime conduit. … [In] 2004: I conducted an informal but fairly intensive market risk audit of Longbeach …. The climate was very adversarial. … We found a total mess." 217 A November 2004 email exchange between two WaMu risk officers provides a sense that poor quality loans were still a problem. The first WaMu risk officer wrote: "Just a heads-up that you may be getting some outreach from Carroll Moseley (or perhaps someone higher up in the chain) at Long Beach regarding their interest in exploring the transfer of … a small amount (maybe $10-20mm in UPB [unpaid principal balance]) of Piggieback 'seconds' (our favorite toxic combo of low FICO borrower and HLTV loan) from HFS [hold for sale portfolio] to HFI [hold for investment portfolio]. "As Carroll described the situation, these are of such dubious credit quality that they can't possibly be sold for anything close to their 'value' if we held on to them. … I urged him to reach out to you directly on these questions. (E.g., it's entirely possible we might want to make a business decision to keep a small amount of this crap on our books if it was already written down to near zero, but we would want all parties to be clear that no precedent was being set for the product as a whole, etc., etc.)." 218 The second risk officer sent the email to the head of Long Beach, with the comment, "I think it would be prudent for us to just sell all of these loans." Subcommittee interview of Fay Chapman (2/9/2010). See also 12/21/2005 OTS memorandum, "Long Beach Mortgage Corporation (LBMC)," OTSWMS06-007 0001010, Hearing Exhibit 4/16-31 ("In 2003, adverse internal reviews of LBMC operations led to a decision to temporarily cease securitization activity. WMU's Legal Department then led a special review of all loans in LBMC's pipeline and held-for-sale warehouse in order to ensure file documentation adequately supported securitization representations and warranties and that WMI was not exposed to a potentially significant contingent liability. Securitization activity was reinstated in early 2004 after the Legal Department concluded there was not a significant liability issue.").
²¹⁷ Undated memorandum from Dave Griffith to Michelle McCarthy, "Sub Prime Chronology," likely prepared in early 2007, JPM_WM02095572.
²¹⁸ 11/24/2004 email from Michael Smith to Mark Hillis and others, "LBMC Transfer of Piggiebacks from HFS to HFI," JPM_WM01407692.
²²² Id. (Long Beach "experienced a dramatic increase in EPD's [early payment defaults], during the third quarter of 2005 [which] … led to a large volume of required loan repurchases. The unpaid principal balance repurchased as a
²²³ Id.
²⁴⁸ Id.
²⁶⁰ Id. at JPM_WM02548940-41.
³⁰¹ 2/2005 email chain between Timothy Bates, Tony Meola, Mr. Rotella and others, JPM_WM00616783-84.
³³² At the Subcommittee's hearing, Mr. Vanasek testified that as much as $1 billion in loans originated out of these two offices per year. April 13, 2010 Subcommittee Hearing at 27.
⁴⁰³ Id.
⁴⁶⁴ 2/2007 WaMu internal email chain, Hearing Exhibit 4/13-40b.
⁴⁶⁸ A "60+ delinquency rate" applies to loans in which a payment is late by 60 days or more.
⁵²² Id. The WaMu chart showed that WaMu sold 5,350 interest-only ARMs with a total loan amount of about $1.3 billion to Fannie Mae, and 3,016 interest-only ARMs with a total loan amount of $724 million to Freddie Mac.
⁵²³ Id. The WaMu chart showed that WaMu sold 3,250 hybrid ARMs with with a total loan amount of nearly $700 million to Fannie Mae, and 3,303 hybrid ARMs with a total loan amount of nearly $700 million to Freddie Mac.
⁵²⁴ Id. See chart for more detail.
⁶¹⁷ "Securitizations of Washington Mutual and Long Beach Subprime Home Loans," chart prepared by the Subcommittee, Hearing Exhibit 4/13-1c.
⁷³⁰ See 4/17/2006 memorandum by WaMu General Auditor to Board of Directors' Audit Committees of Washington Mutual Inc. and Washington Mutual Bank, "Long Beach Repurchase Reserve Root Cause Analysis," JPM_WM02533760, Hearing Exhibit 4/13-10 (Long Beach "experienced a dramatic increase in EPD's [early payment defaults], during the third quarter of 2005 [which] … led to a large volume of required loan repurchases. The unpaid principal balance repurchased as a result of the EPD provision for the year ended December 31, 2005 was $837.3 million. The net loss from these repurchases was approximately $107 million.").
⁷⁴² Id.
⁷⁵⁷ See prepared statement of FDIC IG Rymer at 6 (chart showing WaMu ratings and insurance assessments), April 16, 2010 Subcommittee Hearing at 125.
⁷⁹⁹ April 16, 2010 Subcommittee Hearing at 36.
⁸⁷⁸ 1/2009 Center for Responsible Lending report, "The Second S&L Scandal," at 1, Hearing Exhibit 4/16-84.
⁸⁹⁵ Id.
⁹¹⁴ 3/31/2010 Office of Inspector General, Dept. of the Treasury, "Semiannual Report to Congress," http://www.treasury.gov/about/organizational- structure/ig/Documents/March%202010%20SAR%20Final%20%20(04-30-10).pdf.
⁹²⁹ See, e.g., "New Century Ex-leaders to Pay $90 Million in Settlements," Los Angeles Times (7/31/2010).
⁹⁵⁶ "Wall Street and the Financial Crisis: The Role of Credit Rating Agencies," before the U.S. Senate Permanent Subcommittee on Investigations, S.Hrg. 11-673 (4/23/2010) (hereinafter "April 23, 2010 Subcommittee Hearing").
⁹⁹³ 3/11/2008 compliance letter from Moody's to SEC, SEC_OCIE_CRA_011212 and SEC_OCIE_CRA_011214. The 2002 figure does not include gross revenue from CDO ratings as this figure was not readily available due to the transition of Moody's accounting systems.
⁹⁹⁴ 3/14/2008 compliance letter from S&P to SEC, SEC_OCIE_CRA_011218-59, at 18-19.
¹⁰²² 7/30/2010 supplemental response from Moody's to the Subcommittee, Hearing Exhibit 4/23-106 (7/12/2007 Moody's Structured Finance Teleconference and Web Cast, "RMBS and CDO Rating Actions," at MOODYS- PSI2010-0046899-900). The $5.2 billion also included the original value of 32 tranches that were put on review for possible downgrade that same day.
¹⁰³² 6/24/2010 supplemental response from S&P to the Subcommittee, at 6, Hearing Exhibit 4/23-108.
¹⁰³⁵ See "Percent of the Original AAA Universe Currently Rated Below Investment Grade," chart prepared by the Subcommittee using data from BlackRock Solutions, Hearing Exhibit 4/23-1i. See also 3/2008 "Understanding the Securitization of Subprime Mortgage Credit," report prepared by Federal Reserve Bank of New York staff, no. 318, at 58 and table 31 ("92 percent of 1st-lien subprime deals originated in 2006 as well as … 91.8 percent of 2nd-lien deals originated in 2006 have been downgraded."). See also "Regulatory Use of Credit Ratings: How it Impacts the Behavior of Market Constituents," University of Westminster - School of Law International Finance Review (2/2009), at 65-104 (citations omitted) ("As of February 2008, Moody's had downgraded at least one tranche of 94.2% of the subprime RMBS issues it rated in 2006, including 100% of the 2006 RMBS backed by second-lien loans, and 76.9% of the issues rated in 2007. In its rating transition report, S&P wrote that it had downgraded 44.3% of the subprime tranches it rated between the first quarter of 2005 and the third quarter of 2007.")
¹⁰⁶⁵ Id.
¹⁰⁹⁰ See 6/11/2007 email exchange between Merrill Lynch and Moody's, Hearing Exhibit 4/23-23.
¹¹⁰⁴ Moody's downgrade of Vertical ABS CDO 2007-1, Hearing Exhibit 4/23-94k.
¹¹⁵⁴ 1/17/2007 email from Monica Perelmuter to Kyle Beauchamp, and others, Hearing Exhibit 4/23-28.
¹¹⁶⁵ 10/20/2006 email from Greg Lippmann (Deutsche Bank) to Craig Carlozzi (Mast Capital), DBSI_PSI_EMAIL01774820.
¹²³⁷ 3/4/2011 "U.S. Mortgage-Related Securities Issuance" and 1/1/2011 "Global CDO Issuance," charts prepared by Securities Industry and Financial Markets Association, www.sifma.org/research/statistics.aspx. The RMBS total does not include about $6.6 trillion in RM BS securities issued by government sponsored enterprises like Fannie Mae and Freddie Mac.
¹²³⁸ See, e.g., 2/2011 chart, "Goldman Sachs Expected Profit from RM BS Securitizations," prepared by the U.S. Senate Permanent Subcommittee on Investigations using Goldman-produced documents for securitizations from 2005-2007 (underlying documents retained in Subcommittee file); 3/21/2011 letter from Deutsche Bank counsel, PSI-Deutsche_Bank-32-0001.
¹²³⁹ See "Banks' Self-Dealing Super-Charged Financial Crisis," ProPublica (8/26/2010), http://www.propublica.org/article/banks-self-dealing-super-charged-financial-crisis ("A typical CDO could net the bank that created it between $5 million and $10 million – about half of which usually ended up as employee bonuses. Indeed, W all Street awarded record bonuses in 2006, a hefty chunk of which came from the CDO business."). Fee information obtained by the Subcommittee is consistent with this range of CDO fees. For example, Deutsche Bank received nearly $5 million in fees for Gemstone 7, and the head of its CDO Group said that Deutsche Bank received typically between $5 and 10 million in fees, while Goldman Sachs charged a range of $5 to $30 million in fees for Camber 7, Fort Denison, and the Hudson Mezzanine 1 and 2 CDOs. 12/20/2006 Gemstone 7 Securitization Credit Report, DB_PSI_00237655-71 and 3/15/2007 Gemstone CDO VII Ltd. Closing Memorandum, DB_PSI_00133536- 41; Subcommittee interview of Michael Lamont (9/29/2010); and Goldman Sachs response to Subcommittee QFRs at PSI-QFR-GS0249.
¹²⁴⁰ Federal law has never established a "super-regulator" with jurisdiction to police compliance and conduct across banking, brokerage, investment advisory, and insurance sectors, and that remains the case today.
¹²⁴¹ See Section 16 of the Banking Act of 1933, Pub. L. 73-66 (also known as the Glass-Steagall Act).
¹²⁴² Section 3(a)(38) of the Securities Exchange Act of 1934 states: "The term "market maker" means any specialist permitted to act as a dealer, any dealer acting in the capacity of block positioner, and any dealer who, with respect to a security, holds himself out (by entering quotations in an inter-dealer communications system or otherwise) as being willing to buy and sell such security for his own account on a regular or continuous basis." See also SEC website, http://www.sec.gov/answers/mktmaker.htm; FINRA website, FAQs, "W hat Does a Market Maker Do?" http://finra.atgnow.com/finra/categoryBrowse.do.
¹²⁴³ See SEC website, http://www.sec.gov/answers/mktmaker.htm; FINRA website, FAQs, "W hat Does a Market Maker Do?" http://finra.atgnow.com/finra/categoryBrowse.do.
¹²⁴⁴ 1/2011 "Study on Investment Advisers and Broker-Dealers," study conducted by the U.S. Securities and Exchange Commission, at 55, http://www.sec.gov/news/studies/2011/913studyfinal.pdf.
¹²⁴⁵ See Responses to Questions for the Record from Goldman Sachs at PSI_QFR_GS0046.
¹²⁴⁶ See Sections 11 and 12 of Securities Act of 1933. See also Rule 10b-5 of the Securities Exchange Act of 1934. See also, e.g., SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 201 (1963) ("Experience has shown that disclosure in such situations, while not onerous to the advisor, is needed to preserve the climate of fair dealing which is so essential to maintain public confidence in the securities industry and to preserve the economic health of the country."). See also SEC Study on Investment Advisers and Broker-Dealers at 51 (citations omitted) ("Under the so- called 'shingle' theory … , a broker-dealer makes an implicit representation to those persons with whom it transacts business that it will deal fairly with them, consistent with the standards of the profession. … Actions taken by the broker-dealer that are not fair to the customer must be disclosed in order to make this implied representation of fairness not misleading.").
¹²⁴⁷ SEC v. Tambone, 550 F.3d 106 (1st Cir. 2008) [citations omitted].
¹²⁴⁸ Section 11 of the Securities Act of 1933, codified at 15 U.S.C. § 77a.
¹²⁴⁹ In the Matter of Richmark Capital Corporation, Securities Exchange Act Rel. No. 48758 (Nov. 7, 2003) (citing Chasins v. Smith Barney & Co., Inc., 438 F.3d 1167, 1172 (2d Cir. 1970) ("The investor … must be permitted to evaluate overlapping motivations through appropriate disclosures, especially where one motivation is economic self- interest")).
¹²⁵⁰ FINRA Notice No. 96-60.
¹²⁵¹ See FINRA Rules 2210(d)(1)(A) and 2211(a)(3) and (d)(1) (by rule all institutional sales material and correspondence may not "omit any material fact or qualification if the omission, in the light of the context of the material presented, would cause the communications to be misleading.") . See also FINRA Rule 2310 and IM-2310-
¹²⁵² CDO squared transactions will generally be referred to in this Report as "CDO 2." Some Goldman materials also use the term "CDO^2."
¹²⁵³ Each of the five indices tracked a different basket of subprime RM BS securities. One index tracked a basket of
¹²⁵⁴ Subcommittee Interview of Joshua Birnbaum (4/22/2010); Subcommittee Interview of Rajiv Kamilla (10/12/2010).
¹²⁵⁵ See, e.g., "Senate's Goldman Probe Shows Toxic Magnification," W all Street Journal (5/2/2010) (showing how a single $38 million subprime RMBS, created in June 2006, was included in 30 CDOs and, by 2008, had caused $280 million in losses to investors).
¹²⁵⁶ See "Banks' Self-Dealing Super-Charged Financial Crisis," ProPublica (8/26/2010), http://www.propublica.org/article/banks-self-dealing-super-charged-financial-crisis ("A typical CDO could net the bank that created it between $5 million and $10 million – about half of which usually ended up as employee bonuses. Indeed, W all Street awarded record bonuses in 2006, a hefty chunk of which came from the CDO business."). Fee information obtained by the Subcommittee is consistent with this range of CDO fees. For example, Deutsche Bank received nearly $5 million in fees for Gemstone 7, and the head of its CDO group said that Deutsche Bank received typically between $5 and 10 million in fees, while Goldman Sachs charged a range of $5 to $30 million in fees for Camber 7, Fort Denison, and the Hudson Mezzanine 1 and 2 CDOs. 12/20/2006 Gemstone 7 Securitization Credit Report, DB_PSI_00237655-71 and 3/15/2007 Gemstone CDO VII Ltd. Closing Memorandum, DB_PSI_00133536- 41; Subcommittee interview of Michael Lamont (9/29/2010); and Goldman Sachs response to Subcommittee QFRs at PSI-QFR-GS0249.
¹²⁵⁷ See, e.g., discussion of the Hudson CDO, below; Subcommittee interview of Daniel Sparks (4/15/10) (Goldman tried selling subprime loans but could not; it was easier and more efficient to securitize them and then sell the securitized product to transfer loans in bulk; it was also easier to sell CDOs than individual underlying positions).
¹²⁶⁷ Chart, ABS CDOs Issued by DBSI (between 2004 and 2008), PSI-Deutsche_Bank-02-0005-23.
¹²⁷⁹ 8/23/2006 email from Greg Lippmann to Michael Lamont and Richard D'Albert, DBSI_PSI_EMAIL01605465.
¹²⁹¹ Subcommittee interview of Greg Lippmann (10/18/2010).
¹³⁰⁰ Id.
¹³¹⁶ 2/23/2007 email from Greg Lippmann to Anshu Jain, DBSI_PSI_EMAIL02383117-18.
¹³¹⁷ 3/2/2011 letter from Deutsche Bank's counsel to the Subcommittee, PSI-DeutscheBank-31-0004-06.
¹³⁷⁹ 1/5/2007 email from Abhayad Kamat to Kevin Jenks, GEM7-00001977.
¹³⁸⁰ 12/8/2006 and 12/11/2006 emails between Mr. Lippmann and Mr. Jenks, DBSI_PSI_EMAIL01886779-80.
¹³⁹² Id.
¹⁴⁷¹ 2/7/2007 email from Kevin Jenks to Jason Lowry, GEM7-00003084.
¹⁴⁸⁷ M&T Bank Corporation v. Gemstone CDO VII, (N.Y. Sup.), Complaint (June 16, 2008), DB_PSI_00000027- 79, at ¶ 52. For a list of customers and their allocations of Gemstone 7, see Gemstone VII Summary, DB_PSI_00711305.
¹⁴⁸⁹ Subcommittee interview of counsel of Standard Chartered (11/23/2010).
¹⁵¹¹ "W all Street and the Financial Crisis: The Role of Investment Banks," before the U.S. Senate Permanent Subcommittee on Investigations, S.Hrg. 111-674 (4/27/2010) (hereinafter "April 27, 2010 Subcommittee Hearing").
¹⁵¹² See, e.g., Responses to Questions for the Record from Goldman Sachs, including Lloyd C. Blankfein; David A. Viniar; Craig W. Broderick; Daniel L. Sparks; Michael J. Swenson; Joshua S. Birnbaum; and Fabrice P. Tourre, PSI_QFR_GS0001-548 [Redacted]. Unredacted version maintained in the files of the Subcommittee [Sealed Exhibit]. Hereinafter referred to as "Responses to Subcommittee QFR."
¹⁵¹³ The background information about Goldman in this section was taken from several sources. See "Profile, Goldman Sachs," Reuters.com; "Profile, The Goldman Sachs Group, Inc.," Hoovers.com; 4/19/2010, "A Brief History of Goldman Sachs – Timeline," W all Street Journal; 1/2010, "The Bank Job," Vanity Fair (written with cooperation of Goldman Sachs).
¹⁵¹⁴ During 2006 and 2007, Goldman's headquarters were at 85 Broad Street in Manhattan. In 2010, the firm moved its headquarters to 200 W est Street in Manhattan. See "Morgan Stanley May Lease Old Goldman Sachs Building," Bloomberg (10/18/2010).
¹⁵¹⁵ See Goldman Sachs Form 10-K for the fiscal year ending Nov. 30, 2007, filed with the SEC on 1/28/2008, at 64; 11/30/2007 "SPG Trading Mortgages W eekly Metrics 30-November-2007," GS MBS-E-015646485.
¹⁵¹⁶ See supra note 1513.
¹⁵¹⁷ Id.
¹⁵¹⁸ "Prime brokers" are generally large broker-dealers that provide a special set of services to special clients, including securities lending, leveraged trade execution, and cash management. See definition of "prime brokerage" at Investopedia.com.
¹⁵¹⁹ See supra note 1513.
¹⁵²⁰ Subcommittee interviews of David Viniar (4/13/2010), Craig Broderick (4/9/2010), and Daniel Sparks (4/15/2010).
¹⁵²¹ 2/6/2007 Goldman Sachs Form 10-K filing with the SEC.
¹⁵²² Id.
¹⁵²³ Id.
¹⁵²⁴ Id.
¹⁵²⁵ Id.
¹⁵²⁶ Subcommittee interview of Daniel Sparks (4/15/10).
¹⁵²⁷ Id.
¹⁵²⁸ Id.
¹⁵²⁹ Id.
¹⁵³⁰ Id.
¹⁵³¹ "North America Mortgages," chart prepared by Goldman Sachs, GS MBS-E-007818849 (showing organization of Mortgage Department).
¹⁵³² Id.
¹⁵³³ See, e.g., 6/27/2006 email from Brian O'Brien to John Cassidy, "Conduit Sellers and u'writing guides," GS MBS-E-004060914.
¹⁵³⁴ Subcommittee interview of Michael Swenson (4/16/2010).
¹⁵³⁵ 4/22/2010 Goldman Sachs Form 8-K filing with the SEC. Of the 23 Abacus CDOs, 16 contained primarily mortgage related assets.
¹⁵³⁶ "North America Mortgages," chart prepared by Goldman, GS MBS-E-007818849 (showing organization of Mortgage Department). In 2006, Mr. Ostrem co-headed the CDO Origination Desk with David Rosenblum, who was primarily involved in the CLO aspects of the desk's activities. Mr. Rosenblum was in the process of leaving the Mortgage Department for a position in the Credit business in late 2006, though he continued to have some responsibilities with respect to the CDO Origination Desk.
¹⁵³⁷ See discussion of the disclosure obligations of broker-dealers, underwriters, and placement agents, above. The Correlation Trading Desk, which also arranged for the issuance of new CDOs had the same obligations as the CDO desk when issuing a new CDO.
¹⁵³⁸ "North America Mortgages," chart prepared by Goldman, GS MBS-E-007818849 (showing organization of Mortgage Department).
¹⁵³⁹ "Mortgages Organizational Structure," chart prepared by Goldman Sachs, GS MBS-E-010872812.
¹⁵⁴⁰ Id.
¹⁵⁴¹ Undated chart prepared by Goldman for the Subcommittee, GS-PSI-00172.
¹⁵⁴² Undated chart prepared by Goldman for the Subcommittee, GS MBS 0000021129 and GS MBS 0000004276.
¹⁵⁴³ Id.
¹⁵⁴⁴ Id.
¹⁵⁴⁵ See net short chart prepared by the Subcommittee, below; 9/17/2007 Presentation to GS Board of Directors, Residential Mortgage Business at 5, GS MBS-E-001793845, Hearing Exhibit 4/27-41; 3/10/2007 email to Daniel Sparks, "Mortgage Presentation to the board," GS MBS-E-013323395, Hearing Exhibit 4/27-17.
¹⁵⁴⁶ 7/25/2007 email from Mr. Viniar to Mr. Cohn, "Private & Confidential: FICC Financial Package 07/25/07," GS MBS-E-009861799, Hearing Exhibit 4/27-26.
¹⁵⁴⁷ 10/2007 Global Mortgages, Business Unit Townhall at 4-5, GS MBS-E-013703463, Hearing Exhibit 4/27-47.
¹⁵⁴⁹ See discussion of risk limits, VAR measurements, and risk reports, below.
¹⁵⁵⁰ Id. "Value-at-Risk" or VAR is a key risk measurement system used by Goldman. At a 95% confidence level, VAR represents the dollar amount a business unit could expect to lose once every 20 trading days or about once per month. Subcommittee interview of Craig Broderick (4/9/2010). See also Philippe Jorion, "Value at Risk: The New Benchmark for Managing Financial Risk," at 20 (3d ed. 2007).
¹⁵⁵¹ 11/18/2007 email from Lloyd Blankfein, "RE: NYT," GS MBS-E-009696333, Hearing Exhibit 4/27-52.
¹⁵⁵² Under standard CDS contracts designed by the International Swaps and Derivatives Association (ISDA), a credit event is defined as a (1) bankruptcy; (2) failure to pay; (3) restructuring; (4) repudiation of or moratorium on payment in the event of an authorized government intervention; or (5) an acceleration of an obligation. Another common credit event is incurring a credit rating loss.
¹⁵⁵³ See, e.g., 10/17/2006-10/18/2006 email from Tom Montag to Daniel Sparks, "3 things," GS MBS-E- 010917469 (acquisition of a large net long position described as "slipp[ing] up a bit"). In an email to Goldman Co- President Gary Cohn, Richard Ruzika criticized the accumulation of the large net long position: "You know and I know this position was allowed to get too big – for the liquidity in the market, our infrastructure, and the ability of our traders. That statement would be the same even if we had gotten the market direction correct – although the
¹⁵⁵⁴ For more information about the Hudson CDO, see below.
¹⁵⁵⁵ See, e.g., 12/7/2006 email from Tom Montag, GS M BS-E-009756572 ("I don't think we should panic regarding ABX holdings").
¹⁵⁵⁶ 12/14/2006 email from Daniel Sparks, "Subprime risk meeting with Viniar/McMahon Summary," GS MBS-E- 009726498, Hearing Exhibit 4/27-3.
¹⁵⁵⁷ Subcommittee interview of David Viniar (4/13/2010).
¹⁵⁵⁸ 3/10/2007 email to Daniel Sparks, "Mortgage Presentation to the board," GS M BS-E-013323395, Hearing Exhibit 4/27-17. 12/13/2006 Goldman email, "Subprime Mortgage Risk," Hearing Exhibit 4/27-2.
¹⁵⁵⁹ 8/23/2007 email from Tom Montag, "Current Outstanding Notional SN ames," GS MBS-E-010621231.
¹⁵⁶⁰ 11/13/2007 Goldman email, GS MBS-E-010023525 (attachment, 11/14/2007 "Tri-Lateral Combined Comments," GS MBS-E-010135693-715 at 695).
¹⁵⁶¹ 9/7/2007 Fixed Income, Currency and Commodities Annual Individual Review Book, Self-Review of Deeb Salem, GS-PSI-03157-80 at 72 (hereinafter "Salem 2007 Self-Review").
¹⁵⁶² Id.
¹⁵⁶³ See chart entitled, "Goldman Sachs Mortgage Department Total Net Short Position, February-December 2007 in $ Billions," prepared by the Permanent Subcommittee on Investigations, Hearing Exhibit 4/27-162 (April 2010 version), updated January 2011 (updated version), derived from Goldman Sachs Mortgage Strategies, Mortgage Dept Top Sheets provided by Goldman Sachs (hereinafter "PSI Net Short Chart"), See Section C(4)(g).
¹⁵⁶⁴ For more information about the mass rating downgrades, see Chapter V, above. See also 7/10/2007 Goldman email, "GS Cashflow/Abacus CDOs Mentioned in S&P Report on CDO Exposure to Subprime RMBS," GS MBS-E- 001837256.
¹⁵⁶⁵ 10/2007 Global Mortgages, Business Unit Townhall at 4-5, GS MBS-E-013703463, Hearing Exhibit 4/27-47.
¹⁵⁶⁶ Quarterly Breakdown of Mortgage P/L, GS MBS-E-009713204 at 205. Goldman's gross revenues from all derivative products, without deduction of related losses, were apparently $5.9 billion. 4Q07 Fact Sheet prepared for David Viniar (FY07 P&L [profit and loss]: . . . derivatives +5.9B), GS MBS-E-009724276, Hearing Exhibit 4/27- 159.
¹⁵⁶⁷ Swenson self evaluation, Hearing Exhibit 4/27-55b.
¹⁵⁶⁸ Birnbaum self evaluation, Hearing Exhibit 4/27-55c.
¹⁵⁶⁹ Id.
¹⁵⁷⁰ Quarterly Breakdown of Mortgage P/L, GS MBS-E-009713204 at 205.
¹⁵⁷¹ 5/11/2007 email from Daniel Sparks, "You okay?," GS MBS-E-019659221.
¹⁵⁷² Id.; 5/14/2007 email from David Lehman, "Gameplan – asset model analysis," GS MBS-E-001865782 (last email in a longer email chain).
¹⁵⁷³ Id.; 5/14/2007 email from Elisha W eisel, "Modelling Approaches for Cash ABS CDO/CDO^2," GS MBS-E- 001863618.
¹⁵⁷⁴ 5/14/2007 email from Tom Montag to Daniel Sparks, GS MBS-E-019642797.
¹⁵⁷⁵ 5/11/2007 email from Harvey Schwartz to Daniel Sparks, Tom Montag, and others, GS MBS-E-010780864.
¹⁵⁷⁶ 5/20/2007 email, "Viniar Presentation - Updated," GS MBS-E-010965211 (attached file, "Mortgages Department, May 2007," Goldman presentation, GS MBS-E-010965212); see also 5/19/2007 "Mortgages CDO Origination – Retained Positions & W arehouse Collateral, May 2007," Goldman presentation, GS MBS-E- 010951926.
¹⁵⁷⁷ 5/19/2007 "Mortgages CDO Origination – Retained Positions & W arehouse Collateral, May 2007," Goldman presentation, GS MBS-E-010951926.
¹⁵⁷⁸ Compare 5/19/2007 "Mortgages CDO Origination – Retained Positions & W arehouse Collateral, May 2007," Goldman presentation, GS MBS-E-010951926, with 5/20/2007 "Mortgages Department, May 2007," Goldman presentation, GS MBS-E-010965212.
¹⁵⁷⁹ 5/19/2007 "Mortgages CDO Origination – Retained Positions & W arehouse Collateral, May 2007," Goldman presentation, GS MBS-E-010951926; 5/20/2007 email from Lee Alexander to Daniel Sparks, Donald M ullen, Lester Brafman, Michael Kaprelian, "Viniar Presentation - Updated," GS MBS-E-010965211 (attached file "Mortgages V4.ppt," "Mortgages Department, May 2007," GS M BS-E-010965212).
¹⁵⁸⁰ See discussions of Hudson, Anderson, Timberwolf, and Abacus sales efforts, below.
¹⁵⁸¹ 10/2006 Goldman Sachs report, "Hudson Mezzanine Funding, 2006-1, LTD.," at 4, GS MBS-E-009546963, Hearing Exhibit 4/27-87.
¹⁵⁸² Id.
¹⁵⁸³ For more information on this pricing mismatch, see the Hudson discussion, below.
¹⁵⁸⁴ 12/3/2006 Hudson Mezzanine 2006-1, LTD. Offering Circular, GS MBS- E-021821196 at 251 (emphasis added).
¹⁵⁸⁶ 2/7/2008 email from John Pearce to David Lehman, HUD-CDO-00005147.
¹⁵⁸⁷ In April 2007, the month after Anderson issued its securities, New Century announced it would have to restate its earnings. It declared bankruptcy soon after. For more information about New Century, see Chapter IV, section E(2)(c).
¹⁵⁸⁸ See, e.g., 3/2007 Goldman internal email, GS M BS-E-002146861, Hearing Exhibit 4/27-77 ("I recommend putting back 26% of the pool....if possible."). See also 2/2/2007 email from Matthew Nichols to Kevin Gasvoda, GS MBS-E-005556331 ("NC is running a 10% drop rate [due diligence drop] at ~6 points / drop and 4% EPD rate at close to 20 points."). 2/8/2007 email from John Cassidy to Joseph Ozment, others, GS MBS-E-002045021 ("Given the current state of the company I am no longer comfortable with the practice of taking loans with trailing docs . . . that we need in order to conduct compliance testing. . .").
¹⁵⁸⁹ 3/16/2007 GSI Risk Committee Memo, "GSI W arehousing for Structured Product CDOs," GS MBS-E- 001806010.
¹⁵⁹⁰ 3/12/2007 email from Robert Black to Matthew Bieber and others, GS MBS-E-000898037.
¹⁵⁹¹ See Goldman response to Subcommittee QFR at PSI_QFR_GS0223 and PSI_QFR_GS0235.
¹⁵⁹² Among other assets, Goldman sold $15 million in certain Abacus securities to the Timberwolf CDO. Goldman held 100% of the short side of the relevant Abacus CDO. Its sale of the Abacus securities meant that Goldman held the short side of those assets, while Timberwolf investors took the long side.
¹⁵⁹³ 2/26/2007 email between Tom Montag and Daniel Sparks, GS MBS-E-019164806.
¹⁵⁹⁴ 3/2007 Goldman internal email chain, GS MBS-E-001800634.
¹⁵⁹⁵ See, e.g., 6/2007-8/2007 Goldman internal emails, "Timberwolf Sales Efforts," Hearing Exhibit 4/27-166; 3/2007 Goldman internal email, "GS Syndicate Structured Product CDO Axes," Hearing Exhibit 4/27-100.
¹⁵⁹⁶ 4/19/2007 email chain between Daniel Sparks and Bunty Bohra, GS MBS-E-010539324, Hearing Exhibit 4/27-
¹⁵⁹⁷ 5/14/2007 email from Edwin Chin, GS MBS-E-012553986.
¹⁵⁹⁸ 6/2007 Goldman internal email to Daniel Sparks, Hearing Exhibit 4/27-105.
¹⁵⁹⁹ In synthetic CDOs, the cash proceeds from the sales of the CDO securities were used to purchase "collateral debt securities." Later, when cash was needed to make payments to a long or short party, those collateral securities were sold, and the cash was used to make the payments. In the event the collateral securities used to pay the short party (called "default swap collateral") could not be sold for face (par) value, Goldman, the short party, absorbed the loss, effectively serving as the default swap collateral put provider. For more information, see discussion of Goldman's actions taken while the collateral put provider of Timberwolf, below.
¹⁶⁰⁰ 9/17/2007 email from Matthew Bieber to Christopher Creed, GS MBS-E-000766370, Hearing Exhibit 4/27-106.
¹⁶⁰¹ 6/2007 Goldman document, "CDO Platform Overview," at 31, GS M BS-E-001918722 ("ABACUS is the Goldman brand name for single-tranche CLN [credit linked note] issuances referencing portfolios comprised entirely of structured products."); 4/2006 Goldman presentation "Overview of Structured Products," GS MBS-E-016067482.
¹⁶⁰² 3/12/2007 Goldman internal memorandum to M ortgage Capital Committee, "ABACUS Transaction sponsored by ACA," GS MBS-E-002406025, Hearing Exhibit 4/27-118.
¹⁶⁰³ As collateral put provider, which it performed for a fee, Goldman did carry risk in the Abacus 2007-AC1 transaction. In addition, shortly before the Abacus 2007-AC1 transaction closed, Goldman agreed to take the long side of a CDS contract on the performance of a small portion of the underlying assets when Paulson wanted to increase its short position at the last minute. Goldman tried to find an investor to assume its small long position, but was unable to do so.
¹⁶⁰⁴ April 27, 2010 Subcommittee Hearing at 82.
¹⁶⁰⁵ Subcommittee interview of Laura Schwartz (ACA) (4/23/2010). See also In the Matter of Abacus 2007-AC1 CDO, File No. HO-10911 (SEC), Statement of Laura Schwartz (January 21, 2010), ACA ABACUS 00004406 at 408. (hereinafter "Statement of Laura Schwartz").
¹⁶⁰⁶ 3/12/2007 Goldman memorandum to Mortgage Capital Committee, "ABACUS Transaction sponsored by ACA," GS MBS-E-002406025-28, Hearing Exhibit 4/27-118.
¹⁶⁰⁷ Securities and Exchange Commission v. Goldman, Sachs & Co. and Fabrice Tourre, Case No. 10-CV-3229, (S.D.N.Y.), Consent of Goldman Sachs, (July 14, 2010), at 2.
¹⁶⁰⁸ 9/26/2007 Michael J. Swenson Self-Review, GS-PSI-02396-401 at 398, Hearing Exhibit 4/27-55b. See also 12/14/2006 email from Daniel Sparks to Messrs. Montag and Ruzika, "Subprime risk meeting with Viniar/McMahon Summary," GS M BS-E-009726498, Hearing Exhibit 4/27-3 ("there will be very good opportunities as the market[] goes into what is likely to be even greater distress"); 7/13/2006 email from Stuart Bernstein copied to Mr. Cohn, GS MBS-E-016209254 ("he believes the REIT market is dead. We agreed . . . that as the market got worse, his 'distressed' expertise would be more (not less) interesting to investors"). See also Section 5(a)(iii) below regarding Goldman executives' negative views of the market for subprime mortgages and subprime mortgage backed securities.
¹⁶⁰⁹ 9/19/2006 email chain between Joshua Birnbaum and Daniel Sparks, "ABX," GS MBS-E-012683946.
¹⁶¹⁰ Id.
¹⁶¹¹ Goldman responses to Subcommittee QFRs at PSI_QFR_GS0239. For more information on Hudson, see section C(5)(b)(ii)AA., below.
¹⁶¹² 3/10/2007 email to Daniel Sparks, "Mortgage presentation to the Board," GS M BS-E-013323395, Hearing Exhibit 4/27-17 (M ortgage Department was $6 billion net long at start of the quarter). 12/13/2006 Goldman email, "Subprime Mortgage Risk," Hearing Exhibit 4/27-2.
¹⁶¹³ The ABX Index actually consisted of five separate indices. Each index tracked a different set of RMBS securities pulled from the 20 RM BS securitizations in the ABX basket. The sets varied according to their assigned credit ratings. One index tracked the 20 RMBS securities with AAA ratings, another tracked the 20 RMBS securities with AA ratings, and so on.
¹⁶¹⁴ Subcommittee interview of Joshua Birnbaum (10/1/2010); Subcommittee interview of Rajiv Kamilla (10/12/2010).
¹⁶¹⁵ 6/20/2006 email from David Lehman, "Mortara Nomination – ABX/CM BX Indices," GS MBS-E-014038810 (attached file, "2006 Mike Mortara Award for Innovation Nomination Template for ABX & CMBX Indices," GS MBS-E-014038811 at 6 (hereinafter "Mortara Award Submission")).
¹⁶¹⁶ Id. at 8.
¹⁶¹⁷ 6/20/2006 email from "Equities and FICC Communications" to "All Equities and FICC," Mike Mortara Award for Innovation," GS MBS-E-010879020 [original email].
¹⁶¹⁸ Mortara Award Submission at 2.
¹⁶¹⁹ Id. at 3-4. See also 8/30/2006 Fixed Income, Currency and Commodities Individual Review Book for Rajiv K. Kamilla, at 20, GS-PSI-04064 (hereinafter "Kamilla 2006 Review"); 9/6/2007 Fixed Income, Currency and Commodities Individual Review Book for Rajiv K. Kamilla, at 19, GS-PSI-04100 (hereinafter "Kamilla 2007 Review").
¹⁶²⁰ Kamilla 2007 Review at 19. In 2007, Mr. Kamilla was named a Managing Partner at Goldman.
¹⁶²¹ Daniel Sparks, the Mortgage Department head, viewed Mr. Birnbaum as a talented trader, writing in October 2006: "Josh for EMD [Extended Managing Director] – he is an extraordinary commercial talent and a key franchise driver. ... He will make us a lot of money." 10/17/2006-10/18/2006 emails from Daniel Sparks, "3 things," GS MBS-E-010917469. Other Goldman senior executives also relied on his trading skills. See, e.g., 2/21/2007 email from David Lehman, "ACA/Paulson Post," GS M BS-E-003813259 (before approving the Abacus CDO, Mr. Lehman asked Mr. Tourre to "[w]alk josh through the $, if that makes sense, let's go"); 6/29/2007 email from David Lehman, "ABS Update," GS M BS-E-011187909 (during exceptionally bad trading day, Mr. Lehman asked M r. Swenson, "Is Josh in? Mr. Swenson replied "No he is in Spain – don't worry I am fine.").
¹⁶²² Subcommittee interview of Joshua Birnbaum (4/22/2010). Throughout 2006, Mr. Birnbaum was also working to develop a new product for Goldman, a suite of home price derivatives that would track the Case/Schiller Home Price Indices. Like the ABX Index, a derivative product tracking the Case/Schiller Indices would enable investors to bet on the rise or fall in home prices in various U.S. markets, and provide another vehicle to short the mortgage market. See 12/18/2006 New Product Memorandum, "Launch of US Property Derivatives Trading," GS MBS-E- 013492538. In May 2006, Mr. Swenson forwarded an email to Mr. Birnbaum about another financial firm seeking to develop the same type of home price derivatives as Mr. Birnbaum. A note with the email said: "FYI–The cat is crawling out of the bag," meaning that other firms were thinking about launching similar products. See 5/16/2006 email from Michael Swenson to Joshua Birnbaum, "Housing Futures and Options," GS MBS-E-016087363. Goldman offered the new U.S. property derivatives briefly in 2007, but they did not develop significant trading volumes. Subcommittee interview of Joshua Birnbaum (10/1/2010).
¹⁶²³ The ABX Index began trading in January 2006. Goldman's position in the ABX Index was flat when the Index debuted, but became long and grew considerably longer in the fall of 2006. See, e.g., 10/17/2006-10/18/2006 email exchange between Daniel Sparks and Tom Montag, "3 things," GS MBS-E-010917469; 3/1/2007 email from Daniel Sparks, "Dinner," GS MBS-E-002356757, Hearing Exhibit 4/27-143 ("Most of the synthetic flows were hedge funds getting short and CDO vehicles getting long."). Goldman executives also told the Subcommittee that the firm often took the long side of ABX transactions in which hedge funds were going short. Subcommittee interview of Daniel Sparks (4/15/2010); Subcommittee interview of David Viniar (4/13/2010). See also, e.g., 8/10/2006 email from Goldman salesperson, "Paulson bookings," GS MBS-E-012395893 ("GS sold 550mm protection on ABX.HE.A 06-
¹⁶²⁴ Mr. Birnbaum's acquisition of a large net long position in the ABX was viewed negatively by Goldman senior executives. W hen Mr. Sparks recommended Mr. Birnbaum for a promotion to managing director in October 2006, Mr. Montag responded: "Josh slipped a bit with the abx position etc. Is that appropriate." Mr. Sparks replied: "Josh ... has had a rough couple of months. But he has handled it very well and is a key person for our franchise. I don't think those 2 months should confuse his value to the firm." 10/17/2006 email exchange between Daniel Sparks and Tom Montag, "3 things," GS MBS-E-010917469. Mr. Birnbaum was named a managing director later that month, but Mr. Montag again raised the issue of his net long ABX position when Mr. Sparks sought to allow Mr. Birnbaum to continue buying equity put options on companies with subprime exposure. Mr. Montag wrote: "Unfortunately trader josh has not demonstrated a track record of controlling his position. ... Instead of these lousy hedges he should just be selling his position." 3/21/2007 email chain between Tom Montag and Daniel Sparks, GS MBS-E-010629379, Hearing Exhibit 4/27-21. See also 2/5/2007 email from Richard Ruzika to Gary Cohn, "Are you living Morgatages [sic]," GS MBS-E-016165784 (Mr. Ruzika: "You know and I know this position was allowed to get too big – for the liquidity in the market, our infrastructure, and the ability of our traders. That statement would be the same even if we had gotten the market direction correct –although the vultures would not be circling.").
¹⁶²⁵ See, e.g., 12/15/2006 email from David Viniar to Tom Montag, "Subprime Risk Meeting with Viniar/McMahon Summary," GS MBS-E-009726498, Hearing Exhibit 4/27-3 ("there will be very good opportunities as the markets goes into what is likely to be even greater distress"); 2/8/2007 email from Daniel Sparks, "Post," GS MBS-E- 002201668, Hearing Exhibit 4/27-7 ("Subprime environment going from bad to worse (think whack a mole)."); 1/9/2007 Goldman Presentation, "Mortgage Department Update," GS M BS-E-002320968 ("Risks, Challenges and Structural Issues: –Very tough going in Resi Credit world – p&l [profit and loss] will be challenging; –Housing price and loan volume declines; –Investing in business in very difficult environment"); cf. 11/1/2006 Goldman Structured Products Strategist memorandum, "Q3 Mortgage Investor Survey," GS MBS-E-006576068-76 ("Clients expect a downturn in housing in 2007, investors worried about high LTV [loan-to-value], low/no doc loans, pay option ARMs, origination volumes to be down 10% in 2007").
¹⁶²⁶ Subcommittee interview of Peter Ostrem (10/5/2010); Subcommittee interview of Darryl Herrick (10/13/2010) .
¹⁶²⁷ Subcommittee interview of Peter Ostrem (10/5/2010). See also, e.g., 8/10/2006 email from Peter Ostrem to Daniel Sparks, "Leh CDO Fund," GS MBS-E-010898470 (urging Goldman to "do our own fund. SP CDO desk. Big time.").
¹⁶²⁸ Subcommittee interview of Peter Ostrem (10/5/2010).
¹⁶²⁹ 6/8/2006 email from Darryl Herrick to Peter Ostrem, "**GS ABS** RMBS CDS Lineup," GS MBS-E- 016445770.
¹⁶³⁰ Subcommittee interview of Daniel Sparks (4/15/2010); Subcommittee interview of Peter Ostrem (10/5/2010).
¹⁶³¹ See 5/19/2007 Goldman presentation, "Mortgages CDO Origination – Retained Positions & W arehouse Collateral, May 2007," GS MBS-E-010951926 ("average ramp period 6-9 months").
¹⁶³² See, e.g. 3/7/2007 and 3/13/2007 internal emails, "Timberwolf I, Ltd. Preliminary Offering Circular," GS MBS- E-001800634 (Collateral manager Greywolf wrote: "W e will not be fully ramped and I want to use the remaining bucket strategically. Is it OK if we have 5% ramp post-close?" Goldman responded: "W e represented to BSAM [Bear Stearns Asset Management] that deal would be fully ramped upon closing. As long as they're ok (or get veto rights), I don't have any issue.").
¹⁶³³ Subcommittee interview of Daniel Sparks (4/15/2010); Subcommittee interview of David Lehman (4/12/2010).
¹⁶³⁴ See, e.g., 3/16/2007 Goldman memorandum from Mitch Resnick and Peter Ostrem to GSI Risk Committee, "GSI W arehousing for Structured Product CDOs," GS MBS-E-001806010; 2/8/2007 email from Daniel Sparks to Messrs. Cohn, Montag, Viniar et al., "Post," GS M BS-E-002201668, Hearing Exhibit 4/27-7 ("Loan business is long by nature and goal is to mitigate."); Subcommittee interview of Peter Ostrem (10/15/2010).
¹⁶³⁵ 3/16/2007 Goldman memorandum from Mitch Resnick and Peter Ostrem to GSI Risk Committee, "GSI W arehousing for Structured Product CDOs," GS MBS-E-001806010.
¹⁶³⁶ Id.
¹⁶³⁷ 2/28/2007 email from David Rosenblum to Peter Ostrem, "Pete– pls send me cob 2/28 MTM for SP CDO W H's first thing in the morning," GS M BS-E-001800707; 2/28/2007 email from David Rosenblum, "Hedges Status Report," GS MBS-E-002640538 (new ABX hedges added and other hedges allocated to ensure that CDO warehouse risk was fully hedged); 2/22/2007 email from Peter Ostrem to David Rosenblum, "League Tables," GS MBS-E- 001800683 ("FYI Liquidating 3 warehouses tomorrow."); 2/22/2007 email from Daniel Sparks to Tom Montag, GS
¹⁶³⁸ 12/7/2006 email chain between Daniel Sparks and Tom Montag, "More thorough response," GS MBS-E- 010931324. Mr. Montag also raised the possibility of hiring a trader from the Paulson hedge fund to help Goldman short the mortgage market. In addition, the email exchange indicates that Goldman had previously done $7 billion in transactions with the Paulson hedge fund, but had not done much with the hedge fund recently. Mr. Sparks wrote: "They had asked us to do another tranched protection trade for them, and seem fine with it being pushed to January." Id. The tranched protection trade for Paulson that Mr. Sparks mentioned later became the Abacus 2007-AC1 CDO discussed in this Report.
¹⁶³⁹ 12/7/2006 email chain between Tom Montag and David Viniar, GS MBS-E-009756572.
¹⁶⁴⁰ Subcommittee interview of David Viniar (4/13/2010).
¹⁶⁴¹ 12/14/2006 email from Daniel Sparks, "Subprime risk meeting with Viniar/McMahon Summary," GS MBS-E- 009726498, Hearing Exhibit 4/27-3.
¹⁶⁴² Id. See also 12/15/2006 email from David Viniar to Tom Montag, GS MBS-E-009726498, Hearing Exhibit 4/27-3.
¹⁶⁴³ Subcommittee interview of David Viniar (4/13/2010), Daniel Sparks (4/15/2010), and David Lehman (4/12/2010).
¹⁶⁴⁴ Subcommittee interview of David Viniar (4/13/2010) .
¹⁶⁴⁵ Id.
¹⁶⁴⁶ Id. In terms of risk reduction, taking on offsetting short positions to reduce long positions does not necessarily offer the same degree of certainty of risk protection as simply selling off the long assets. In many cases, the offsets may not perfectly match, leaving some degree of risk exposure known as "basis risk." See, e.g., 2/12/2007 email from Mr. Sobel to Mr. Cohn, "Post today," GS MBS-E-009763506 ("Risk that concerns me is basis between ABX and single names."); 2/11/2007 email from Tom Montag, GS M BS-E-009688192 (discussing ABX offsets: "There is no est[imated] loss in the basis risk. Big wildcard. They [the traders] think they have correlation right and moves either way should be ok but obviously index assumptions have been wrong starting last may or june when positions were being put on and the gains seduced us to do more.").
¹⁶⁴⁷ 12/14/2006 email from Daniel Sparks, "Subprime risk meeting with Viniar/McMahon Summary," GS MBS-E- 009726498, Hearing Exhibit 4/27-3. "Residuals" refers to the equity positions that Goldman had retained from the RMBS and CDO securitizations it originated.
¹⁶⁴⁸ 12/14/2006 email from Tom Montag to David Viniar, GS MBS-E-009726498, Hearing Exhibit 4/27-3.
¹⁶⁴⁹ 12/15/2006 email from David Viniar to Tom Montag, GS MBS-E-009726498, Hearing Exhibit 4/27-3.
¹⁶⁵⁰ See 1/5/2007 "Notionals (ABX convention)" chart, taken from "Index and Single Name Position History 2006 as of 05Jan07.xls," attachment to 1/8/2007 email from Joshua Birnbaum to Daniel Sparks, "ABX Subprime Risk by vintages," GS MBS-E-010214409. The SPG Desk also periodically updated that chart. See, e.g., chart attachments to 2/6/2007 email from Kevin Kao to Joshua Birnbaum, "Index and Single Name Position History 2006 as of
¹⁶⁵¹ 12/14/2007 email from Mr. Gasvoda, "Retained bonds," GS MBS-E-010935323, Hearing Exhibit 4/27-72.
¹⁶⁵² 2/9/2007 email exchange between Kevin Gasvoda and sales syndicate, "GS Syndicate RM BS Axes (INTERNAL)," GS MBS-E-010370495, Hearing Exhibit 4/27-73.
¹⁶⁵³ 2/11/2007 email exchange between Lloyd Blankfein and Tom Montag, "Mortgage Risk – Credit residential," GS MBS-E-009686838, Hearing Exhibit 4/27-130.
¹⁶⁵⁴ Id.
¹⁶⁵⁵ 2/23/2007 "Significant Cash Inventory Change (Q1'07 vs. Q4'06)," prepared by Goldman, GS MBS-E- 010037310, Hearing Exhibit 4/27-12. "Scratch and dent" loans are loans that are not performing.
¹⁶⁵⁶ 3/26/2007 Goldman presentation to Board of Directors, "Subprime Mortgage Business," GS MBS-E- 005565527, Hearing Exhibit 4/27-22 ; 3/14/2007 Goldman Presentation to SEC, "Subprime Mortgage Business 14- Mar-2007," at 7, GS MBS-E-010022328.
¹⁶⁵⁷ 3/2/2007 email from Patrick W elch to Craig Broderick, "Audit Committee Package_Feb 21_Draft_M ortgage_Page.ppt," GS MBS-E-009986805, Hearing Exhibit 4/27-63. In the context of assets offered by a customer to the Correlation Desk, it appears that Mr. Egol also may have returned an unappealing bid: "Many of these assets are garbage. I told her should would not like the level [the price bid by Goldman] ...." 2/26/2007 email from Jon Egol, "Portfolio for Proposed Transaction 070226 (2).xls," GS MBS-E-002631719.
¹⁶⁵⁸ 4/22/2007 email from Kevin Gasvoda, "Resi credit QTD/YTD P&L and positions," GS MBS-E-010474983.
¹⁶⁵⁹ The Mortgage Department also worked to sell assets from its CDO warehouse accounts, an issue discussed in part below and in part in connection with the Report's section on Goldman's CDO activity.
¹⁶⁶⁰ Subcommittee interview of Michael Swenson (4/16/2010).
¹⁶⁶¹ Id. By adopting the strategy of offsetting the long positions with similar, but not necessarily identical short positions, the SPG Desk was incurring a very large amount of basis risk – the risk of a mismatch between the offsetting assets. Mr. Sparks and other senior Goldman executives wanted to reduce that basis risk by paring the positions down on both sides – selling the long assets and covering the short assets. The SPG Desk was not, however, making the progress Mr. Sparks wanted to see in reducing the basis risk. On January 23, 2007, Mr. Sparks wrote to Messrs. Swenson, Birnbaum, and Lehman: "It does not look like you made any progress on the things we discussed – I want a plan and daily reports on progress. Not to be difficult, but if you 3 are too busy I can add someone who can focus on the issue. My other concern is I want to stay nimble, and not get too wedded to one way positions – getting massively short could be more painful than what we have experienced." 1/23/2007 email from Daniel Sparks, GS MBS-E-010267341. A week later, Mr. Swenson requested a meeting with Mr. Sparks and Mr. Ruzika to discuss the difficulties the traders were encountering in reducing the basis risk. He wrote: "I want to go over the facts of what we are up against." 1/30/2007 email from Michael Swenson to David Lehman, GS M BS-E-011375519. Mr. Swenson and Mr. Birnbaum met with Mr. Ruzika and Mr. Sparks around February 1, 2007. The group apparently discussed the SPG Desk's net short position and the difficulties of reducing the basis risk. On February 5, 2007, Mr. Ruzika wrote to M r. Cohn about how the short position was "allowed to get too big" and stated: "I don't want to be short – I want to neutralize the risk and shed our basis risk." 2/5/2007 email from Richard Ruzika to Gary Cohn, "Are you living Morgatages [sic]?," GS MBS-E- 016165784. About a week later, when the large net short positions began producing large profits, Mr. Ruzika apparently changed his mind and became supportive of the large net short, though he still wanted to reduce basis risk "whenever possible." 2/13/2007 email from Richard Ruzika to Gary Cohn, "Catch up," GS MBS-E-019794071.
¹⁶⁶² Salem 2007 Self-Review, GS-PSI-03157 at 71-72.
¹⁶⁶³ The reference to 70% in the email involves correlation assumptions. Correlation trading depends upon assumptions about the relative values between one asset (such as a CDS contract referencing the ABX Index) and another (such as a CDS contract referencing a single RMBS security). A correlation value of 100% means that the values of both assets move together in the same amounts. W ith 100% correlation, a 10% decline in the value of one asset implies a 10% decline in the value of the other. The correlation ratios between different assets are a matter of the trading desk's informed judgment. As one Goldman mortgage trader noted: "We should discuss base correlations live . . . there is no market standard for calculating them." 3/26/2007 email from SPG Trading to Goldman London, "ABX – TABX : Request from [customer]," GS MBS-E-021893369. Once a correlation ratio was set, however, the general practice at Goldman was to change correlation ratios only upon a showing of observable market trade prices supporting the change. Traders, thus, engaged in frequent discussions of "observability." A change in correlation ratios could result in an immediate markdown or markup of particular positions, which could effect Goldman's profit and loss calculations, collateral calls, and the value of individual customer positions. In his February 12 email, Mr. Sparks wrote that the SPG Desk had been marking down the value of single name long CDS contracts by only one-third of the amount that would apply if the desk's true calculation of the correlation between single name and ABX CDS contracts was correct – that the two products were more closely correlated than the market recognized. Mr. Swenson told the Subcommittee that, in late 2006 and early 2007, single name long CDS contracts were trading at higher prices than similar ABX CDS contracts, and the observable market prices of single name CDS contracts were not falling as quickly as market professionals thought they should. Subcommittee interview of Michael Swenson (4/16/2010). Nonetheless, in a steeply declining market, Goldman's Mortgage Department assumed that the single name long CDS contracts would eventually fall to the same low values as the long ABX contracts. If that happened, since the SPG Desk was net short single name CDS contracts, the anticipated drop in value would result in an equivalent amount of profit for the desk's short position – hence, Mr. Sparks' reference to the "upside embedded in" the book. On February 14, 2007, the Mortgage Department actually captured that upside by changing its correlation assumptions to recognize a higher correlation between single name CDS and ABX CDS contracts. Using the new assumptions, Goldman then marked down the value of its customers' single name CDS contracts to levels closer to the ABX Index assets. As the short party to those same CDS contracts, Goldman also realized a profit of $100 million in a single day. See 2/14/2007 email from Arbind Jha to Michael Swenson, "Mortgages Estimate REVISED," GS MBS-E-012474685.
¹⁶⁶⁴ 2/12/2007 email from Daniel Sparks, "Post today," GS MBS-E-009763506.
¹⁶⁶⁵ 2/14/2007 email from Daniel Sparks, "Post," GS MBS-E-009635410, Hearing Exhibit 4/27-8.
¹⁶⁶⁶ 3/21/2007 email from Daniel Sparks to Tom Montag, GS MBS-E-010629379, Hearing Exhibit 4/27-21. See also 2/19/2007 email from Mr. Sparks to Mr. Montag, "2 things," GS MBS-E-010378492 ("Please send a short note to Josh Birnbaum, Mike Swenson and David Lehman telling them great week – short singles and short CDOs."); 2/28/2007 email from Michael Sherwood to Messrs. Sparks, Swenson, Birnbaum and Lehman, "ABX/Single name notional/risk history," GS M BS-E-010389296 (Mr. Sherwood, a London managing director and member of the Firmwide Risk Committee, wrote: "Many congrats on last few weeks trading ... keep it up!").
¹⁶⁶⁷ 2/8/2007 email from Daniel Sparks, "Post," GS MBS-E-002201668, Hearing Exhibit 4/27-7.
¹⁶⁶⁸ Id.; see also 3/10/2007 email from Mr. Dinias to Daniel Sparks, "Mortgage Presentation to the board," GS MBS-E-013323395, Hearing Exhibit 4/27-17; 3/11/2007 email from Daniel Sparks, "Risk Changes Over Quarter," GS MBS-E-010400546, Hearing Exhibit 4/27-18; cf. 3/27/2007 Presentation to GS Board of Directors, "Subprime Mortgage Business," GS MBS-E-005565527, Hearing Exhibit 4/27-22.
¹⁶⁶⁹ 9/26/2007 2007 EMD Reviews, Joshua Birnbaum Self-Review, Hearing Exhibit 4/27-55c. In his self-review, Mr. Birnbaum provided a detailed explanation of his reasons for recommending that the SPG Desk go "VERY short": "(1) Given how much ABX we had purchased through the broker market in 2006, the world would think GS was very long for the foreseeable future. W e could use that fear to our advantage if we could flip our risk, (2) After unsuccessfully trying to sell our long to some of [a Goldman salesperson's] accounts, I realized traditional distressed buyers were no more likely to buy ABX at 85, 75, 65, etc. than at 95. The cash flow was just too binary, so there would be little support if negative momentum began, (3) The fundamentals for mortgage credit were undeniably deteriorating, (4) CDO managers were in denial ... [their positive market] sentiments would allow us to amass large amounts of cheap single name protection if we desired, and (5) If the market truly tanked, the already large CDO warehouses would have to liquidate, further exacerbating the move and ultimately allowing us to cover." Id.
¹⁶⁷⁰ Id.
¹⁶⁷¹ Id.
¹⁶⁷² Id.
¹⁶⁷³ Salem 2007 Self-Review at GS-PSI-03157 at 71-72.
¹⁶⁷⁴ Subcommittee interview of Deeb Salem (10/6/2010).
¹⁶⁷⁵ 3/12/2007 Mortgage Capital Committee memo, "ABACUS Transaction to be Lightly-Managed by Lion Capital," at 2, GS MBS-E-002665382, Hearing Exhibit 4/27-150.
¹⁶⁷⁶ See 3/10/2007 email from Mr. Dinias to Daniel Sparks, "Mortgage Presentation to the board," GS MBS-E- 013323395, Hearing Exhibit 4/27-17; 3/11/2007 email from Daniel Sparks, "Risk Changes Over Quarter," GS MBS- E-010400546, Hearing Exhibit 4/27-18; 3/27/2007 presentation to GS Board of Directors, "Subprime Mortgage
¹⁶⁷⁷ Salem 2007 Self-Evaluation [emphasis in original].
¹⁶⁷⁸ 8/23/2007 email from Tom Montag, "Current Outstanding Notional SN ames," GS MBS-E-010621231.
¹⁶⁷⁹ 2/8/2007 email from Bill McMahon, "VaR limit for Mtg SPG," GS MBS-E-009980807.
¹⁶⁸⁰ 2/23/2007 Goldman internal document, "Mortgage VaR Change (Q1'07 vs. Q4'06)," GS MBS-E-010037310, Hearing Exhibit 4/27-12; 3/8/2007 email from Jha Arbind, "Risk changes over the quarter," GS MBS-E-010400546, Hearing Exhibit 4/27-18.
¹⁶⁸¹ Id.
¹⁶⁸² 2/23/2007 Goldman internal document, "Mortgage VaR Change (Q1'07 vs. Q4'06)," GS MBS-E-010037310, Hearing Exhibit 4/27-12.
¹⁶⁸³ 2/14/2007 email from Mr. Gmelich to Tom Montag, GS MBS-E-016165580.
¹⁶⁸⁴ Id.
¹⁶⁸⁵ 2/22/2007 email from Daniel Sparks to Messrs. Birnbaum, Swenson and Lehman, "Block size tranche protection offers for Paulson or others," GS MBS-E-010381411.
¹⁶⁸⁶ Id.
¹⁶⁸⁷ Subcommittee interview of Joshua Birnbaum (4/22/2010) (Mr. Birnbaum wanted to continue to hold the short position, rather than cover it, since he thought it would earn additional profit); see also 2007 Birnbaum Self-Review, Hearing Exhibit 4/27-55c (Mr. Birnbaum wrote that he should have argued more forcefully against covering the shorts in February 2007).
¹⁶⁸⁸ 2/21/2007 email chain from Daniel Sparks, "Mortgages today," GS MBS-E-010381094, Hearing Exhibit 4/27- 10. In response, Mr. Viniar wrote to M r. Sparks: "Good start. Keep covering." 2/21/2007 email from David Viniar to Daniel Sparks, "Mortgages today," GS M BS-E-009757841. In another email, Mr. Montag wrote: "How hard are
¹⁶⁸⁹ 2/22/2007 email from Richard Ruzika to Tom Montag and Daniel Sparks, GS MBS-E-010381967.
¹⁶⁹⁰ Subcommittee interview of Michael Swenson (4/16/2010).
¹⁶⁹¹ Id.
¹⁶⁹² Id.
¹⁶⁹³ A similar situation existed at the time in the market for commercial mortgage backed securities (CMBS). In a February email to Mr. Lehman, a CM BS trader remarked: "It's amazing that everyone was lifting [accepting bids on] cmbs 1 and 2 [CMBX indices], but NOBODY will bid single names." 2/23/2007 email from [CMBS trader] to David Lehman, "CT CDO w/ [Bank]," GS M BS-E-011270138-39 [emphasis in original].
¹⁶⁹⁴ 2/25/2007 email from Daniel Sparks to Tom Montag, "Questions you had asked," GS MBS-E-010987763.
¹⁶⁹⁵ 2/27/2007 email from Richard Ruzika to Tom Montag, Justin Gmelich, and Daniel Sparks, GS MBS-E- 002204942.
¹⁶⁹⁶ Id.
¹⁶⁹⁷ 2/27/2007 email from Daniel Sparks, "Opcom Directive," GS MBS-E-017250218.
¹⁶⁹⁸ 2/27/2007 email from Daniel Sparks, "Goals," GS MBS-E-010387086, Hearing Exhibit 4/27-11.
¹⁶⁹⁹ See, e.g., 2/22/2007 Goldman internal emails, GS MBS-E-018938493, GS MBS-E-018940734; 2/27/2007 email from Michael Swenson to Bill McM ahon, GS M BS-E-012502371 ("Bought 1.5bb of sn baa3 risk from harbinger."); 3/1/2007 email from Daniel Sparks, "SN Protection Offers for Harbinger (50 names)," GS MBS-E-019460848 ("Trade was executed at +725 "); 3/3/2007 email to Michael Swenson and Daniel Sparks, "Harbinger Update," GS MBS-E-010707216. As a result, Harbinger became Goldman's largest hedge fund counterparty credit risk: "Harbinger is our #1 hedge fund exposure globally. W e had to explain this to the SEC this month." 4/20/2007 Goldman internal email, "Harbinger didn't add the last piece we had spoke of, but are now thinking of adding ~50mm," GS M BS-E-012523933. Harbinger was also instrumental in Goldman's second round of short covering efforts in August 2007. See, e.g., 7/30/2007 email to Michael Swenson, "Harbinger Single-A Offerings.xls," GS MBS-E-012374026; 8/23/2007 email from Michael Swenson, "Harbinger Post," GS MBS-E-009739009.
¹⁷⁰⁰ 2/28/2006 Goldman internal memorandum, "Firmwide Risk Committee: February 28th FW R Minutes, "GS MBS-E-009687468, Hearing Exhibit 4/27-13 [sic - correct year is 2007].
¹⁷⁰¹ Id. See also 2007 Swenson Self-Review ("we prudently covered $5bb of single-name shorts at the all time lows at the time back in February"), Hearing Exhibit 4/27-55b.
¹⁷⁰² 3/5/2007 email from Tom Montag, GS MBS-E-010393092. Goldman COO Gary Cohn expressed concern that a positive move in the markets would cause the Mortgage Department to incur large losses due to its net short: "A big plus would hurt the Mortgage business but Justin [Gmelich] thinks he has a big trade lined up for the morning to get us out of a bunch of our short risk." 3/5/2007 email from Gary Cohn, GS MBS-E-009656525, Hearing Exhibit 4/27- 15. The big trade referred to by Mr. Cohn was one of the Harbinger trades that enabled Goldman to cover $4 billion of its single name CDS short positions.
¹⁷⁰³ 3/9/2007 email to David Viniar, "Mortgage Talking Points for Earnings Call," GS M BS-E-009762678, Hearing Exhibit 4/27-16.
¹⁷⁰⁴ 9/17/2007 Presentation to GS Board of Directors, Residential Mortgage Business at 5, GS MBS-E-001793840, Hearing Exhibit 4/27-41.
¹⁷⁰⁵ 3/17/2007 email from Daniel Sparks and Tom Montag, "Cactus Delivers," GS MBS-E-009632839.
¹⁷⁰⁶ Id. Mr. Montag's comment suggests that he may have wanted the Mortgage Department to reduce the size of both its longs and shorts to reduce its overall risk, or to reduce its basis risk, the risk that arises when two different types of assets are used to offset one another, and the assets are imperfectly matched.
¹⁷⁰⁷ 3/14/2007 email from David Lehman, "ABS Trading - Subprime risk," GS MBS-E-010397102.
¹⁷⁰⁸ Id.
¹⁷⁰⁹ See "Notionals (ABX convention)," chart attached to 5/23/2007 email from Kevin Kao to Joshua Birnbaum, "RM BS Subprime risk history as of 18May07," GS MBS-E-012890599.
¹⁷¹⁰ See, e.g., 3/8/2007 email from Mr. Sparks, "Mortgage Risk," GS MBS-E-002206279, Hearing Exhibit 4/27-75 (noting Mortgage Department's $9 billion short position on the AAA ABX index).
¹⁷¹¹ Subcommittee interview of Daniel Sparks (4/15/2010), David Lehman (4/12/2010), Joshua Birnbaum (4/22/2010), and Michael Swenson (4/16/2010).
¹⁷¹² See chart entitled "Goldman Sachs Mortgage Department Total Net Short Position, February-December 2007 in $ Billions," prepared by the Subcommittee, April 2010, updated January 2011, derived from Goldman Mortgage Strategies and Mortgage Department Top Sheets.
¹⁷¹³ Subcommittee interview of Daniel Sparks (10/3/2010).
¹⁷¹⁴ 8/17/2007 Goldman internal chart, "RM BS Subprime Notional History (Mtg Dept.)," GS MBS-E-012928391, Hearing Exhibit 4/27-56a. The analyst's cover email stated: "The attached spreadsheet covers the single name and ABX positions of the entire mortgage department for the fiscal year 2007. I spot checked the numbers with risk reports they tie out well." See also 8/17/2007 email from Joshua Birnbaum, GS MBS-012928388, Hearing Exhibit 4/27-56b.
¹⁷¹⁵ W hen shown the chart during his interview, Mr. Sparks told the Subcommittee he was unfamiliar with it and pointed what he believed to be an anomaly related to its depiction of the Mortgage Department's short position involving BBB rated RMBS securities. He also indicated that he could not confirm its depiction of the AAA ABX short position. Since multiple Goldman email messages confirm the existence of the AAA ABX short position during most of Goldman's fiscal year 2007, however, the chart's depiction of that position as a nearly flat line at about $9 billion short until July 2007 appears consistent with the other evidence.
¹⁷¹⁶ 3/4/2007 email from Kevin Gasvoda to Daniel Sparks, "Quick thoughts on ABX AAA risk," GS MBS-E- 010398072.
¹⁷¹⁷ Id. Despite Mr. Gasvoda's suggestion that he might try to cover a portion of the $8 billion net short, the AAA ABX short position in Mr. Gasvoda's area appears to have remained unchanged until around July 2007. 8/17/2007 Goldman internal chart, "RMBS Subprime Notional History (M tg Dept.)," GS MBS-E-012928391, Hearing Exhibit 4/27-56a.
¹⁷¹⁸ Goldman's hedging practice was that each desk was responsible for its own hedges. Accordingly, different desks would not necessarily share information about their respective hedges, even if both were hedging with the same product, such as an ABX short.
¹⁷¹⁹ 3/5/2007 email from Cyrus Pouraghabagher, "ABX hedges for Resi businesses," GS MBS-E-012085546.
¹⁷²⁰ Id.
¹⁷²¹ 2/28/2007 email from Jonathan Egol to Fabrice Tourre, "Hedges Status Report," GS MBS-E-002628642.
¹⁷²² The report from Mr. Gasvoda's group may have inadvertently omitted a particular loan book that was holding the additional $1 billion in hedges, the figure may be a typographical error, or the group may have chosen not to disclose some of its hedges. The Goldman personnel interviewed by the Subcommittee were unable to explain the discrepancy.
¹⁷²³ 3/8/2007 email from Daniel Sparks, "Mortgage Risk," GS MBS-E-002206279, Hearing Exhibit 4/27-75.
¹⁷²⁴ Id. See also 8/23/2007 email from Tom Montag to Lloyd Blankfein, GS MBS-E-009585951, Hearing Exhibit 4/27-37 (M ortgage Department "bought back 9 billion of AAA abx index over last two weeks." ); 8/23/2007 email from Tom Montag to Gary Cohn and David Viniar, "Harbinger Post," GS MBS-E-009739009.
¹⁷²⁵ 3/4/2007 email Kevin Gasvoda to Daniel Sparks, "Quick thoughts on ABX AAA risk," GS MBS-E-010398072 (" we get good jump risk . . . Net, think this is a good position to have on given downside protection and relatively light upside pain.").
¹⁷²⁶ Subcommittee interview of Daniel Sparks (4/15/2010).
¹⁷²⁷ Id.
¹⁷²⁸ Id.
¹⁷²⁹ See 8/17/2007 Goldman internal chart, "RMBS Subprime Notional History (Mtg Dept.)," GS MBS-E- 012928391, Hearing Exhibit 4/27-56a.
¹⁷³⁰ The AAA ABX short appears to have served as a hedge for long assets in the W hole Loan and CDO Origination areas in M arch 2007. Many of those assets were sold during the spring and summer of 2007. If a hedged asset is sold, the hedge is ordinarily unwound commensurately. See, e.g., 5/30/2007 email from David Lehman, "ABX hedges – Buy order," GS M BS-E-011106690 (directing the unwinding of certain short ABX hedges held against the CDO Origination Desk when the CDO positions were transferred to another desk).
¹⁷³¹ See 8/17/2007 Goldman internal chart, "RMBS Subprime Notional History (Mtg Dept.)," GS MBS-E- 012928391, Hearing Exhibit 4/27-56a.
¹⁷³² 3/26/2007 Goldman presentation to Board of Directors, "Subprime Mortgage Business," GS MBS-E- 005565527, Hearing Exhibit 4/27-22. While the final version of the presentation indicated Goldman had an overall net long position in subprime assets by about $900 million, a near-final draft of the presentation indicated that Goldman had an overall net short position of $2.8 billion. 3/16/2007 draft presentation to Board of Directors by Daniel Sparks, "Subprime Mortgage Business," GS MBS-E-002207710. The primary difference between the two figures appears to be the inclusion in the final version of Goldman's net long holdings of Alt A mortgages, even though Alt A assets are not usually considered to be subprime mortgages. Subcommittee interview of David Viniar (4/13/2010).
¹⁷³³ Id. at 4.
¹⁷³⁴ Id. at 8 [footnotes defining CDO and CDS omitted].
¹⁷³⁵ 9/17/2007 Presentation to Goldman Sachs Board of Directors, Residential Mortgage Business, at 5, GS MBS-E- 001793840, Hearing Exhibit 4/27-41.
¹⁷³⁶ 3/26/2007 Goldman Sachs presentation to Board of Directors, "Subprime Mortgage Business," GS MBS-E- 005565527, Hearing Exhibit 4/27-22.
¹⁷³⁷ See, e.g., Salem 2007 Self-Review.
¹⁷³⁸ See, e.g. 4/5/2007 email from Deeb Salem, "let's sell ~200mm in Baa2 protection . . .," GS MBS-E-004516519 (Mr. Swenson's reply: "Make that 500mm").
¹⁷³⁹ Deeb Salem 2007 Self-Review [emphasis in original].
¹⁷⁴⁰ Subcommittee interview of Deeb Salem (10/6/2010).
¹⁷⁴¹ Id.
¹⁷⁴² 5/25/2007 email from Michael Swenson to Edwin Chin and Deeb Salem, GS MBS-E-012443115.
¹⁷⁴³ 5/29/2007 email from Michael Swenson to Deeb Salem, "they want to think about doing this again," GS MBS- E-012561798.
¹⁷⁴⁴ Subcommittee interview of Michael Swenson (10/8/2010).
¹⁷⁴⁵ Goldman's CDS collateral agreements were usually bilateral, meaning collateral could flow either way, to the short or long party, depending upon price movements in the underlying assets. Subcommittee interview of Michael Swenson (10/18/2010). Clients wrote emails to Goldman questioning how they could owe collateral on CDS contracts they had only recently purchased from Goldman.
¹⁷⁴⁶ 5/21/2007 email from Deeb Salem to Michael Swenson and Edwin Chin, "A few things pain-related," GS MBS- E-021887795 [ellipses in original].
¹⁷⁴⁷ Id.
¹⁷⁴⁸ 5/21/2007 email to Edwin Chin, "Edwin–Important–Stanfield levels," GS MBS-E-012570169.
¹⁷⁴⁹ Id.
¹⁷⁵⁰ 5/24/2007 email from Stanfield, "Our thoughts on single-name RM BS CDS," GS MBS-E-012891722.
¹⁷⁵¹ 5/31/2007 email from sales to Edwin Chin and Deeb Salem, "Stark CDO CDS potential trade 5/31," GS MBS- E-012443662.
¹⁷⁵² Id.; see also, e.g., "Valuation & Pricing Related to Transactions with AIG," prepared by Goldman in response to inquiry by the Financial Crisis Inquiry Commission, GS MBS 0000039096.
¹⁷⁵³ 5/31/2007 Goldman email chain, "Stark CDO CDS potential trade 5/31," GS MBS-E-012443675. Mr. Swenson made no mention of his email from two days earlier in which he recommended lowering CDS values to "have people totally demoralized." 5/29/2007 email from Michael Swenson to Deeb Salem, GS MBS-E-012561798.
¹⁷⁵⁴ 6/7/2007 Goldman internal email chain, "BSAM Post," GS MBS-E-011184213.
¹⁷⁵⁵ 6/7/2007 email from Deeb Salem to Michael Swenson and Edwin Chin, GS MBS-E-012444252.
¹⁷⁵⁶ Id.
¹⁷⁵⁷ Id.
¹⁷⁵⁸ Id.
¹⁷⁵⁹ 6/8/2007 email from Michael Swenson to Benjamin Case, Edwin Chin, and Deeb Salem, "CDO CDS protection offers," GS MBS-E-012551726.
¹⁷⁶⁰ 6/10/2007 email from Michael Swenson to Deeb Salem, Edwin Chin, and salesman, "CDSs on CDOs," GS MBS-E-012551460.
¹⁷⁶¹ Id.
¹⁷⁶² 6/13/2007 email from sales, "CDO protection," GS MBS-E-012445931.
¹⁷⁶³ 6/11/2007 Goldman email chain, "Please advise – Client challenging marks," GS MBS-E-018947548.
¹⁷⁶⁴ 6/12/2007 email from controllers, "CDS," GS MBS-E-012445404.
¹⁷⁶⁵ 6/19/2007 email from controllers, "A3 subprime bonds in transition account," GS M BS-E-012458169. Mr. Swenson replied: "Tier 4 bonds talk to Deeb [Salem]."
¹⁷⁶⁶ See Markowski v. SEC, 274 F.3d 525, 527-28 (D.C. Cir. 2001) (Congress determined that "'manipulation' may be illegal solely because of the actor's purpose"); In re IPO Litigation, 241 F. Supp. 2d 281, 391 (S.D.N.Y. 2003) (no additional requirements aside from manipulative intent); H.R. Rep. No. 1383, 73rd Cong., 2d Sess. 20 (1934) (under Securities Exchange Act, "if a person is merely trying to acquire a large block of stock for investment, or desires to dispose of his holdings, his knowledge that in doing so he will affect the market price does not make his actions unlawful. His transactions become unlawful only when they are made for the purpose of raising or depressing the market price."); but see GLF Advantage Fund, Ltd. v. Colkitt, 272 F.3d 189, 205 (3d Cir. 2001) (requiring, in addition to manipulative intent, "that the alleged manipulator injected inaccurate information into the market or created a false impression of market activity"). Single name CDS contracts referencing RMBS and CDO securities appear to qualify as "security-based swap agreements" subject to anti-manipulation and anti-fraud prohibitions under the federal securities laws.
¹⁷⁶⁷ PSI Net Short Position Chart; 8/17/2007 Goldman chart, "RMBS Subprime Notional History (Mtg Dept.)," GS MBS-E-012928391, Hearing Exhibit 4/27-56a.
¹⁷⁶⁸ 7/25/2007 email from Mr. Viniar to Mr. Cohn, "Private & Confidential: FICC Financial Package 07/25/07," GS MBS-E-009861799, Hearing Exhibit 4/27-26.
¹⁷⁶⁹ See 6/7/2007 Goldman email chain, "BSAM Post," GS MBS-E-011184213.
¹⁷⁷⁰ Id. Some have suggested that the financial problems experienced by the Bear Stearns hedge funds were caused in part by severe markdowns taken by Goldman on assets held in the funds' portfolios, and that Goldman caused the funds to collapse. In its final report, the Financial Crisis Inquiry Commission (FCIC) briefly addressed these allegations. See The Financial Crisis Inquiry Report 2010 at 237-40, 244 (hereinafter "Final Report"). Goldman denied the allegations with respect to its April and M ay 2007 marks in filings with the FCIC. See 11/1/2010 letter from Goldman counsel Janet Broecke to FCIC, "FCIC Requests for Documents and Information" and Appendices A- G, available at www2.goldmansachs.com. The FCIC's Final Report was critical of Goldman's marks in general as being significantly lower than those of other banks and noted in particular its collateral dispute with AIG. See Final Report at 243-44, 265-71. W ith respect to the Bear Stearns hedge funds, however, the Final Report merely noted that Bear Stearns had disputed marks from Goldman and three other banks and cited the testimony of the funds' portfolio manager, Ralph Cioffi, that "a number of factors contributed to the April revision [in the hedge funds' values, which ultimately led to the funds' collapse], and Goldman's marks were one factor." Final Report at 240. In addition to the markdowns in April and May, Goldman also marked down certain CDO securities held by the Bear Stearns funds in June 2007, but it appears those June markdowns did not play a significant role in the hedge funds' collapse. That month, Goldman marked down their positions in four Goldman CDOs by two points each. See, e.g., 6/8/2007 email from Jonathan Egol to Daniel Sparks, "BSAM mark recap," GS MBS-E-001920339 (Mr. Egol emailed Mr. Sparks a recap of the Bear Stearns markdowns and stated: "W e lowered the marks on 4 bonds down 2 pts each."). Mr. Swenson had urged larger markdowns, but his advice was not followed. On June 7, 2007, Mr. Egol had first marked down the funds' holdings in a single Abacus CDO by 2 points, from 89 to 87. Mr. Egol emailed Mr. Sparks a spreadsheet with a cover note: "GS exposure to BSAM [Bear Stearns Asset Management] as of today. ABACUS mark corrected to 87 to handle." 6/7/2007 email from Mr. Egol to Mr. Sparks GS MBS-E-003375593. Since Abacus was only one of four Goldman CDOs in which the Bear Stearns funds held positions, Mr. Swenson emailed Mr. Lehman recommending further markdowns: Mr. Swenson: I am on the same page [as] egol we n[e]ed to mark him [Ralph Cioffi, Portfolio Manager of the Bear Stearns funds]
¹⁷⁷¹ 6/8/2007 email to Daniel Sparks, "Heads Up – rates market volatile," GS MBS-E-010796702.
¹⁷⁷² Id.
¹⁷⁷³ 6/8/2007 email from Joshua Birnbaum, "* ABX Markets 07-1, 06-2, 06-1:11:00 a.m.," GS MBS-E-012900708.
¹⁷⁷⁴ 6/12/2007 email to Craig Broderick, "BSAM Bullet Points," GS MBS-E-009967117.
¹⁷⁷⁵ Id. A month later, on July 17, 2007, Mr. Sparks reported to Mr. Mullen and Mr. Montag that the Bear Stearns funds were "returning 9 cents and 0 cents on the dollar in the less-levered and more-levered funds." 7/17/2007 email from Daniel Sparks, "Mortgages Estimate," GS MBS-E-010857498.
¹⁷⁷⁶ 6/12/2007 email to Craig Broderick, "BSAM Bullet Points," GS MBS-E-009967117.
¹⁷⁷⁷ See 6/22/2007 emails from David Lehman, "BSAM Repo Summary," GS MBS-E-001916435. See also 6/18/2007 email from David Lehman, "Today's Bear Stearns Prices," GS MBS-E-001919600; 6/27/2007 email from Daniel Sparks to David Viniar, "CDO^2s," GS MBS-E-009747489. The prices Goldman paid to Bear Stearns on the A1B and A1C tranches of Timberwolf were approximately one cent (or 100 basis points) above its own internal marks on the Timberwolf tranches in the week of June 18, which were then at 95 and 89 points, respectively. Id. In May 2007, Goldman had completed a re-evaluation of its CDO assets, which suggested on a preliminary basis that the AAA Timberwolf securities should be marked down dramatically in value. Accordingly, Goldman may have been generous toward Bear Stearns in buying back the Timberwolf positions at 96 and 90. On the other hand, repurchasing the Timberwolf securities near its own low internal marks might have reduced the price Goldman could obtain in reselling the tranches, which it identified in a June 22 sales directive to its sales force and recommended selling at 98.5 and 95, respectively. When asked about the buyback of the Timberwolf tranches, Mr. Viniar told the Subcommittee that Goldman had financed the purchase of both tranches and may have been legally entitled to seize them, but there are circumstances in which Goldman voluntarily settles a dispute on agreed terms, rather than going through the legal process entailed in seizing and selling collateral. Subcommittee interview of David Viniar. (4/13/2010).
¹⁷⁷⁸ 6/22/2007 email from Tom Montag to Daniel Sparks, "Few Trade Posts," GS M BS-E-010849103 (Mr. Montag: "Can I get a complete rundown on everything we bought from BSAM and what's left?" Mr. Sparks: "Yes – main thing left is 300mm timberwolfs Other large positions were tmts - gone, octan - gone, abacus - we will collapse against short There were some small rmbs positions.").
¹⁷⁷⁹ At the time, a trader from another bank stated in a market update: "[T]he BSAM [Bear Stearns Asset Managment] story will dictate the tone in the market in the short term, as a continued liquidation of their holdings will put further downward price pressure on ... ABX trading." 6/18/2007 email to Edwin Chin, "ABX Open," GS MBS-E-021890868.
¹⁷⁸⁰ 9/26/2007 2007 MD Reviews, Joshua Birnbaum Self-Review, GS-PSI-01956, Hearing Exhibit 4/27-55c. The SPG Desk's ABX shorting efforts caught the attention of another Goldman trader who was apparently unaware of Mr. Birnbaum's strategy. The trader emailed: "yo-who the F- is getting short the ABX at these levels." 6/21/2007 email to Deeb Salem, GS MBS-E-021905440.
¹⁷⁸¹ This presentation was drafted to support a proposal that the SPG traders be compensated in a manner similar to hedge fund managers. 10/3/2007 "SPG Trading – 2007," presentation by Joshua Birnbaum, GS MBS-E-015654036. Mr. Birnbaum had drafted the presentation on behalf of the SPG Trading Desk as a whole. Mr. Swenson and Mr. Lehman reviewed and commented upon the presentation, and M r. Birnbaum revised it to make the changes they suggested. See, e.g., 10/2/2007 email from David Lehman to Joshua Birnbaum, "SPG Trading - 2007.ppt," GS MBS-E-015653681 (providing comments and suggesting text for presentation). Mr. Birnbaum replied and copied Mr. Swenson on the email chain as well: "I added your bullet and one more." Id. See also 10/4/2007 email from Joshua Birnbaum to Michael Swenson and David Lehman, "How's this?," GS M BS-E-015712249 (forwarding another revised bullet point for presentation). Mr. Birnbaum told the Subcommittee, however, that the SPG Trading Desk ultimately did not use the presentation. See Birnbaum responses to Subcommittee QFRs at PSI_QFR_GS0509.
¹⁷⁸² 10/3/2007 "SPG Trading – 2007," presentation by Joshua Birnbaum, GS MBS-E-015654036 [emphasis in original]. See also Birnbaum responses to Subcommittee QFRs at PSI_QFR_GS0509.
¹⁷⁸³ 6/29/2007 emails between Michael Swenson and David Lehman, "ABS Update," GS MBS-E-011154528.
¹⁷⁸⁴ 7/10/2007 Goldman internal email, "GS Cashflow/Abacus CDOs Mentioned in S&P Report on CDO Exposure to Subprime RM BS," GS MBS-E-001837256.
¹⁷⁸⁵ See id.
¹⁷⁸⁶ 7/12/2007 email from Joshua Birnbaum, "ABX Markets 07-1, 06-2, 06-1:12:00 p.m.," GS MBS-E-012944742, Hearing Exhibit 4/27-146.
¹⁷⁸⁷ 7/27/2007 email to Tom Montag, Daniel Sparks, and Donald M ullen, "Structured Products W eekly Update – 7/27/07," GS MBS-E-010876357.
¹⁷⁸⁸ 7/20/2007 email from Gary Cohn to Lloyd Blankfein, "Private & Confidential: FICC Financial Package 07/20/07," GS MBS-E-009648405, Hearing Exhibit 4/27-24.
¹⁷⁸⁹ 7/24/2007 email from David Viniar to Lloyd Blankfein, "Daily Estimate 07-24-07 – Net Revenues $74M," GS MBS-E-009690033, Hearing Exhibit 4/27-25.
¹⁷⁹⁰ 7/29/2007 email from Daniel Sparks to Tom Montag, "Correlation information you asked for," GS MBS-E- 010876594, Hearing Exhibit 4/27-27.
¹⁷⁹¹ 9/26/2007 2007 EMD Reviews, Joshua Birnbaum Self-Review, GS-PSI-01975, Hearing Exhibit 4/27-55c.
¹⁷⁹² 8/11/2007 email from David Lehman, "Japan exposure to CDOs," GS MBS-E-001929202.
¹⁷⁹³ 8/23/2007 email from Tom Montag to Gary Cohn and David Viniar, "Harbinger Post," GS MBS-E-009739009. See also 8/21/2007 email from Michael Swenson, "Mortgage Commentary for Firmwide Risk Committee," GS MBS-E-010619375 ("Current SPG Trading Desk Position Summary: – RMBS AAA – long $2.2bb").
¹⁷⁹⁴ The one short position the Mortgage Department did not attempt to cover was its $3 billion net short in BBB and BBB- rated RMBS securities, as discussed below.
¹⁷⁹⁵ 8/5/2007 email from Michael Swenson, "great week," GS MBS-E-012376888, Hearing Exhibit 4/27-28.
¹⁷⁹⁶ Id.
¹⁷⁹⁷ Id.
¹⁷⁹⁸ 8/8/2007 email from Tom Montag to Michael Swenson and David Lehman, GS MBS-E-011088957.
¹⁷⁹⁹ 8/9/2007 email from Tom Montag, GS MBS-E-009640293.
¹⁸⁰⁰ 8/11/2007 emails between Donald Mullen and David Lehman, "Japan exposure to CDOs," GS MBS-E- 001929202.
¹⁸⁰¹ Id. See also 8/11/2007 email from Daniel Sparks to Tom Montag and Donald Mullen, "GSC ms prop/Paulson swap," GS MBS-E-010673306 ("W e need to keep buying AAA ABX, and now we can start looking to cover some CDO CDS").
¹⁸⁰² 8/20/2007 email exchange between Daniel Sparks and Tim Montag, "Hsbc loans," GS MBS-E-010681855.
¹⁸⁰³ 8/14/2007 email from Michael Swenson, "ABS Summary for W eek Ended August 10 th," GS MBS-E- 010678428.
¹⁸⁰⁴ Id.
¹⁸⁰⁵ 8/19/2007 email from Tom Montag, "Mtg Department W eekly Update," GS MBS-E-010681647.
¹⁸⁰⁶ Id.
¹⁸⁰⁷ Id. Not everyone at Goldman agreed that the risk of loss on AAA was "remote." On July 29, 2007, Mr. Rosenblum circulated an email to Mortgage Department managers and research analysts with a series of questions about how AAA subprime RM BS securities would be affected by other market developments. 6/29/2007 email from David Rosenblum, GS MBS-E-010060183. The head of Goldman's Structured Product Strategies area, Alan Brazil, responded: "W ell, as is becoming clearer to the market is [sic] that the subprime issue is really a triple-a issue, either directly as a aaa subprime or indirectly in a aaa cdo. As a rough guide, over 90% of a subprime deal are in aaas. ... And once you start downgrading bbb/bbb- you will ultimately be start [sic] downgrading aaas. And, in my view, that
¹⁸⁰⁸ Subcommittee interview of Joshua Birnbaum (4/22/2010).
¹⁸⁰⁹ Id.
¹⁸¹⁰ Id.
¹⁸¹¹ 8/14/2007 email from Daniel Sparks, "Fw: Post," GS MBS-E-010678053, Hearing Exhibit 4/27-30.
¹⁸¹² See 8/14/2007 email from Gary Cohn to Daniel Sparks, "Fw: Post," GS MBS-E-010678053, Hearing Exhibit 4/27-30 ("Talk to me before you go long."); 8/14/2007 email from Tom Montag, "Post," GS MBS-E-009741145 ("W e will not be going long billions. Lots of risk to clean up first imo").
¹⁸¹³ 8/15/2007 email from Daniel Sparks, "Post," GS MBS-E-009740784, Hearing Exhibit 4/27-32.
¹⁸¹⁴ 8/20/2007 email from Daniel Sparks to Gary Cohn, David Viniar, Jon W inkelried, Tom Montag, and Donald Mullen, "Big Opportunity," GS M BS-E-009739836. See also 8/20/2007 email exchange between Daniel Sparks and Tom Montag, "Hsbc loans," GS MBS-E-010681855 (M r. Sparks pitched the plan again to Mr. Montag separately: "As a overall business, we're not short AAA's anymore. W e are putting on the long index (mostly AAA)/short single name mezz trade on .... We are planning to continue to play offense. . . . Discussions on the up the quality trade (top cap stack and top quality collateral) were had in various times with don [M ullen], gary [Cohn] and bill
¹⁸¹⁵ 8/21/2007 email from Joshua Birnbaum, "Potential large subprime trade and impact on firmwide VAR," GS MBS-E-016359332, Hearing Exhibit 4/27-34; 8/21/2007 email from Joshua Birnbaum, "For 2 p.m. meeting," GS MBS-E-010608145 (graphs in support of plan to go long up to $10 billion in AAA ABX index).
¹⁸¹⁶ Id.
¹⁸¹⁷ See 8/21/2007 email from Mr. Montag to Mr. Birnbaum, GS MBS-E-010682736 ("FYI. I think it would be much better for all concerned that we all discuss this and any strategy and have agreem[e]nt before we go to the presidents and cfo .... Secondly, I think we should be reducing our basis trades to reduce var as is .... Let's sit down").
¹⁸¹⁸ 8/21/2007 email from Bill McMahon, "Potential large subprime trade and impact on Firmwide VAR," GS MBS- E-012606879.
¹⁸¹⁹ 8/21/2007 email from Joshua Birnbaum, "Potential large subprime trade and impact on firmwide VAR," GS MBS-E-016359332, Hearing Exhibit 4/27-34
¹⁸²⁰ 8/15/2007 email from Gary Cohn, "Trading VaR $165mm," GS MBS-E-009778573.
¹⁸²¹ 7/21/2007 email from Daniel Sparks to Donald Mullen, Tom Montag, and others, "Mortgages Estimate," GS MBS-E-009640287.
¹⁸²² See id. (noting $50 million down trading day, followed by a day in which the AAA index accounted for half of the day's profit).
¹⁸²³ Id.
¹⁸²⁴ 8/9/2007 email from Joshua Birnbaum to Deeb Salem, GS MBS-E-012927140.
¹⁸²⁵ 8/8/2007 email from Tom Montag to Michael Swenson and David Lehman, GS M BS-E-011311633. Mr. Swenson explained that the approximately $100 million loss was split between the Residential W hole Loan Trading Desk, the SPG Trading Desk, and the CDO Origination Desk. Id.
¹⁸²⁶ 8/9/2007 email from Joshua Birnbaum to Deeb Salem, GS MBS-E-012927140.
¹⁸²⁷ 8/9/2007 email from Joshua Birnbaum to Deeb Salem, "MarketRisk: Mortgage Risk Report (cob 08/08/2007)," GS M BS-E-012927200 ("These VAR numbers are ludicrous, btw. Completely overestimated for SPG trading, underestimated for other mortgage desks."). See also 8/21/2007 email from Joshua Birnbaum to Bill McM ahon, "Potential large subprime trade and impact on Firmwide VAR," GS M BS-E-012606879 ("W e have the 13.5Bln IO which makes us less short by $1-1.5 Bln ....") (IO is an asset arising from differences in the duration and timing of CDS premium payment streams); 8/21/2007 email from Michael Dinias, "Trading VaR Analysis," GS MBS-E- 009993267 ("the mortgage desk has questioned the size of the implied short exposure (i.e. desk believes they are less short than implied by the VaR model). W e are reviewing the current VaR methodology with the mortgage traders/strategists and assessing the impact of various potential enhancements."); Subcommittee interview of Joshua Birnbaum (10/1/2010).
¹⁸²⁸ For more information on the Mortgage Department's VAR levels, see below.
¹⁸²⁹ On August 7, 2007, a senior risk executive wrote to Messrs. Cohn, Viniar, and McM ahon: "W e are doing a detailed analysis of mortgage and credit trading var contributors to see where we might get the most efficient var reduction." 8/7/2007 email from Bruce Petersen, "VaR," GS MBS-E-009775575.
¹⁸³⁰ See, e.g., 8/21/2007 email from Joshua Birnbaum, "Potential large subprime trade and impact on firmwide VAR," GS MBS-E-016359332, Hearing Exhibit 4/27-34 (favoring preservation of the $3.5 billion BBB/BBB- short).
¹⁸³¹ Risk controller Robert Berry explained to Messrs. Viniar, McM ahon, and Broderick that VAR was becoming acutely sensitive to estimates of correlation implicit in the data used in the VAR computation: "[T]here will be days where 'nothing happened' – positions didn't change, markets were quiet, but small changes in correlation will mean the difference between 140 and 160. It will really be difficult to explain to you and to the desks why we were under [VAR limits] yesterday but over today." 8/15/2007 email from Robert Berry, "MarketRisk: End of Day Summary –
¹⁸³² See, e.g., 8/15/2007 email from Michael Dinias, "Hedge Analysis cob 8/13/07," GS MBS-E-010678553 (analyzing 6 potential VAR-reducing trading scenarios featuring different proposed transactions); 8/21/2007 email from Michael Dinias, "Trading VaR Analysis," GS MBS-E-009993267 (analyzing the VAR-reducing impact of going long in various classes of assets); 8/22/2007 email from Daniel Sparks to Tom Montag and Donald Mullen, "VAR reduction possibilities," GS MBS-E-010619824 (proposed transactions in single name CDS protection to reduce VAR).
¹⁸³³ 8/15/2007 email from Gary Cohn, "Trading VaR $165mm," GS MBS-E-009778573. Mr. Viniar agreed. Two days earlier, after seeing a daily risk report showing Firmwide VAR at $159 million, Mr. Viniar emailed senior risk executives: "No comment necessary. Get it down." 8/13/2007 email from David Viniar to Bill McMahon, Craig Broderick, and Robert Berry, "MarketRisk: End of Day Summary – cob 8/10/2007," GS MBS-E-009779885. Even after Mr. Cohn's order to "get down now," Firmwide VAR continued to increase. On August 16, Firmwide VAR rose from $165 million to $171 million. 8/16/2007 email from Michael Dinias, "Trading VAR $171mm," GS MBS- E-099775568. On August 17, it rose to $174 million. 8/17/2007 email to David Viniar, Gary Cohn, Jon W inkelried, Tom Montag, Bill McMahon, Craig Broderick et al., "W eekly Market Risk Summary as of 8/17/07," GS MBS-E- 009756424.
¹⁸³⁴ On August 22, 2007, Mr. Montag emailed Mr. Blankfein: "[W ]e are covering a number of shorts in mortgages today and tomorrow–probably $1.5 billion worth–will reduce mortgages [VAR] hopefully to below 80." 8/22/2007 email from Tom Montag to Lloyd Blankfein, "Trading VaR $144mm," GS MBS-E-009605812, Hearing Exhibit 4/27-36. The next morning Mr. Montag emailed Mr. Blankfein that the Department "covered about 700 million in shorts in mtgs last night–500 million in single names . . . . lots more to go–but they fortunately had bought back 9 billion of AAA abx index over last two weeks." 8/23/2007 email from Tom Montag to Lloyd Blankfein, GS MBS- E-009585951, Hearing Exhibit 4/27-37.
¹⁸³⁵ 8/23/2007 email from Michael Swenson, "Harbinger Post," GS MBS-E-009739009.
¹⁸³⁶ 8/23/2007 email from Daniel Sparks, "Current Outstanding Notional SN ames," GS MBS-E-010621231.
¹⁸³⁷ Id.
¹⁸³⁸ 8/23/2007 email exchange between Tom Montag and Daniel Sparks, "Current Outstanding Notional SN ames," GS MBS-E-010621324.
¹⁸³⁹ 8/23/2007 email exchange between Gary Cohn and Lloyd Blankfein, "Trading VaR $133mm," GS MBS-E- 009643469.
¹⁸⁴⁰ Id. Goldman senior executives continued to monitor the Mortgage Department's actions. For example, on August 31, 2007, Mr. Montag emailed Mr. Lehman: "abx hurting us today? Mkt over reacting?" 8/31/2007 email from Tom Montag, "Structured Products W eekly Update – 08/30/07 (Internal Use only)," GS MBS-E-009589083. Mr. Birnbaum responded: "Based on the markets we are making, we would be ok in this move. We are +50mm in AAAs alone right now." Mr. Montag forwarded the emails to Mr. Blankfein who wrote: "Thanks. Appreciate the posts, I'm watching the financial news."
¹⁸⁴¹ 12/2007 Quarterly Market Risk Review, GS MBS-E-009586222, Hearing Exhibit 4/27-54f (third quarter mortgages average VAR was $68 million; fourth quarter mortgages average VAR was $75 million).
¹⁸⁴² Subcommittee interview of David Viniar (4/13/2010); Subcommittee interview of Daniel Sparks (4/15/2010); Subcommittee interview of Joshua Birnbaum (4/22/2010).
¹⁸⁴³ 8/21/2007 email from Michael Swenson, "Mortgage Commentary for Firmwide Risk Committee," GS MBS-E- 010619375 ("Current SPG Trading Desk Position Summary: – RMBS AAA – long $2.2bb"); Michael J. Swenson, responses to Subcommittee QFRs at PSI_QFR_GS0474.
¹⁸⁴⁴ In the week of December 6, 2007, the Mortgage Department's risk managers noted "an increase in net short position in the residential sector." 12/7/2007 email to David Viniar, "W eekly Market Risk Summary as of 12/06/07," GS MBS-E-009708911, Hearing Exhibit 4/27-53. See also 9/5/2007 email from Michael Swenson to Tom Montag, "ABS Update," GS M BS-E-012386239, Hearing Exhibit 4/27-39; 9/23/2007 email to David Viniar, "Mortgage P&L for the W eek Ended 9/21," GS MBS-E-009732431, Hearing Exhibit 4/27-43 (Finance division reported that, in week of September 21, the Mortgage Department reported $63 million from "short synthetic positions including SPG Trading (+$40M), CDO (+22M) and Residential Credit (+12M).").
¹⁸⁴⁵ Salem 2007 Self-Review.
¹⁸⁴⁶ Id. [emphasis in original].
¹⁸⁴⁷ Id. Mr. Salem described the trading strategies as follows: "a. The Dispersion Trade More than a year ago, Edwin [Chin] and I realized that the dispersion amongst single-name subprime CDS was grossly mispriced. Bad names (tier 4), that the market almost universally disliked traded only 50 bps wider than securities that we all agreed were superior. ... So for the past year, we bought protection on tier 4 names at every chance possible . . . When we wanted to flatten out the book, we just wrote protection on the tier 1 names. Amazingly we did this for most of the year without a usable model to value different single names. ... W e were very aggressive with pricing and only shared risk with smart guys if they gave us insight on names to go short or go long in return. Even when the dispersion widened out ... by the end of February, Edwin and I refused to monetize the trade .... W ith 3-4bb of notional in this dispersion trade, we have recognized $750mm of P&L so far on this trade. "b. Our single name market share: Having traded over $200bb of notional in SN [single name] CDS, GS is the dominant market-maker in single name CDS. W e approximate our market share to be greater than 33%. ... This market share and willingness to trade size proved invaluable in November, December and January when we decided to make the HUGE directional bet of being long SN CDS protection [or "short risk," i.e., taking the short side of a CDS transaction]. ... If we did not have such presence in the SN CDS market, it is unlikely that we would have achieved the size short that we desired and eventually put on. W e're up $1.7bb in RM BS SN CDS!
¹⁸⁴⁸ See, e.g., 10/11/2007 email from Michael Swenson to Donald Mullen, "Early post on P and L," GS MBS-E- 016031234, Hearing Exhibit 4/27-69. For more information about this downgrade, see Chapter V.
¹⁸⁴⁹ Id.
¹⁸⁵⁰ Id.
¹⁸⁵¹ 10/12/2007 email exchange between Michael Swenson and Donald Mullen, "P and L," GS MBS-E-018936577, Hearing Exhibit 4/27-68.
¹⁸⁵² Id.
¹⁸⁵³ See 10/3/2007 Goldman presentation, "SPG Trading – 2007," GS MBS-E-015654036. See also 11/16/2007 Goldman chart, "Mortgages W eekly Metrics 16-November-2007," GS M BS-E-015863620 ("P&L YTD Annl 3,742,461").
¹⁸⁵⁴ See, e.g., 4/2010 "Goldman Sachs Mortgage Department Total Net Short Position, February - December 2007 in $ Billions," chart prepared by the Subcommittee, Hearing Exhibit 4/27-162 (compiled from Top Sheets); examples of Top Sheets include GS MBS-E-010369585 and GS MBS-E-010850895, Hearing Exhibit 4/27-162.
¹⁸⁵⁵ Id.
¹⁸⁵⁶ See 2/26/2007 Mortgage Department Top Sheet, GS MBS-E-010388545, and 6/25/2007 Mortgage Department Top Sheet, GS MBS-E-010850895, Hearing Exhibit 4/27-162.
¹⁸⁵⁷ Subcommittee interview of Daniel Sparks (4/15/2010).
¹⁸⁵⁸ Id.; 2/26/2007 email to Daniel Sparks, Michael Swenson, and others, "New cross desk Top Sheet risk report," GS MBS-E-010386051.
¹⁸⁵⁹ Subcommittee interview of Daniel Sparks (4/15/2010).
¹⁸⁶⁰ Subcommittee discussions with Goldman Controller staff on Responses to Questions for the Record and related documents. Despite the fact that the Mortgage Department Top Sheet was the primary comprehensive position report available to Mortgage Department managers, some more senior Goldman executives appeared to be unaware of its existence. Chief Risk Officer Craig Broderick, for example, testified that he was unaware of a Mortgage Department Top Sheet and he thought the "top sheet" concept might not be suitable for the Mortgage Department. Subcommittee interview of Craig Broderick (4/9/2010). His risk office produced its own daily risk reports that translated the Mortgage Department's electronic trading data directly into risk measures, such as "VAR." Id.; see also, e.g., 8/9/2007 email from risk manager, "MarketRisk: Mortgage Risk Report (cob 08/08/2007)," GS MBS-E- 010674894 (attached Goldman report, "Mortgage Risk Report – 8/9/07," GS MBS-E-010674895). The Controller's office also produced its own reports based on the Mortgage Department's electronic trading data, such as the daily profit and loss report for the Mortgage Department. Subcommittee discussions with Goldman Controller staff on responses to Subcommittee QFRs and related documents. See also 7/20/2007 email from controllers, "Mortgages Estimate," GS MBS-E-009640287.
¹⁸⁶¹ 2/26/2007 email to Daniel Sparks, Michael Swenson, and others, "New cross desk Top Sheet risk report," GS MBS-E-010386051. The Mortgage Department shared its Top Sheet and several sub-reports for September 25, 2007, with Mr. Viniar around October 1, 2007, in a presentation that summarized the changes in the Mortgage Department's long/short positions across all desks and all assets since the initiation of the Gameplan in May 2007. 10/1/2007 Goldman internal document, "September Risk Pack Viniar," GS MBS-E-013693128 (attached to 10/1/2007 email, "Viniar Risk Pack - Sept," GS MBS-E-013693127).
¹⁸⁶² The balance of the page provided detail regarding the amount of each asset class held by each of the Mortgage Department's desks or business units. Behind the top sheet, the report provided detailed data regarding the various desks and provided different data analyses, such as changes in position from week to week. The last page of each report listed all of the electronic data sources and separate reports from which the Top Sheet was compiled. See, e.g., 2/5/2007 Mortgage Department Top Sheet, GS MBS-E-010369585, Hearing Exhibit 4/27-162.
¹⁸⁶³ See chart entitled, "Goldman Sachs Mortgage Department Total Net Short Position, February-December 2007 in $ Billions," prepared by the Permanent Subcommittee on Investigations, Hearing Exhibit 4/27-162 (April 2010 version), updated January 2011 (updated version), derived from Goldman Sachs Mortgage Strategies, Mortgage Dept Top Sheets provided by Goldman Sachs (hereinafter "PSI Net Short Chart").
¹⁸⁶⁵ See Birnbaum responses to Subcommittee QFRs at PSI_QFR_GS0509. Subcommittee interview of Joshua Birnbaum (10/1/2010).
¹⁸⁶⁶ Subcommittee interview of Joshua Birnbaum (10/1/2010); Subcommittee interview of Michael Swenson (10/8/2010).
¹⁸⁶⁷ Subcommittee interview of Joshua Birnbaum (10/1/2010).
¹⁸⁶⁸ Id.
¹⁸⁶⁹ Id. Mr. Swenson made similar statements in his second Subcommittee interview. "W ere we ever net short? It's hard to say what 'net short' means really." Subcommittee interview of Michael Swenson (10/8/2010). Mr. Swenson had no such difficulty, however, in his first Subcommittee interview. W hen asked the greatest amount by which he remembered his desk being net short, Mr. Swenson replied: "$9 billion." Subcommittee interview of Michael Swenson (4/16/2010).
¹⁸⁷⁰ As noted above, the risk management and controller areas at Goldman kept their own daily reports based on the Mortgage Department's electronic trading data, but they did not track Goldman's aggregate positions in each asset class on either a notional or market value basis. Rather, the risk area converted the Mortgage Department data into risk measures, while the controllers' area converted the data into profit and loss reports. Though based on the Mortgage Department's reported daily trading, these reports did not directly reflect specific net positions in subprime mortgage assets.
¹⁸⁷¹ In general, positions were expressed in market values for all liquid assets and in "hedge equivalents" of illiquid assets, meaning the market value of a position that could be used to hedge that asset. See e.g., 3/5/2007 Mortgage Department Top Sheet, GS M BS-E-010630691 (Legend: "Market Value (MM$)(Hedge Equiv MV for CDS)"); 9/11/2007 email, GS MBS-E-010690522, attaching 9/10/2007 Mortgage Department Top Sheet, GS MBS-E- 010690523 ("Market value of bonds/loans, bond equiv mkt val for synthetics.").
¹⁸⁷² See e.g., 3/5/2007 email from Daniel Sparks to Tom Montag and others, GS M BS-E-010646842 ("W e think the overall business is net short"); 3/8/2007 email from Daniel Sparks to Jon W inkelried and others, "Mortgage Risk," GS MBS-E-002211242 ("W e are still net short"); 7/21/2007 email from Daniel Sparks to Donald Mullen and others, "Mortgages Estimate," GS M BS-E-009640287 ("There is also a large net short that we are chipping away to cover").
¹⁸⁷³ 1/10/2011 Concordance search of all documents produced to the Subcommittee by Goldman for the phrase "net short."
¹⁸⁷⁴ Subcommittee interview of Joshua Birnbaum (10/1/2010).
¹⁸⁷⁵ 8/5/2007 email from David Lehman to Tom Montag, "Mtg Department W eekly Update," GS MBS-E- 010671564.
¹⁸⁷⁶ Id.
¹⁸⁷⁷ Id.
¹⁸⁷⁸ See, e.g., 8/23/2007 email from Tom Montag to Daniel Sparks, "Current Outstanding Notional in SN ames," GS MBS-E-010621231 (Mr. Montag said, "so if I make you sell a whopping 800 out of 3 billion which is less than 30% how can anyone complain- -the position is huge and outsized."); 3/14/2007 email from Tom Montag to Lloyd Blankfein, "Cactus Delivers," GS M BS-E-009632839 ("Covered another 1.2 billion in shorts in mortgages"); 8/23/2007 email from Tom Montag to Gary Cohn and David Viniar, "Harbinger post," GS MBS-E-009739009 ("W e had bought back almost 9 billion of aaa abx over last two weeks though"); 2/27/2007 email from Richard Ruzika to Tom Montag, GS M BS-E-002204942 ("I want to see us getting the short down to 4.5 bil[lion] net").
¹⁸⁷⁹ Subcommittee interview of David Viniar (4/13/2010).
¹⁸⁸⁰ See, e.g., Testimony of David Viniar, April 27, 2010, Subcommittee Hearing at 98, 99-100; 4/7/2010 Blankfein & Cohn Letter to Shareholders (quoted in 4/2010 Goldman report, "Risk Management and the Residential Mortgage Market," at 12, Hearing Exhibit 4/27-161).
¹⁸⁸¹ 9/26/2007 email from Lloyd Blankfein, "Fortune: How Goldman Sachs Defies Gravity," GS MBS-E- 009592726. Mr. Blankfein went on to explain what he meant by "hedge": "Ie, the avoidance of a bet. W hich is why for a part it subtracted from var, not added to var." Mr. Blankfein did not explain the "part" in which the big short subtracted from VAR. In February and August 2007, most of Goldman's senior management expressed concern that the large net short positions added to VAR, rather than subtracted from it, and indeed, pushed the firmwide VAR to record levels.
¹⁸⁸² 10/3/2007 Goldman presentation, "SPG Trading – 2007," GS M BS-E-015654036. Mr. Swenson and Mr. Lehman reviewed and commented upon the "SPG Trading – 2007 " presentation. Mr. Birnbaum revised the presentation to make the changes Mr. Swenson and Mr. Lehman suggested. See, e.g., 10/2/2007 email from David Lehman to Joshua Birnbaum, "SPG Trading - 2007.ppt," GS M BS-E-015653681 (providing comments and suggesting text for presentation). Mr. Birnbaum replied and copied Mr. Swenson on the email chain as well: "I added your bullet and one more." Id. See also 10/4/2007 email from Joshua Birnbaum to Michael Swenson and David Lehman, "How's this?," GS MBS-E-015712249 (forwarding revised bullet point for presentation). This collaboration indicates the presentation was made on behalf of the SPG Trading Desk as a whole. Mr. Birnbaum, however, told the Subcommittee that the SPG Trading Desk ultimately did not use the presentation in connection with its proposal for 2007 compensation. See Birnbaum responses to Subcommittee QFRs at PSI_QFR_GS0509.
¹⁸⁸³ 10/3/2007 Goldman presentation, "SPG Trading – 2007," GS M BS-E-015654036 [emphasis in original].
¹⁸⁸⁴ See Birnbaum responses to Subcommittee QFRs at PSI_QFR_GS0509.
¹⁸⁸⁵ 2/28/2007 email from David Rosenblum to Peter Ostrem, "Pete– pls send me cob 2/28 MTM for SP CDO W H's first thing in the morning," GS M BS-E-001800707; 2/28/2007 email from David Rosenblum,"Hedges Status Report," GS MBS-E-002640538 (new ABX hedges added and other hedges allocated to ensure that CDO warehouse risk was fully hedged).
¹⁸⁸⁶ Id.
¹⁸⁸⁷ 2/12/2007 email from Daniel Sparks, "Post today," GS MBS-E-002202310.
¹⁸⁸⁸ Id.; PSI Net Short Chart.
¹⁸⁸⁹ Subcommittee interview of Craig Broderick (4/9/2010). See also Philippe Jorion, "Value at Risk: The New Benchmark for Managing Financial Risk," at 20, (3d ed. 2007).
¹⁸⁹⁰ See Mortgage Department Quarterly Average VAR. (Third Quarter 2006 - $13 million; Fourth Quarter 2006 - $14 million; Second Quarter 2007 - $63 million; Third Quarter 2007 - $68 million; Fourth Quarter 2007 - $75 million). See 9/2007 Quarterly Market Risk Review, "Market Risk Management and Analysis," GS MBS-E- 009590673, Hearing Exhibit 4/27-54e; see also 12/2007 Quarterly Market Risk Review, "Market Risk Management and Analysis," GS MBS-E-009586222, Hearing Exhibit 4/27-54f.
¹⁸⁹¹ 8/9/2007 email from Joshua Birnbaum to Deeb Salem, "MarketRisk: Mortgage Risk Report (cob 08/08/2007)," GS MBS-E-012927202.
¹⁸⁹² 2/27/2007 email from Richard Ruzika to Tom Montag and others, GS MBS-E-002204942; 8/15/2007 email from Gary Cohn, "Trading VaR $165mm," GS M BS-E-016344758; Subcommittee interview of Joshua Birnbaum (10/1/2010).
¹⁸⁹³ Subcommittee interview of Craig Broderick (4/9/2010).
¹⁸⁹⁴ 8/8/2007 email from Tom Montag to David Lehman and Michael Swenson, GS MBS-E-011311633.
¹⁸⁹⁵ Subcommittee interview of David Viniar (4/13/2010).
¹⁸⁹⁶ Mr. Birnbaum frequently argued that VAR, or at least Goldman's then-current model of VAR, was an inappropriate risk measure for the Mortgage Department's shorting activities. 8/9/2007 email from Joshua Birnbaum to Deeb Salem, "MarketRisk: Mortgage Risk Report (cob 08/08/2007)," GS MBS-E-012927200 ("These VAR numbers are ludicrous, btw. Completely overestimated for SPG trading, underestimated for other mortgage desks."). He contended that for various reasons, the Mortgage Department was not actually as short as the VAR measure reflected. See, e.g., 9/26/2007 2007 MD Reviews, Joshua Birnbaum Self-Review, GS-PSI-01956, Hearing Exhibit 4/27-55c. In arguing for a special compensation model for the SPG Trading Desk, Mr. Birnbaum pointed out that the desk never lost as much money as the firm's VAR measure predicted it would. 10/3/2007 Goldman presentation, "SPG Trading – 2007," GS MBS-E-015654036. Accordingly, Mr. Birnbaum may have been correct that the firm's VAR measure did not accurately measure risk to the firm. Id. On the other hand, since VAR rests on probability theory which is based on a "normal" distribution of profits and losses (the typical "bell curve"), the Mortgage Department may have benefitted from the extraordinary and continual one-way movement downward in the subprime mortgage markets. One risk management expert testified before Congress: "It is well known that VaR cannot measure crisis risk. During periods of crisis the relationship between securities changes in strange and seemingly unpredictable ways. VaR, which depends critically on a set structure for volatility and correlation, cannot provide useful information in this situation. It contains no mechanism for predicting the type of crisis that might occur, and does not consider the dynamics of market crises. This is not to say that VaR has no value or is hopelessly flawed. Most of the time it will provide a reasonable measure of risk – indeed the vast majority of the time this will be the case. If one were forced to pick a single number for the risk of a portfolio in the near future, VaR would be a good choice for the job." Prepared statement of Richard Bookstaber, "The Risks of Financial Modeling: VaR and the Economic Meltdown," before the U.S. House of Representatives Committee on Science and Technology, Subcommittee on Investigations and Oversight, Serial No. 111-48 (9/10/2009), at 4.
¹⁸⁹⁷ Subcommittee interview of Craig Broderick (4/9/2010).
¹⁸⁹⁸ The Mortgage Department had other risk limits aside from VAR, including Credit Spread W idening or "CSW ," which seeks to measure what would happen if credit spreads suddenly widened by large amounts (called "shocks"); "dv01," which measures the dollar amount by which a security's value would change based on a 1 basis point change in the relevant index or interest rate; and balance sheet limits, meaning the amount of Goldman's balance sheet the relevant business unit would be permitted to consume. Subcommittee interview of Craig Broderick (4/9/2010).
¹⁸⁹⁹ 9/2006-12/2007 Goldman Sachs Quarterly Market Risk Review, "Market Risk Management & Analysis," Hearing Exhibits 4/27-54a-f and GS MBS-E-010674895.
¹⁹⁰⁰ 11/13/2007 Goldman email, GS MBS-E-010023525 (attachment, 11/14/2007 "Tri-Lateral Combined Comments," GS M BS-E-010135693-715). In November 2007, Goldman's Chief Risk Officer, Craig Broderick, Controller Sarah Smith, and senior members of their staffs met with the Tri-Lateral Review Group, which included representatives of the Federal Reserve Bank, the SEC, and the United Kingdom's Financial Services Authority, to discuss risk management during the financial crisis. The "Trilateral Combined Comments" are the talking points prepared by Goldman senior executives for that meeting, in order to respond to specific written questions Goldman and other firms had received from the Trilateral Review Group.
¹⁹⁰¹ Id.
¹⁹⁰² Id. The reference to the 30th floor was to the floor on which Goldman's senior executives then had their offices in Goldman's New York headquarters. Goldman also noted that "sr mgmt participated actively in all of the significant exposure management including when / how to reduce positions."11/13/2007 Goldman email, GS MBS-E-010023525 (attachment, 11/14/2007 "Tri-Lateral Combined Comments," GS MBS-E-010135693-715 at 695).
¹⁹⁰³ Subcommittee interview of Joshua Birnbaum (10/1/2010); Subcommittee interview of Craig Broderick (4/9/2010).
¹⁹⁰⁴ Subcommittee interview of Joshua Birnbaum (10/1/2010).
¹⁹⁰⁵ See, e.g., 2/8/2007 email from Michael Dinias to Robert Berry, and Craig Broderick, GS MBS-E-009980807; 2/24/2007 email from Robert Berry to David Viniar, Craig Broderick and Bill McMahon, "Mortgage VaR," GS MBS-E-009778897 (recommending model parameters for VAR calculations); 4/18/2007 email from Jeremy Primer to Joshua Birnbaum, "Resolution from MRMA meeting?," GS MBS-E-012868698 (discussing further adjustment to
¹⁹⁰⁶ See, e.g., 8/21/2007 email from Tom Montag to Gary Cohn, GS MBS-E-016344758; 8/21/2007 email from Michael Dinias, "Trading VaR Analysis," GS MBS-E-009742070; Subcommittee interview of David Viniar (4/13/2010) and Joshua Birnbaum (10/1/2010); 2/24/2007 email from Robert Berry to David Viniar and others, "FW : Mortgage VaR," GS MBS-E-009778897.
¹⁹⁰⁷ See generally "The Risks of Financial Modeling: VaR and the Economic Meltdown," before the U.S. House of Representatives Committee on Science and Technology, Subcommittee on Investigations and Oversight, H.R. Hrg. 111-48 (9/10/2009), at 4 (W ritten Testimony of Richard Bookstaber); Philippe Jorion, "Value at Risk: The New Benchmark for Managing Financial Risk (3d ed. 2007) at 64.
¹⁹⁰⁸ See id. Based on these factors, VAR is generally lower if a desk has many small and non correlated (well diversified) positions that are trading at steady and predictable price levels. By contrast, VAR is higher if a desk is holding a small number of very large and highly correlated positions that are trading at volatile and unpredictable price levels. The position size/correlation and volatility factors may also operate independently. Thus, even if the desk has a large number of relatively small and non correlated positions, VAR tends to rise as the volatility of trading rises. Similarly, even if there is little volatility in trading, VAR tends to rise as the desk's position sizes become larger and increasingly correlated. The two factors also reinforce one another – large position sizes combined with high volatility tend to increase VAR dramatically.
¹⁹⁰⁹ Market Risk Management & Analysis, Quarterly Market Risk Review, December 2006, GS MBS-E-009583144, Hearing Exhibit 4/27-54; see also 2/6/2007 email from MarketRisk,"MarketRisk: Mortgage Risk Report (cob 02/06/07)," GS M BS-E-009980807 (Mortgage SPG VaR Limit 20).
¹⁹¹⁰ 2/8/2007 email from Michael Dinias, "VaR limit for Mtg SPG," GS MBS-E-009980807.
¹⁹¹¹ Id.
¹⁹¹² Id.
¹⁹¹³ Subcommittee interview of Craig Broderick (4/9/2010).
¹⁹¹⁴ 2/27/2007 email from Richard Ruzika to Tom Montag, others, GS MBS-E-002204942; Subcommittee interview of Joshua Birnbaum (4/22/2010); Subcommittee interview of Daniel Sparks (4/15/2010); 8/9/2007 email from Joshua Birnbaum to Deeb Salem, "MarketRisk: Mortgage Risk Report (cob 08/08/2007)," GS MBS-E-012927202; 8/16/2007 email from Michael Dinias, "mortgage var contribution," GS MBS-E-011247689 ("Mortgage Trading has 53.8% marginal contribution to Firmwide VaR and removing the entire mortgage business reduces Firmwide VaR by $53mm (from $165mm to $112mm). ... As expected SPG Trading desk dominates this risk with 56% contribution and adds $49mm to Firmwide VaR. This is primarily driven by ABS Synthetics and Correlation book which have the bulk of the mortgage shorts."); 8/21/2007 email from Michael Dinias, "Trading VaR Analysis," GS MBS-E- 009742070 (Mortgage VAR "primarily driven by mortgage shorts on the ABS Synthetics and Correlation desks."); 8/22/2007 email from Tom Montag to Lloyd Blankfein, "Trading VaR $144mm," GS M BS-E-009605812, Hearing Exhibit 4/27-36 ("we are covering a number of shorts in mortgages today and tomorrow–probably 1.5 billion worth–will reduce mortgages [VAR] hopefully to below [$]80 [million]").
¹⁹¹⁵ Subcommittee interview of Joshua Birnbaum (10/1/2010).
¹⁹¹⁶ 8/9/2007 email from Joshua Birnbaum to Deeb Salem, "MarketRisk: Mortgage Risk Report (cob 08/08/2007)," GS M BS-E-012927198. It is unclear the extent to which Goldman's regulators were aware of the Mortgage Department's VAR levels. In November 2007, Goldman met with the Tri-Lateral Review Group, which included the Federal Reserve Bank, the SEC, and the United Kingdom's Financial Services Authority, regarding its risk management during the financial crisis. Talking points prepared by Goldman personnel for that meeting stated that with respect to VAR: "Exposures were managed responsibly by the business units within agreed limits. Highs were set in Mortgages .... Benign P&L allowed for a disciplined but measured response."11/13/2007 Goldman email, GS MBS-E-010023525 (attachment, 11/14/2007 "Tri-Lateral Combined Comments," GS MBS-E-010135693-715 at 707). This description did not disclose that the Mortgage Department, for nearly the entire year, had routinely exceeded its $35 million VAR limit by significant amounts for months on end.
¹⁹¹⁷ 2/8/2007 email from Michael Dinias, "FW : VaR limit for Mtg SPG," GS MBS-E-009980807.
¹⁹¹⁸ 2/13/2007 email, "MarketRisk: End of Day Summary - cob 02/12/2007," GS MBS-E-009716432; see also 2/14/2007 Goldman internal email, "Increase in Mortgage VaR," GS MBS-E-010374687 ("MTG SPG Desk VaR increase from $21 mm to $48mm from cob Feb 6 to cob Feb 13, driven primarily by SPG Trading desk").
¹⁹¹⁹ 2/14/2007 email, "MarketRisk: End of Day Summary - cob 02/13/2007," GS MBS-E-009763394 ("Mortgages VAR is over its $35mm limit. Temporary $50mm limit was granted until cob 02/20/2007.").
¹⁹²⁰ 2/20/2007 email, "MarketRisk: End of Day Summary - cob 02/16/2007," GS MBS-E-009724779. 2/22/2007 email, "MarketRisk: End of Day Summary - cob 02/21/2007," GS MBS-E-009762741 (Mortgages VAR on 2/20 was
¹⁹²¹ Id. ("Mortgages VAR has a temporary $60mm limit until cob 2/27/2007.").
¹⁹²² 2/26/2007 email, "MarketRisk: End of Day Summary - cob 2/23/2007," GS MBS-E-009720057; 2/27/2007 email, "MarketRisk: End of Day Summary - cob 2/26/2007," GS MBS-E-009764685.
¹⁹²³ 2/27/2007 email, "MarketRisk: End of Day Summary - cob 2/26/2007," GS MBS-E-009764685 ("Mortgages VAR has a temporary $90mm limit until cob 03/06/07."). 2/28/2007 email, "MarketRisk" End of Day Summary - cob 2/27/2007," GS MBS-E-009762239.
¹⁹²⁴ 2/27/2007 email from Richard Ruzika to Tom Montag, others, GS MBS-E-002204942.
¹⁹²⁵ 3/1/2007 email, "MarketRisk: End of Day Summary - cob 02/28/2007," GS MBS-E-009757430.
¹⁹²⁶ 3/2007 Goldman "Quarterly Market Risk Review, Market Risk Management & Analysis," GS MBS-E- 009685934, Hearing Exhibit 4/27-54c.
¹⁹²⁷ 4/2010 Goldman report, "Risk Management and the Residential Mortgage Market," Hearing Exhibit 4/27-161.
¹⁹²⁸ 12/2006 Goldman "Quarterly Market Risk Review, Market Risk Management & Analysis," GS MBS-E- 009583144, Hearing Exhibit 4/27-54b.
¹⁹²⁹ 3/2007 Goldman Quarterly Risk Review, "Market Risk Management and Analysis," GS MBS-E-009685958, Hearing Exhibit 4/27-54.
¹⁹³⁰ 8/14/2007 Market Risk Report, Mortgage Portfolio Summary, GS MBS-E-012380294, Hearing Exhibit 4/27-35 (Mortgage Structured Products, VAR 110.1 on 8/14/07, Percentage Contribution to Firmwide VaR 53.8%).
¹⁹³¹ 2/27/2007 email from Richard Ruzika to Tom Montag and Daniel Sparks, GS MBS-E-002204942; 8/15/2007 email from Gary Cohn, "Trading VaR $165mm," GS MBS-E-016344758.
¹⁹³² 8/16/2007 email from Jon W inkelried to Daniel Sparks, "Mort P&L Explanation," GS MBS-E-010680327-330; 7/25/2007 email from David Viniar to Gary Cohn, "Private & Confidential: FICC Financial Package 07/25/07," GS MBS-E-009861799, Hearing Exhibit 4/27-26; 2/27/2007 email from Richard Ruzika to Tom Montag, others, GS MBS-E-002204942; 8/15/2007 email from Gary Cohn, "Trading VaR $165mm," GS MBS-E-016344758.
¹⁹³³ 8/16/2007 email from Jon W inkelried to Daniel Sparks, "Mort P&L Explanation," GS MBS-E-010680327-330.
¹⁹³⁴ 8/21/2007 email from Joshua Birnbaum, "Potential large subprime trade and impact on firmwide VAR," GS MBS-E-016359332, Hearing Exhibit 4/27-34
¹⁹³⁶ See 8/16/2007 email from Jon W inkelried to Daniel Sparks, "Mort P&L Explanation," GS MBS-E-010680327- 330; 7/25/2007 email from David Viniar to Gary Cohn, "Private & Confidential: FICC Financial Package 07/25/07," GS MBS-E-009861799, Hearing Exhibit 4/27-26. 2/27/2007 email from Richard Ruzika to Tom Montag, others, GS MBS-E-002204942; 8/15/2007 email from Gary Cohn, "Trading VaR $165mm," GS MBS-E-016344758.
¹⁹³⁷ 2/26/2007 Market Risk Report, Mortgage Risk Portfolio Summary, GS MBS-E-010388177.
¹⁹³⁸ 2/22/2007 email from Daniel Sparks, "FW : Block size tranche protection offers for [redacted] or others," GS MBS-E-010381411.
¹⁹³⁹ 2/27/2007 email from Richard Ruzika to Tom Montag, Justin Gmelich, and Daniel Sparks, GS MBS-E- 002204942.
¹⁹⁴⁰ Id.
¹⁹⁴¹ Subcommittee interview of Joshua Birnbaum (10/1/2010); see also 2/22/2007 email from Mr. Ruzika to Mr. Montag and Mr. Sparks, GS M BS-E-010381967 (Mr. Ruzika: "covering the single name bbb and bbb- is prudent because it cuts vol and var the most").
¹⁹⁴² 8/9/2007 email from Deeb Salem to Joshua Birnbaum, "MarketRisk: Mortgage Risk Report (cob 08/08/2007)," GS MBS-E-012927200.
¹⁹⁴³ Id.; Subcommittee interview of Joshua Birnbaum (10/1/2010).
¹⁹⁴⁴ 8/9/2007 email from Joshua Birnbaum to Deeb Salem, "MarketRisk: Mortgage Risk Report (cob 08/08/2007)," GS MBS-E-012927200.
¹⁹⁴⁵ Id.
¹⁹⁴⁶ Id.
¹⁹⁴⁷ Id.
¹⁹⁴⁸ Subcommittee interview of Joshua Birnbaum (10/1/2007).
¹⁹⁴⁹ Id.
¹⁹⁵⁰ 8/15/2007 email from Daniel Sparks, "Trading VaR $165mm," GS MBS-E-016344758; See, e.g., 8/15/2007 email from Michael Dinias, "Hedge Analysis cob 8/13/07," GS MBS-E-010678553 (analyzing 6 potential VAR- reducing trading scenarios featuring different proposed transactions); 8/21/2007 email from Mr. Dinias, "Trading VaR Analysis," GS MBS-E-009993267 (analyzing the VAR-reducing impact of going long in various classes of assets); 8/22/2007 email from Daniel Sparks to Tom Montag and Donald Mullen, "VAR reduction possibilities," GS MBS-E-010619824 (proposed transactions in single name CDS protection to reduce VAR).
¹⁹⁵¹ See, e.g., 8/14/2007 Goldman Market Risk Report, GS MBS-E-010679220; 8/21/2007 email from MarketRisk,"MarketRisk: End of Day Summary - cob 8/20/07," GS MBS-E-009740158.
¹⁹⁵² 8/21/2007 email from MarketRisk, "MarketRisk: End of Day Summary - cob 8/20/07," GS MBS-E-009740158.
¹⁹⁵³ 8/15/2007 email from Gary Cohn, "Trading VaR $165mm," GS MBS-E-016344758.
¹⁹⁵⁴ See, e.g, 8/28/2007 email from MarketRisk, "MarketRisk: End of Day Summary - cob 8/28/07," GS MBS-E- 009716460 (Mortgages temporary VAR limit was $110 million); 9/14/2007 email from MarketRisk, "MarketRisk: End of Day Summary - cob 9/13/07," GS M BS-E-009714807 (Mortgages temporary VAR limit was $90 million); 9/27/2007 email from MarketRisk, "MarketRisk: End of Day Summary - cob 9/27/07," GS MBS-E-009708872 (Mortgages temporary VAR limit was $90 million); 10/3/2007 email from MarketRisk, "MarketRisk: End of Day Summary - cob 10/2/07," GS MBS-E-009717721 (Mortgages temporary VAR limit was $85 million); 10/19/2007 email from MarketRisk, "MarketRisk: End of Day Summary - cob 10/18/07," GS MBS-E-009724040 (Mortgages temporary VAR limit was $85 million); 12/13/2007 email from MarketRisk, "MarketRisk: End of Day Summary - cob 12/12/07," GS M BS-E-009707379 (Mortgages temporary VAR limit was $80 million).
¹⁹⁵⁵ Subcommittee interview of Craig Broderick (4/9/2010).
¹⁹⁵⁶ 9/28/2007 Goldman Market Risk Report, GS MBS-E-009926240.
¹⁹⁵⁷ See 4/3/2007 Goldman Sachs Group Inc. Form 10-Q at 79 (first quarter 2007 Average Daily VAR reported as $127 million); 10/9/2007 Goldman Sachs Group, Inc. Form 10-Q at 86 (third quarter 2007 Average Daily VAR reported as $139 million).
¹⁹⁵⁸ See 10/9/2007 Goldman Sachs Group Inc. Form 10-Q at 66. See also, e.g., "How Goldman Sachs Defies Gravity," Fortune (9/20/2007).
¹⁹⁵⁹ 9/19/2007 Goldman internal document, "Third Quarter 2007 Earnings Call Script for David Viniar," GS MBS- E-009779213, Hearing Exhibit 4/27-45.
¹⁹⁶¹ 9/17/2007-9/18/2007 Goldman Sachs Board of Directors Meeting, "Financial Summary, Quarter Ended August 31, 2007," GS MBS-E-009776900, Hearing Exhibit 4/27-42.
¹⁹⁶² 10/5/2007 Goldman presentation, "Global Mortgages Business Unit Townhall Q3 2007," GS MBS-E- 013703463, Hearing Exhibit 4/27-47.
¹⁹⁶³ Id.
¹⁹⁶⁴ Id.
¹⁹⁶⁵ 4/2010 "Goldman Sachs: Risk Management and the Residential Mortgage Market," report prepared by Goldman Sachs, Hearing Exhibit 4/27-161.
¹⁹⁶⁶ 10/5/2007 Goldman presentation, "Global Mortgages Business Unit Townhall Q3 2007," GS MBS-E- 013703463, Hearing Exhibit 4/27-47.
¹⁹⁶⁷ "Global Mortgages Business Unit Townhall Q3 2007," Final version, GS MBS-E-013668603.
¹⁹⁶⁸ Subcommittee interview of Daniel Sparks (10/4/2010). In his subsequent responses to the Subcommittee's Questions for the Record, Mr. Sparks said: "The presentation should have used the words 'net short position,' not 'proprietary position.'" Daniel L. Sparks responses to Subcommittee QFRs, PSI_QFR_GS0452 at 470 (Question 6). Mr. Sparks' response did not resolve the question of whether the position was proprietary or undertaken on behalf of customers, as a "net short position" could be either.
¹⁹⁶⁹ 10/29/2007 "Contagion and Crowded Trades," Goldman Sachs Tax Department Presentation, GS MBS-E- 010018511, Hearing Exhibit 4/27-48 [emphasis in original].
¹⁹⁷⁰ Joshua Birnbaum Self-Review, Hearing Exhibit 4/27-55c. The figures cited for ABS synthetics and ABS (both cash and synthetics) are apparently both included within the total of $3 billion profit cited for the SPG Trading Desk as a whole.
¹⁹⁷¹ Id. Mr. Birnbaum also wrote: "During this period, I would also add that the ABS team contributed significantly to the Correlation desk[']s $800+mm in YTD p&l by dissuading that desk from externalizing their shorting opportunities to the likes of Paulson Partners, even when significant risk-free p&l was available at the time." Id.
¹⁹⁷² Michael Swenson Self-Review, Hearing Exhibit 4/27-55b. The $2 billion profit figure attributed to ABS trading is apparently included within the $3 billion figure cited as the year-to-date profit for the SPG Trading Desk.
¹⁹⁷³ Salem 2007 Self-Review.
¹⁹⁷⁴ See description of Mr. Salem's single name trading strategies, above.
¹⁹⁷⁵ 10/4/2007 letter from Goldman Sachs to the SEC, GS MB S-E-009758287, Hearing Exhibit 4/27-46 [emphasis added].
¹⁹⁷⁶ 11/7/2007 letter from Goldman Sachs to the SEC, GS MBS-E-015713460, Hearing Exhibit 4/27-50.
¹⁹⁷⁷ 11/13/2007 Goldman email, GS MBS-E-010023525 (attachment, 11/14/2007 "Tri-Lateral Combined Comments," GS MBS-E-010135693-715 at 694).
¹⁹⁷⁸ Id.
¹⁹⁷⁹ "Goldman Doesn't Plan Significant Mortgage W ritedown," Bloomberg (11/13/2007); see also 11/13/2007 email to Lloyd Blankfein, GS MBS-E-009601759 (forwarding Bloomberg article regarding Mr. Blankfein's remarks at conference sponsored by Merrill Lynch & Co. in New York City on Nov. 13, 2007).
¹⁹⁸⁰ "Goldman Sachs Rakes in Profit in Credit Crisis," New York Times (11/19/2007).
¹⁹⁸¹ 11/18/2007 email from Lloyd Blankfein, "RE: NYT," GS MBS-E-009696333, Hearing Exhibit 4/27-52. Goldman's Co-President, Gary Cohn, replied to Mr. Blankfein's message, adding, "W e were just smaller in the toxic products" Id.
¹⁹⁸² 11/7/2007 Goldman document, "How Did GS Avoid the Mortgage Crisis?," GS M BS-E-009713204, Hearing Exhibit 4/27-51.
¹⁹⁸³ Id.
¹⁹⁸⁴ Id.
¹⁹⁸⁵ See 11/30/2007 "SPG Trading Mortgages W eekly Metrics 30-November-2007," GS MBS-E-015646485.
¹⁹⁸⁶ See Goldman Sachs Form 10-K for the fiscal year ending Nov. 30, 2007, filed on 1/28/2008, at 64; see also Goldman presentation, "Overview of Goldman Sachs," at 5, available at http://www2.goldmansachs.com/our-firm/investors/creditor-information/creditor-presentation-3-1-11.pdf.
¹⁹⁸⁷ April 27, 2010 Subcommittee Hearing at 96. See also 235, 252, 345.
¹⁹⁸⁸ Id. at 98.
¹⁹⁸⁹ 11/30/2007 "SPG Trading Mortgages W eekly Metrics 30-November-2007," GS MBS-E-015646485.
¹⁹⁹⁰ In the third quarter of 2007, for example, Lehman Brothers had $700 million in loan and mortgage writedowns. 9/23/2007 email to Lloyd Blankfein and others, "W eekly Competitor, EM and Regulatory News – W eek Ending 9/21/07," GS MBS-E-009653853. Morgan Stanley had $940 million in loan writedowns. Id. Bear Stearns had $250 million in loan writedowns and $450 million in mortgage writedowns. Id. Citibank had approximately $1.6 billion in mortgage writedowns and a $636 million loss in credit trading. 10/21/2007 email to Lloyd Blankfein and others, "W eekly Competitor, EM and Regulatory News – Week Ending 10/19/07," GS MBS-E-009631348. JPMorgan Chase had $1.3 billion in loan writedowns and $339 million in mortgage writedowns. Id.
¹⁹⁹¹ 7/25/2007 email from David Viniar to Gary Cohn, "Private & Confidential: FICC Financial Package 07/25/07," GS MBS-E-009861799, Hearing Exhibit 4/27-26.
¹⁹⁹² 10/3/2007 Goldman presentation, "SPG Trading – 2007," GS MBS-E-015654036.
¹⁹⁹³ Goldman also highlighted losses it suffered in 2008, related to its mortgage business, particularly mortgage related products associated with prime and Alt A residential loans. The Subcommittee did not investigate Goldman's use of short positions in 2008, nor its involvement with prime and Alt A loan products.
¹⁹⁹⁴ Gregory Zuckerman, The Greatest Trade Ever (2009); Michael Lewis, The Big Short (2010).
¹⁹⁹⁵ 7/20/2007 email from Joshua Birnbaum, "ABX Markets 07-02, 07-01, 06-2, 06-1: 3:00 p.m.," GS MBS-E- 012962076 (Mr. Birnbaum: "greatest trade ever . . . I have a huge short . . .").
¹⁹⁹⁶ 7/12/2007 email from Joshua Birnbaum, "ABX Markets 07-1, 06-2, 06-1:12:00 p.m.," GS MBS-E-012944742, Hearing Exhibit 4/27-146.
¹⁹⁹⁷ 10/3/2007 Goldman presentation, "SPG Trading – 2007," GS MBS-E-015654036; Birnbaum Self-Review, Hearing Exhibit 4/27-55c.
¹⁹⁹⁸ See 9/17/2007 Goldman presentation to Board of Directors, "Residential Mortgage Business, Global Impact of the Mortgage Crisis," at 2, GS MBS-E-001793840, Hearing Exhibit 4/27-41 (noting bankruptcies of Goldman clients IKB and Basis Capital). See also 8/10/2007 Goldman internal memorandum, "Summary of German Bank US Sub Prime Exposure," GS MBS-E-009994305; 11/27/2007 email from Mr. Lehman to Mr. Sparks, "ACA" (discussing "what would happen upon an ACA bankruptcy (which is the most likely scenario in our opinion)."), GS MBS-E-013746511.
¹⁹⁹⁹ See, e.g., April 27, 2010 Subcommittee Hearing, testimony of Lloyd Blankfein at 132 and David Viniar at 98.
²⁰⁰¹ 4/2010 Goldman report, "Risk Management and the Residential Mortgage Market," Hearing Exhibit 4/27-161.
²⁰⁰² Id.
²⁰¹² 2/8/2007 email from Daniel Sparks, "Post," Hearing Exhibit 4/27-7.
²⁰¹³ 2/14/2007 email from Daniel Sparks to himself, "Risk," GS MBS-E-002203268.
²⁰¹⁴ 2/21/2007 email exchange between Daniel Sparks and Jon W inkelried, "Mortgages today," GS MBS-E- 010381094, Hearing Exhibit 4/27-10.
²⁰¹⁵ 2/26/2007 emails between Tom Montag and Daniel Sparks, "Questions you had asked," GS MBS-E-019164799.
²⁰¹⁶ 3/3/2007 email from Daniel Sparks, "Call," Hearing Exhibit 4/27-14.
²⁰¹⁷ 3/12/2007 Goldman Firmwide Risk Committee, "March 7th FW R Minutes," GS M BS-E-00221171, Hearing Exhibit 4/27-19; see also 3/7/2007 email from Daniel Sparks to himself, "Risk Comm," GS MBS-E-002212223.
²⁰¹⁸ 3/8/2007 email from Daniel Sparks, "Mortgage risk," Hearing Exhibit 4/27-75.
²⁰¹⁹ 1/29/2007 email from Jon Egol to Fabrice Tourre, GS M BS-E-002620292. Mr. Tourre responded: "'The market is dead'??? Ouahhh, what do you mean by that? Do you have any insight I don't?" Mr. Egol replied: "LDL [let's discuss live] tomorrow." Id. Mr. Egol later wrote: "This is not my personal opinion – just a synopsis of the views of the customers we have seen today." 1/29/2007 email from Jon Egol to Daniel Sparks, GS MBS-E- 003249991.
²⁰²⁰ 2/11/2007 email from Jon Egol, "Index Tranche Pricing Study - 08Feb07.xls," GS MBS-E-002640951. See also 2/20/2007 email from Fabrice Tourre to Jon Egol, GS MBS-E-009332408 (Mr. Tourre: "By the way, quote from an ABS correlation trader (non-GS): "the mezz ABS CDO business is dead." Mr. Egol responded: "who." Mr. Tourre replied: "LDL." "LDL," which means "let's discuss live," is an abbreviation that appears throughout the Goldman documents produced to the Subcommittee.); 3/27/2007 email from a Goldman analyst, GS MBS-E- 009685430 ("The housing slowdown has the risk now not be[ing] offsetting [sic] by stronger capital spending. Both
²⁰²¹ 3/8/2007 email from Daniel Sparks, "Mortgage risk," Hearing Exhibit 4/27-75.
²⁰²² See also emails expressing concerns about the CDO market in particular. 6/27/2007 email from Jonathan Sobel, "Citi feedback on debt mkts," GS MBS-E-010807091 (reporting a conversation with the head of the mortgage desk at Citibank: "He is very nervous. ... Some Citi people think the CDO market is dead - a potential result of [subprime] contagion."); 8/30/2007 email from Daniel Sparks, "RAIT," GS MBS-E-010626401 ("the business model pursued by these guys (taking junior parts of the . . . capital structure and obtaining further leverage via the CDO market) is dead for the foreseeable future.").
²⁰²³ See also Section C(4)(b) of this chapter, above.
²⁰²⁴ 12/14/2007 email from Kevin Gasvoda, "Retained bonds," GS MBS-E-010935323, Hearing Exhibit 4/27-72. See also 2/8/2007 email from Kevin Gasvoda to Tom Montag, "Mortgage risk – credit residential," at 2, GS MBS-E- 010372233, Hearing Exhibit 4/27-74 (seven weeks later, Mr. Gasvoda reported transferring the remaining Goldman- originated RM BS securities to the mortgage trading desk to sell: "moving retained bonds out of primary desk hands and into 2ndry desk.").
²⁰²⁵ 2/9/2007 email exchange between Kevin Gasvoda and sales syndicate, "GS Syndicate RM BS Axes (INTERNAL)," GS MBS-E-010370495, Hearing Exhibit 4/27-73.
²⁰²⁶ 2/23/2007 "Significant Cash Inventory Change (Q1'07 vs. Q4'06)," datasheet prepared by Goldman, GS MBS- E-010037311, Hearing Exhibit 4/27-12.
²⁰²⁷ See, e.g., 3/8/2007 email from Daniel Sparks, "Mortgage risk," GS MBS-E-002206279, Hearing Exhibit 4/27-
²⁰²⁸ 2/8/2007 email from Kevin Gasvoda to Daniel Sparks, "Post," GS MBS-E-002201668, Hearing Exhibit 4/27-7 ("monthly performance analysis completed this morning on what can be securitized vs will be foreclosed tells us we should mark down around $22mm"). See also 2/2/2007 email from Daniel Sparks, "Second lien deal performance and write-down," GS MBS-E-002201050, Hearing Exhibit 4/27-92 ("Gasvoda alerted me last night that we will take a write-down to some retained positions next week as the loan performance data from a few second lien sub-prime deals just came in (comes in monthly) and it is horrible."); 2/8/2007 email from Kevin Gasvoda to Tom Montag, "Mortgage risk – credit residential," at 2, GS MBS-E-010372233, Hearing Exhibit 4/27-74. Mr. Gasvoda summarized the other write-downs as follows: "– 2nd lien residual – took $20-25mm write-downs over last 3 months (could lose $5-15 mm more) – 2nd lien retained bonds–took $18mm write-down this week (could lose $5-15 more) – Subperforming loan book – taking $28mm write-down this week (could lose $20-40mm more) W hat do all these areas have in common? – most HPA [housing price appreciation] sensitive sectors. They've crumbled under HPA slowdown as these are the most levered borrowers. W hat have we done to mitigate? – we stopped buying subprime 2nd liens in the summer of '06 and have focused on alt-a and prime."
²⁰²⁹ 2/9/2007 email from Daniel Sparks, "Scratch & dent loan write down $30mm," GS MBS-E-009760380.
²⁰³⁰ Id.
²⁰³¹ 2/13/2007 email from Richard Ruzika to Gary Cohn, "Catch Up," GS MBS-E-019794071. Mr. Cohn forwarded Mr. Ruzika's report to M essrs. Blankfein and W inkelried. Id. See also 6/8/2007 email from Kevin Gasvoda, "Project Omega - Mortgages MTM of Resids," GS MBS-E-013411815 (working on potential deal to sell marked- down mortgage residuals).
²⁰³² See Goldman Sachs response to Subcommittee QFR at PSI_QFR_GS0039.
²⁰³³ Id.
²⁰³⁴ Using loan data, the U.S. mortgage industry had developed anticipated default rates, including EPDs, for different mortgage classes, such as subprime, Alt A, and prime loans. These default rates, however, were based in large part on past loan underwriting practices and loan types that bore little resemblance to the loans issued in the years leading up to the financial crisis, as explained in Chapter V of this Report. In 2006, subprime loans began to experience higher than anticipated EPD rates, and lenders were hit by unanticipated repurchase demands they could not afford to pay. The first EPD-related mortgage lender failures occurred in late 2006, and bankruptcies continued throughout 2007.
²⁰³⁵ See, e.g., 3/26/2007 "Subprime Mortgage Business," Goldman presentation to Board of Directors, at 3-5, GS MBS-E-005565527 at 532, Hearing Exhibit 4/27-22 (timeline showing Ownit, a subprime lender, filed for bankruptcy on December 28, 2006, and list of subprime related businesses bankrupted, suspended, closed, sold, or put up for sale).
²⁰³⁶ Goldman or a third party due diligence firm it hired typically examined a sample of the loans. Based on the number of problem loans found in the sample, Goldman or the due diligence firm extrapolated the total percentage of problem loans likely to be contained in the pool. This information was then factored into the price Goldman paid for the pool. Any specific loans identified in the sampling process as deficient were generally returned to the lender for repurchase, but it was rare for an investment bank to review 100% of a pool to identify all of the deficient loans and return them. Subcommittee interview of Clayton Holdings (11/9/2010).
²⁰³⁷ See, e.g., 1/8/2007 email from Daniel Sparks, "Color on the Sub Prime Market," GS MBS-E-002195434 (after receiving a report on potential EPD problems, Mr. Sparks wrote: "I just can't see how any originator in the industry is worth a premium. I'm also a bit scared of accredited and new century, and I'm not sure about taking on a bunch of new exposures."); 2/8/2007 email from FICC analyst to Mr. Sparks, Mr. Gasvoda, and others, "2006 Subprime 2nds Deals Continue to Underperform," GS MBS-E-003775340, Hearing Exhibit 4/27-167d ("2006 vintage Subprime closed-end seconds (CES) issuance has continued to deteriorate. ... [N]on-GS Subprime CES deals are categorically experiencing similar negative behavior across shelves, originators, and servicers. ... Outlook: 2006 vintage ... could eventually reach 4-5+ times that of 2004/early 2005 vintages (more than double that of RA expected losses).").
²⁰³⁸ 2/2/2007 email from Daniel Sparks to Messrs. Montag, Ruzika, and Viniar, GS M BS-E-002201050, Hearing Exhibit 4/27-92. See also 2/2/2007 email from Michelle Gill, "W arehouse policy," GS MBS-E-005556331 (discussing proposal to charge higher warehouse fees to mortgage originators with higher EPD and "drop-out" rates, including Fremont and New Century).
²⁰³⁹ 2/27/2007 email from Christopher Gething, "Our Expansion," GS MBS-E-010387242 (expansion of St. Petersburg office to accommodate staff for loan repurchase effort).
²⁰⁴⁰ See, e.g. 3/2007 Goldman email chain, "RE: NC Visit," GS M BS-E-002048050 (mentioning four different third party "vendors" conducting loan reviews for the loan repurchase effort and stating: "W e're off to other vendors at this point.").
²⁰⁴¹ See 3/9/2007 email from Kevin Gasvoda, "priorities," GS M BS-E-002211055 (listing priority mortgage originators as Accredited, Fremont, New Century, and Novastar); 3/14/2007 Goldman email, "NC Visit," GS MBS- E-002048050 (identifying New Century, Fremont and Long Beach); 6/29/2007 email from Ed Chavez, "Countrywide Investigation Review Update," GS MBS-E-002134411.
²⁰⁴² 3/2/2007 email to Craig Broderick, "Audit Committee Package_Feb 21_Draft_Page.ppt," GS MBS-E- 009986805, Hearing Exhibit 4/27-63.
²⁰⁴³ 3/7/2007 email from Daniel Sparks, "Originator exposures," GS MBS-E-002206279, Hearing Exhibit 4/27-75.
²⁰⁴⁴ 3/12/2007 email from Daniel Sparks, "Subprime Opportunities," GS MBS-E-004641002. See also 4/15/2007 email, "March 2007 Counterparty Surveillance," GS MBS-E-002135667 (forwarding report to loan repurchase team, "Please find attached the March counterparty surveillance report (and boy, is it a doozy)."); 3/26/2007 "Subprime Mortgage Business," Goldman presentation to Board of Directors, at 5, GS MBS-E-005565527, Hearing Exhibit 4/27-22 (list of subprime related businesses bankrupted, suspended, closed, sold, or put up for sale).
²⁰⁴⁵ 3/13/2007 email from Manisha Nanik, "New Century EPDs," GS MBS-E-002146861, Hearing Exhibit 4/27-77. The review of the New Century loan pool found: "– approx 7% of the pool has material occupancy misrepresentation where borrowers took out anywhere from 4 to 14 loans at a time and defaulted on all. ... – approx 20% of the pool has material compliance issues. These are mainly missing HUDs. ... – approx 10% of the pool is flagged as potential REO [Real Estate Owned by lender] or potential unsecured
²⁰⁴⁶ See Goldman Sachs response to Subcommittee QFR at PSI_QFR_GS0040.
²⁰⁴⁷ 3/14/2007 Goldman email, "NC Visit," GS-MBS-E-002048050. See also 3/21/2007 email from Daniel Sparks to Tom Montag, GS M BS-E-002207114 (noting progress in cutting down funding commitments to mortgage originators to $300 million, including closeout of all funding to New Century in exchange for loans).
²⁰⁴⁸ See Goldman Sachs response to Subcommittee QFR at PSI_QFR_GS0040.
²⁰⁴⁹ 3/14/2007 Goldman email, "NC Visit," GS-MBS-E-002048050. See also 8/10/2007 email from Michelle Gill, "Fremont - Incremental Information," GS MBS-E-009860358 (Goldman's repurchase claims against Fremont would have amounted to a 9% ownership stake in Fremont after a proposed buyout by investor group; Goldman was not the largest purchaser of Fremont loans but its repurchase claims were 3-4 times larger than the claims of the nearest counterparty).
²⁰⁵⁰ 6/29/2007 email from Ed Chavez, "Countrywide Investigation Review Update," GS MBS-E-002134411.
²⁰⁵¹ See Goldman Sachs response to Subcommittee QFR at PSI_QFR_GS0040. The five mortgage originators to which Goldman directed the most repurchase requests were First Franklin, New Century, Fremont, Greenpoint, and Long Beach. Id.
²⁰⁵² 2/15/2007 email from Loren Morris of Goldman Sachs to David Schneider of W aMu and others, GS MBS-E- 002142424, Hearing Exhibit 4/13-69b.
²⁰⁵³ See, e.g., Goldman response to Subcommittee QFR at PSI_QFR_GS0040; 3/8/2007 email from Daniel Sparks to Jon W inkelried and others, "Mortgage risk," GS_M BS-E-002206279, Hearing Exhibit 4/27-75 ("Accredited ... plan to send us $21mm"); 6/25/2007 email from Deana Knox, "Option One," GS MBS-E-019645932 ("Option One has agreed to settle the entire claim, paying $2.5M (repurchase and monitor) and $3M will be rescinded.").
²⁰⁵⁴ New Century, for example, declared bankruptcy in April 2007. In re New Century TRS Holdings, Inc., Case No. 07-10416 (KJC) (US Bankruptcy Court, District of Delaware). See also 6/7/2007 email from Loren Morris, "W FALT 05-2 Repurchase demand," GS MBS-E-002131857.
²⁰⁵⁵ See, e.g., 1/3/2011 Bank of America press release, "Bank of America Announces Fourth-Quarter Actions," bankofamerica.com (announcing agreements to pay $3 billion to Freddie Mac and Fannie Mae to resolve residential mortgage repurchase claims related to loans originated by Countrywide).
²⁰⁵⁶ See 2/2/2007 Goldman memorandum to the Mortgage Capital Committee, "Agenda for Monday, February 5, 2007," GS MBS-E-002201064; 2/5/2007 Mortgage Capital Committee Memorandum regarding GSAMP Trust 2007-FM2, GS MBS-E-002201055-58.
²⁰⁵⁷ See discussion of Goldman's loan repurchase effort, above. In addition, in the prior month, a Goldman employee in the mortgage credit trading department sent senior Mortgage Department officials a lengthy email on the deteriorating subprime mortgage market and observed: "Subprime originators, large and small, ha[ve] exhibited a notable increase in delinquencies and defaults, however, deals backed by Fremont and Long Beach collateral have generally underperformed the most." 2/8/2007 email from Fabrice Tourre, "FW : 2006 Subprime 2nds Deals Continue to Underperform **INTERNAL ONLY**," at GS MBS-E-003775340, Hearing Exhibit 4/27-167d.
²⁰⁵⁸ In re Fremont Investment & Loan, Docket No. FDIC-07-035b, Order to Cease and Desist (M arch 7, 2007).
²⁰⁵⁹ See Standard & Poor's www.globalcreditportal.com.
²⁰⁶⁰ 3/23/2007 Goldman memorandum to members of the Mortgage Capital Committee, "Agenda for M onday, March 26, 2007," Hearing Exhibit 4/27-79 ("GSAMP 2007-HE2 – Goldman to securitize $960 million of subprime mortgage loans purchased by Goldman Sachs from New Century (71.9%)" and other mortgage originators. "The securitization is scheduled to be completed by April 12, 2007.").
²⁰⁶¹ See discussion of Goldman's loan repurchase effort, above. Earlier in March, a Goldman review of a different New Century loan pool had found that 26% of the loans were deficient and ought to be returned to New Century for a refund. 3/13/2007 email from Manisha Nanik, "New Century EPDs," GS MBS-E-002146861, Hearing Exhibit 4/27-77. In addition, New Century had already informed Goldman that it had insufficient cash to pay any loan repurchase requests. 3/14/2007 Goldman email, "NC Visit," GS-MBS-E-002048050.
²⁰⁶² In re New Century TRS Holdings, Inc., Case No. 07-10416 (KJC) (US Bankruptcy Court, District of Delaware).
²⁰⁶³ See Standard & Poor's www.globalcreditportal.com.
²⁰⁶⁴ 4/11/2007 email to Jon Egol, "GSAMP 2006-S3 – Computational Materials for W achovia (external)," GS MBS- E-003322028 [emphasis in original].
²⁰⁶⁵ 11/7/2007 letter from Sarah Smith, Controller and Chief Accounting Officer to SEC, at 5, GS MBS-E- 015713460, Hearing Exhibit 4/27-50. Goldman issued its final RM BS securitization for the year in August 2007.
²⁰⁶⁶ 4/2010 "Goldman Sachs Long Cash Subprime Mortgage Exposure, Investments in Subprime Mortgage Loans, and Investments in Subprime Mortgage Backed Securities November 24, 2006 vs. August 31, 2007 in $ Billions," chart prepared by the Subcommittee, Hearing Exhibit 4/27-163.
²⁰⁶⁷ 1/31/2007 email from Daniel Sparks to Tom Montag, "MTModel," Hearing Exhibit 4/27-91.
²⁰⁶⁸ See, e.g., 2/25/2007 emails between Daniel Sparks and Tom Montag, "Questions you had asked," GS MBS-E- 019164799.
²⁰⁶⁹ See 2/23/2007 email from Daniel Sparks, "Mortgages today," GS MBS-E-009759477 ("W e liquidated 3 CDO warehouses today and started the liquidation of another."); 2/26/2007 emails between Daniel Sparks and Tom Montag, "Questions you had asked," GS MBS-E-019164799; 2/22/2007 email from Peter Ostrem to David Rosenblum, "League Tables," GS MBS-E-001800683 ("FYI Liquidating 3 warehouses tomorrow. And Dan [Sparks] wants to liquidate Greywolf.").
²⁰⁷⁰ 2/25/2007 emails between Daniel Sparks and Tom Montag, "Questions you had asked," GS MBS-E-019164799.
²⁰⁷¹ See, e.g., 3/8/2007 email from Daniel Sparks to Mr. W inkelried and others, GS M BS-E-002206279, Hearing Exhibit 4/27-75 (Mortgage Department is "rushing to get deals rated"). See also discussions of Anderson and Timberwolf CDOs, below.
²⁰⁷² See 6/1/2007 email from David Lehman, "CDO Update," GS MBS-E-001866889 (referring to "liquidated warehouses"); 5/30/2007 email from David Lehman, "ABX hedges – Buy order," GS M BS-E-011106690 (directing trading desk to unwind hedges for CDO warehouse accounts). Some of the assets were accounted for in a separate "CDO Transition book," but the sale of the assets became the responsibility of the SPG trading desk.
²⁰⁷³ 6/22/2007 email from David Lehman, "Few trade posts," GS MBS-E-010848985.
²⁰⁷⁴ Between the fall of 2006 and mid-2007, Goldman originated 14 CDOs, which included or referenced many assets that were from or similar to Goldman's own inventory. The Subcommittee examined seven of those CDOs, and found that 57% of the CDO assets had come from Goldman, including over $3 billion in synthetic assets in which Goldman was the short party, and therefore stood to profit from a decline in the value of the underlying assets. Goldman had unsold securities from a number of these CDOs on its books.
²⁰⁷⁵ 3/9/2007 email exchange between Daniel Sparks and sales managers, "help," GS M BS-E-010643213, Hearing Exhibit 4/27-76.
²⁰⁷⁶ Id.
²⁰⁷⁷ Id.
²⁰⁷⁸ Id.
²⁰⁷⁹ 3/12/2007 email from David Lehman, "**Internal** Three focus axes for SP CDOs/SPG Trading," GS MBS-E- 021895601.
²⁰⁸⁰ Id.
²⁰⁸¹ 3/21/2007 email from syndicate, "Non-traditional Buyer Base for CDO AXES," GS MBS-E-003296460, Hearing Exhibit 4/27-78.
²⁰⁸² 3/30/2007 email from Fabrice Tourre to Daniel Sparks, David Lehman, and others, GS MBS-E-002678071, Hearing Exhibit 4/27-80.
²⁰⁸³ 4/11/2007 email from syndicate, "GS Syndicate Structured Product CDO Axes (INTERNAL)," GS MBS-E- 010533482, Hearing Exhibit 4/27-101. Mr. Sparks forwarded the directive to global senior sales executives with a note: "Your focus on this ax would be very helpful – we are trying to clean up deals and this is our priority."
²⁰⁸⁴ 4/19/2007 email from Daniel Sparks to Bunty Bohra, GS MBS-E-010539324, Hearing Exhibit 4/27-102. Mr. Sparks authorized large sales credits on at least one other occasion as well – for sales to cover the Department's $9 million AAA ABX net short position in September 2007. See 9/27/2007 email from Tom Montag to Daniel Sparks, GS M BS-E-010703744 (Mr. Montag asked: "Did we really pay sixty million in gcs [gross credits] on the aaa short covering? W hy so high?" Mr. Sparks responded: "It was a very big ax, but sales credits have become such a contentious point that trading team doesn't debate it anymore. The politics around sales credits had become unbelievable and were a hinderance [sic] to business." Mr. Montag replied: "so you overpay?").
²⁰⁸⁵ See, e.g., 5/11/2007 email from Tom Montag to Daniel Sparks, GS MBS-E-019648100.
²⁰⁸⁶ 5/11/2007 email from Daniel Sparks to Richard Ruzika, "You okay?," GS MBS-E-019659221.
²⁰⁸⁷ Id. ("We had a meeting today with viniar, don [Mullen], mcmahon, my team, controllers, gary [Cohn] on the phone to walk through situation. The market has seized up so much that levels are very hard to determine for the complex products – which also are difficult to model for value due to market changes."); 5/14/2007 email from David Lehman, "Gameplan – asset model analysis," GS MBS-E-001865782 (last email in a longer email chain).
²⁰⁸⁸ 5/14/2007 email from David Lehman, "Gameplan – asset model analysis," GS MBS-E-001865782 (last email in a longer email chain) ("Following up from this afternoon's meeting. W e are going to better evaluate the CDO^2 risk using three distinct frameworks: 1) Blended scenario analysis using HPA [housing price appreciation;] ... 2) Risk neutral/correlation framework, consistent with our current synthetic ABS CDOs[;] 3) Simplistic loss assumptions on the underlyings / Market Value Coverage"); 5/14/2007 email from Elisha W eisel, "Modelling Approaches for Cash ABS CDO/CDO^2," GS MBS-E-001863618. See also 3/6/2007 email from Elisha W eisel to Daniel Sparks, "Property Derivs," GS MBS-E-010649734 (discussing lack of model or models to consistently value subprime assets).
²⁰⁸⁹ 5/14/2007 email from Tom Montag to Daniel Sparks, GS MBS-E-019642797.
²⁰⁹⁰ 5/20/2007 email from Lee Alexander to Daniel Sparks, Donald Mullen, Lester Brafman, and Michael Kaprelian, "Viniar Presentation - Updated," GS MBS-E-010965211 (attached file "Mortgages V4.ppt," "Mortgages Department, May 2007," GS MBS-E-010965212). This document is identified in the relevant correspondence as "v.4," and appears to be the final version of a draft presentation prepared earlier that day, "Mortgages Department, May 2007," GS MBS-E-001863651, which bears a time and date stamp of May 20, 2007, 2:58 p.m. See also 5/20/2007 Goldman document, "Mortgage Presentation to David Viniar – Dial In Information," GS MBS-E-
²⁰⁹¹ The writedowns were required, in part, because the assets in the CDO warehouses had generally been marked at cost when purchased or at a value related to the final securitized structure, called "mark-to-securitization-exit." Those valuation methods generally resulted in values well above what the assets would bring if sold individually in a declining mortgage market.
²⁰⁹² Id.
²⁰⁹³ 5/20/2007 email from Lee Alexander to Daniel Sparks, Donald Mullen, Lester Brafman, Michael Kaprelian, "Viniar Presentation - Updated," GS MBS-E-010965211 (attached file "Mortgages V4.ppt," "Mortgages Department, May 2007," GS MBS-E-010965212). By May 2007, Goldman had ceased originating any new CDO securitizations.
²⁰⁹⁴ Id. The four identified customers appear to be ones which the sales force felt it had the greatest likelihood of success in selling the CDO assets. Two of the customers, Basis Capital and Polygon, had already made recent purchases of Point Pleasant and Timberwolf securities, respectively, from Goldman. See Goldman Sachs response to Subcommittee QFR at PSI_QFR_GS0226.
²⁰⁹⁵ The client list drawn up pursuant to the Gameplan was a stark example of actions taken by Goldman to target specific clients for CDO sales, but different Mortgage Department desks maintained their own "target lists" that focused on specific types of products, specific transactions, and specific types of cross-selling opportunities with other Goldman departments. See, e.g., 3/1/2007 email from Michael Swenson, "names," GS MBS-E-012504595 (SPG Trading target list tiered according to likelihood of purchasing); 2/14/2007 email to Matthew Bieber, "Timberwolf I, Ltd. – Target Account List," GS MBS-E-001996121 (list of U.S. accounts "we should be directly targeting" for Timberwolf sales); 3/2/2007 email from David Lehman, "ABX/Mtg Credit Accts," GS MBS-E-
²⁰⁹⁶ 5/19/2007 Goldman presentation, "Mortgages CDO Origination – Retained Positions & W arehouse Collateral, May 2007," GS MBS-E-010951926.
²⁰⁹⁷ 5/19/2007 email from Daniel Sparks, "Mortgages CDO Origination Presentation," GS M BS-E-010973174 (Mr. Sparks: "p. 5 again 'marked to securitization exit' [re marked to model language] ... some A and BBB were sold on the deals [re demand only for the supersenior tranche language]").
²⁰⁹⁸ See 5/19/2007 email from Dan Sparks to Lee Alexander, others, GS MBS-E-010973174 (attached file "Mortgages V3.ppt," GS MBS-E-010973175); and 5/20/2007 9:52 a.m. draft "Mortgages V4.ppt," GS MBS-E- 010952331; compared to final version, 5/20/2007 email from Lee Alexander to Daniel Sparks, Donald Mullen, Lester Brafman, and Michael Kaprelian, "Viniar Presentation - Updated," GS MBS-E-010965211 (attached file "Mortgages V4.ppt," "Mortgages Department, May 2007," GS M BS-E-010965212).
²⁰⁹⁹ 5/17/2007 email from Daniel Sparks to Tom Montag, "Ostrem is resigning," GS MBS-E-019654926.
²¹⁰⁰ 5/11/2007 email from Daniel Sparks, "You okay?," GS M BS-E-019659221 ("I'm going to make a change in the responsibility of the business away from Ostrem to david lehman (with Swenson helping).").
²¹⁰¹ 5/19/2007 email to David Lehman, "congratulations, but seems like you have a lot of work ahead of you," GS MBS-E-018921924.
²¹⁰² Id.
²¹⁰³ 5/19/2007 email from Jon Egol to Daniel Sparks, GS MBS-E-018921924.
²¹⁰⁴ 5/20/2007 email from David Lehman, "ABX hedges – Buy order," GS M BS-E-011106690 ("begin unwinding certain ABX hedges vs. the CDO W H [warehouse] and transition book"); 6/1/2007 email from Mr. Lehman, "CDO Update," GS M BS-E-001866889 ("liquidated warehouses and the trading books").
²¹⁰⁵ Subcommittee interview of David Lehman (9/27/2010).
²¹⁰⁶ 5/24/2007 email from Yusuf Aliredha to Mr. Sparks, Mr. Lehman, and others, "Priority Axes," GS MBS-E- 001934732.
²¹⁰⁷ Id.
²¹⁰⁸ 4/27/2007 email from George Maltezos, Goldman Australia sales, to Jon Egol, "utopia," GS MBS-E- 003305101.
²¹⁰⁹ 5/20/2007 email from George Maltezos to David Lehman, "T/wolf and Basis," GS MBS-E-001863555.
²¹¹⁰ See Goldman Sachs response to Subcommittee QFR at PSI_QFR_GS0226.
²¹¹¹ 5/30/2007 email from David Lehman, "Timberwolf – Order from Tokyo Star Bank," GS MBS-E-001934058. Tokyo Star Bank was not on the list of "targeted" customers, but had been solicited previously by the Japan sales team pursuant to an earlier sales directive listing Timberwolf as a priority.
²¹¹² 6/11/2007 email from syndicate, "GS Syndicate Structured Product CDO Axes (INTERNAL USE ONLY)," GS MBS-E-001914921-24.
²¹¹³ Id.
²¹¹⁴ Id. See also "New Investors Board the Asian CDO Train," Creditflux (6/1/2007) (noting that while non bank investors had previously been barred from buying CDO assets in most Asian countries, regulators increasingly allowed life insurance companies and other financial firms to buy them within prescribed limits).
²¹¹⁵ 6/13/2007 email from Goldman Sachs Japan sales, "**GS SP CDO Axes** – Asia Trade Update (INTERNAL USE ONLY)," GS M BS-E-010803888 [emphasis in original].
²¹¹⁶ 6/13/2007 email from Goldman Sachs Japan sales, "**GS SP CDO Axes** – Asia Trade Update (INTERNAL USE ONLY)," GS MBS-E-011212260.
²¹¹⁷ 6/18/2007 email from David Lehman, "$20mm Point Pleasant trade w/ TK Star Bank," GS MBS-E-011136832.
²¹¹⁸ Id.
²¹¹⁹ 6/18/2007 email from Goldman Sachs Japan sales, "Point Pleasant 07-A1 // Tokyo Star Bank (internal use only)," GS M BS-E-001920459 [emphasis in original].
²¹²⁰ See Goldman Sachs response to Subcommittee QFR at PSI_QFR_GS0226; 7/24/2007 email from [Taiwan], "7/23 CDO/RM BS requests from Taiwan," GS MBS-E-011198375, Hearing Exhibit 4/27-67.
²¹²¹ Id.
²¹²² 8/15/2007 email from Donald Mullen, "Post," GS MBS-E-009740784, Hearing Exhibit 4/27-32.
²¹²³ 8/17/2007 email from Michael Swenson, "Twolf super seniors," GS MBS-E-001927791.
²¹²⁴ 8/23/2007 email from Jon Egol, "*** SP CDO/Correlation Desk Super Senior Axes *** (INTERNAL USE ONLY), GS MBS-E-011310717.
²¹²⁵ Id. Around the same time, a Goldman managing director who ran Corporate / PW M [Private W ealth Management] Sales in Japan and sold investments to wealthy individuals, inquired: "Do you have any cdo secondary inventory." 8/21/2007 email from PW M Managing Director, GS MBS-E-010619382. He was advised by the SPG Trading Desk that Goldman was "prohibited from offering cdo paper to all pw [private wealth] clients, even [qualified institutional] pw clients. ... To change this, we would have to petition the committee that oversees such things [the Structured Investment Product Committee]." Id. Mr. Lehman added: "Spoke with Sparks about this. Given the complexity of the product, we would like to handle this on a client by client basis." Id. After receiving information that potential clients had previously purchased ABS CDOs from other firms, Mr. Lehman asked Goldman compliance: "W hat do we need to do on our end to get this approved." 8/28/2007 email from David Lehman, "Japan PW M Client Interest in ABS CDO (internal use only)," GS M BS-E-011090928. One of Mr. Lehman's team members in the Mortgage Department replied: "Ldl [let's discuss live]. Have info on this." Id. Mr. Lehman replied "xoxo." Id.
²¹²⁶ 9/5/2007 email from Michael Swenson, "Refresh of Axe Priorities," GS MBS-E-010684858.
²¹²⁷ Id.
²¹²⁸ Id.
²¹²⁹ 9/6/2007 email from Daniel Sparks to syndicate desk, "Refresh of Axes Priorities," GS MBS-E-010685200.
²¹³⁰ 3/1/2010 letter from Goldman Sachs to the Financial Crisis Inquiry Commission, GS-PSI-01310 at 16.
²¹³¹ 4/19/2007 email from Daniel Sparks, "*UPDATE* GS Syndicate Structured Product CDO Axes," GS MBS-E- 010539324, Hearing Exhibit 4/27-102.
²¹³² Subcommittee interview of David Viniar (4/13/2010) and Craig Broderick (4/9/2010).
²¹³³ See, e.g., 2/2007 Goldman email chain, "FYIs," GS M BS-E-002339552 (regarding residential credit scratch & dent loan book: "Has the biz agreed with controllers about how frequently each book is to be marked? Daily? W eekly? M onthly?"; Mr. Sparks' response: "For this book I think monthly is the right way as the data comes monthly on performance. Dramatic mkt moves could change things."). CDOs were often marked monthly, as hedge fund clients generally needed month-end valuations of CDOs in their portfolios to enable them to report hedge fund Net Asset Values (NAVs) to clients. See, e.g., 6/28/2007 email from Bear Stearns, "Missing Marks (15).xls," GS MBS-E-001965860 (portfolio manager requesting month-end marks: "I need the 4 bonds marked for 5/31/07 we still need to report an NAV."); 6/19/2007 email from Lester Brafman to Jon Egol, GS M BS-E-003373736 (regarding Abacus CDO securities, Mr. Egol wrote: "W e mark them monthly").
²¹³⁴ See, e.g., 2/12/2007 email from Daniel Sparks, "Post today," GS MBS-E-009763506 (New Century "claim[s] we are the only ones being harsh. C-Bass claims we are the only one margin calling. Our marks are appropriate for moves in the market. More margin calls going out today.").
²¹³⁵ Subcommittee interview of David Lehman (4/12/2010).
²¹³⁶ Mr. Broderick explained in his interview with the Subcommittee that because of the volatility in the subprime market, Goldman had an unusually large number of disputes with customers over marks or collateral valuation during 2007. Subcommittee interview of Craig Broderick (4/9/2010). See also 8/2/2007 email from Stacy Bash- Polley, "Marks Summary," GS M BS-E-013349723 (transmitting complaints from eight clients that Goldman's marks were far lower than those of other dealers); 2/12/2007 email from Daniel Sparks, "Post today," GS MBS-E- 009763506 (New Century "claim[s] we are the only ones being harsh. C-Bass claims we are the only one margin calling."); 8/10/2007 Goldman memorandum, "Summary of German Bank US Sub Prime Exposure," GS MBS-E-009994305. This memorandum was generated by Goldman's European Investment Banking Division, FICC Sales and Credit. It highlighted losses incurred by many German banks due to markdowns in the value of U.S. subprime assets, necessitating several European Central Bank bailouts. The memorandum stated: "W e understand from clients that valuation marks provided by Goldman Sachs on ABS are substantially lower than the competition's valuations. As a result, clients are irritated by the valuation difference." Goldman's dispute with AIG FP is another example. The two companies disagreed over both the marks and the amount of collateral and margin that AIG had to post with Goldman in connection with various mortgage products. At one point in the dispute, Co-President Jon W inkelried wrote to his colleagues: "[O]ne thing we're not going to do is compromise on what we think the right marks are and our margin process." 8/2/2007 email from Jon W inkelried, "Aig collateral call," GS MBS-E-010055302. Goldman's dispute with AIG continued for over a year until the Federal Reserve, through the Maiden Lane III transaction, ultimately ensured that Goldman and its customers received 100 cents on the dollar on the bulk of their disputed claims against AIG. Subcommittee interview of David Viniar (4/13/2010). Goldman later told regulators that it had more collateral disputes than anticipated during the financial crisis. 11/13/2007 Goldman email, GS MBS-E-010023525 (attachment, 11/14/2007 "Tri-Lateral Combined Comments," GS MBS-E-010135693-715 at 695). According to Goldman documents, as late as October 30, 2007, its Mortgage Department generated approximately 66% of all derivative collateral disputes by Goldman customers. 10/30/2007 Goldman presentation, "Derivative Collateral Dispute Summary," GS MBS-E- 009882064.
²¹³⁷ See, e.g., 8/10/2007 Goldman memorandum, "Summary of German Bank US Sub Prime Exposure," GS MBS-E-009994305 (highlighting losses incurred by many German banks due to markdowns in the value of U.S. subprime assets, necessitating several European Central Bank bailouts).
²¹³⁸ 5/11/2007 email from Craig Broderick, "CDOs - Mortgages," Hearing Exhibit 4/27-84.
²¹³⁹ Id. The reference to the "30th floor" was the floor on which Goldman's most senior executives had office space in its New York headquarters.
²¹⁴⁰ 5/11/2007 email from Harvey Schwartz to Daniel Sparks, Tom Montag, and others, GS MBS-E-010780864. As explained earlier, some clients were affected by Goldman's marks even after completing purchase of CDO securities, due to repo financing margin requirements, CDS collateral requirements, or other arrangements.
²¹⁴¹ 5/11/2007 chain of email exchanges among Messrs. Mullen, Schwartz, Montag, and Sparks, GS-MBS-E- 010780849, Hearing Exhibit 4/27-103.
²¹⁴² Id.
²¹⁴³ See, e.g., discussion of Timberwolf CDO, below.
²¹⁴⁴ See Section (3)(a), above.
²¹⁴⁵ 4/2010 "Goldman Sachs Mortgage Department Total Net Short Position, February - December 2007 in $ Billions (including All Synthetic and Cash Positions in Mortgage Related Products)," Hearing Exhibit 4/27-162.
²¹⁴⁶ See 7/25/2007 email from Arbind Jha to Kevin Kao, "Cash bonds," GS MBS-E-011128623 ("huge changes in marks today").
²¹⁴⁷ 7/29/2007 email from Daniel Sparks to Tom Montag, "Problem," GS MBS-E-010876595 ("[w]e probably should have taken more time to put through the CDO monster remark").
²¹⁴⁸ 7/29/2007 email from Daniel Sparks to Mr. Mullen, "Problem," GS MBS-E-010876565.
²¹⁴⁹ 7/29/2007 email from Daniel Sparks to Tom Montag, "Problem," GS MBS-E-010876595 ("we rushed it because of Basis and a desire to protect ourselves against counter-parties"). See also 7/13/2007 email from John McHugh to Michael Swenson and David Lehman, "Talking Points Needed for Gary Cohn," GS MBS-E-010853931 ("BSAM [Bear Stearns Asset Management] & other hedge fund managers (most recently Basis Capital) announced they were halting fund redemptions and/or liquidating holdings, with some likely to fail.").
²¹⁵⁰ See 7/31/2007 email chain between Tom Montag and Lloyd Blankfein, "Mortgage Derivative Collateral Disputes – 7/31 Update (COB 7/27 marks)," GS MBS-E-009691545.
²¹⁵¹ Id.
²¹⁵² Id. By late August, Goldman had instituted a system that required senior management pre-approval for large markdowns. On August 28, 2007, Mr. Lehman sent Mr. Sparks a list of "Mark changes which are greater than 5% / greater than 10%" for his approval. 8/28/2007 email from David Lehman to Daniel Sparks, GS MBS-E-010623779. Mr. Lehman asked whether he should ask Mr. Mullen for approval of the changes greater than 10%, and Mr. Sparks told him to do so. Id.
²¹⁵³ Id.
²¹⁵⁴ 8/16/2007 email from Daniel Sparks, "Mort P&L explanation," GS MBS-E-010680327. Since Goldman took the entire net short side in many of its Abacus CDOs, the customers' losses translated directly into gains for Goldman.
²¹⁵⁵ Id. The Correlation Trading Desk reported $145 million in total profits, which were then offset by losses on other mortgage desks.
²¹⁵⁶ 8/16/2007 email from Jon Egol to M ichael Swenson, "Projected Corr Customers winners/losers from single- name mark changes," GS MBS-E-011092473, Hearing Exhibit 4/27-33.
²¹⁵⁷ See, e.g., 5/11/2007 email from Craig Broderick, "CDOs - Mortgages," GS MBS-E-009976918, Hearing Exhibit 4/27-84; see also 8/10/2007 Goldman internal memorandum, "Summary of German Bank US Sub Prime Exposure," GS MBS-E-009994305.
²¹⁵⁸ 10/12/2007 email to Daniel Sparks, "US ABS SS Intermediation Trades," GS M BS-E-013706095, Hearing Exhibit 4/27-70.
²¹⁵⁹ Id.
²¹⁶⁰ 7/24/2007 email from [Taiwan], "7/23 CDO/RMBS requests from Taiwan," GS M BS-E-011198375, Hearing Exhibit 4/27-67.
²¹⁶¹ 8/2/2007 email from Stacy Bash-Polley to Messrs. Montag, Mullen, Schwartz, and Sparks, "Marks Summary," GS MBS-E-013349723.
²¹⁶² Id.
²¹⁶³ 6/21/2007 email from Mr. Sparks to Lester Brafman, "Repo," GS MBS-E-010847490.
²¹⁶⁴ The Subcommittee did identify at least one instance of a mark change. Goldman's China sales representative contacted the ABS Desk to request an increase in a mark on an RMBS security: "[C]an we try our best to show 'better' indicative prices for [client]? ... [C]lient is under pressure of being questioned that they bought something looks really bad. ... [W ]e showed a price of LBMLT 06 A A1 as of 95-00 . . . this is something hard for client to believe .... [W]e need them to think of GS as the best firm, and we need them to be our best client when next biz boom comes. ... W e would highly appreciate if a slightly aggressive price can be showed from trading desk." 5/21/2007 email from China sales representative to Edwin Chin and others, "Mark to market prices," GS MBS-E- 011068490. Mr. Chin moved the mark in question from 95 to 98, and wrote:
²¹⁶⁵ 8/6/2007 email from David Lehman to Japan sales, "RE: Tokyo Star," GS MBS-E-001927891.
²¹⁶⁶ Id.
²¹⁶⁷ 6/6/2007 email from David Lehman to Japan sales, "Point Pleasant Marks – request from Tokyo Star Bank," GS MBS-E-001912408-10 at 9.
²¹⁶⁸ 9/26/2007 Goldman Sachs 2007 Performance Review for Michael Swenson, "Reviewee's Feedback," GS-PSI- 02399, Hearing Exhibit 4/27-55b.
²¹⁶⁹ 11/20/2007 email from Thomson IFR - ABS, "ABS: Market Tense as Goldman Predicts RMBS CDO Problems to Drag On," GS MBS-E-013782989.
²¹⁷⁰ Id.
²¹⁷¹ Id.
²¹⁷² See 9/17/2007 Goldman presentation to Board of Directors, "Residential Mortgage Business, Global Impact of the Mortgage Crisis," at 2, GS MBS-E-001793840, Hearing Exhibit 4/27-41 (noting bankruptcies of Goldman clients IKB and Basis Capital). See also 8/10/2007 Goldman internal memorandum, "Summary of German Bank US Sub Prime Exposure," GS MBS-E-009994305; 11/27/2007 email from David Lehman to Daniel Sparks, "ACA,"
²¹⁷³ See 6/21/2007 email from Fabrice Tourre, "Post on ACA," GS MBS-E-002562148. See also ACA Financial Guaranty Corp. v. Goldman, Sachs & Co., Complaint (filed 1/6/2011, Sup. Ct. N.Y) at ¶ 7 (ACA now "operates as a run-off insurance company."), available at http://www.aca.com/press/pdfs/2011/20110106-GoldmanComplaint.pdf.
²¹⁷⁴ April 27, 2010 Subcommittee Hearing at 66.
²¹⁷⁵ Id.
²¹⁷⁶ Id.
²¹⁷⁷ Id. Mr. Sparks went on to say: "I mentioned we made some bad business decisions. These deals performed horribly. That is bad. ... [T]hat said, just because one person in my business unit or a few people might have had one view, I can tell you there were a lot of people in my business unit that had a very different view, and there were a lot of investors that had a very different view." Id.
²¹⁷⁸ See 5/19/2007 draft Goldman presentation, "Mortgages CDO Origination – Retained Positions & W arehouse Collateral, May 2007," GS MBS-E-010951926.
²¹⁷⁹ 2/8/2007 email from Mr. Sparks, "Post," Hearing Exhibit 4/27-7.
²¹⁸⁰ 3/3/2007 email from Mr. Sparks, "Call," Hearing Exhibit 4/27-14.
²¹⁸¹ 3/8/2007 email from Mr. Sparks, "Mortgage risk," Hearing Exhibit 4/27-75.
²¹⁸² 3/12/2007 Goldman memorandum to Firmwide Risk Committee, "March 7th FW R Minutes," GS MBS-E- 00221171, Hearing Exhibit 4/27-19.
²¹⁸³ 2/21/2007 email from Daniel Sparks to Jon W inkelried, "Mortgages today," GS M BS-E-010381094, Hearing Exhibit 4/27-10.
²¹⁸⁴ April 27, 2010 Subcommittee Hearing at 66. The Anderson, Timberwolf, and Abacus 2007-AC1 CDOs were issued in March and April 2007.
²¹⁸⁵ 4/27/2007 email from Deeb Salem to M ichael Swenson, GS MBS-E-012432706 (6 of 20 deals in ABX Index put on watch or downgraded).
²¹⁸⁶ 7/10/2007 email to George Maltezos, "GS Cashflow/ABACUS CDOs Mentioned in S&P Report on CDO Exposure to Subprime RMBS," GS MBS-E-001837256; 7/10/2007 email from Goldman Sachs analyst to Goldman Sachs Japan salesman, "GS Cashflow/ABACUS CDOs Mentioned in S&P Report on CDO Exposure to Subprime RMBS," GS M BS-E-001990255 (updating percentage exposure from 25% to 35%).
²¹⁸⁷ Id.
²¹⁸⁸ 10/26/2007 email from Goldman salesman to Michael Swenson, "ABACUS 2007-AC1 – Marketing Points (INTERNAL ONLY) [T-Mail]," GS MBS-E-016034495.
²¹⁸⁹ See "List of W aMu-Goldman Loans Sales and Securitizations," Hearing Exhibit 4/13-47b.
²¹⁹⁰ 2/13/2006 Goldman chart, "Current W arehouse Facilities and Funded Balances," GS MBS-E-001157934.
²¹⁹¹ See Chapters III and IV, above.
²¹⁹² See, e.g., 4/14/2005 OTS email, "Fitch," OTSW ME05-012 0000806, Hearing Exhibit 4/13-8a.
²¹⁹³ 2/8/2007 email from Goldman analyst to Mr. Sparks, Mr. Gasvoda, and others, "2006 Subprime 2nds Deals Continue to Underperform **INTERNAL ONLY**," GS MBS-E-003775340, Hearing Exhibit 4/27-167d.
²¹⁹⁴ 5/17/2007 email from Deeb Salem to Michael Swenson, "FW : LBML 06A," GS M BS-E-012550973, Hearing Exhibit 4/27-65.
²¹⁹⁵ See wamusecurities.com.
²¹⁹⁶ For more information about Fremont, see Chapter IV, Section D(2)(d).
²¹⁹⁷ 3/7/2007 Fremont General Corporation 8-K filing with the SEC.
²¹⁹⁸ 11/16/2006 Goldman internal email, "ACA and Freemont [sic] deal," Hearing Exhibit 4/27-173.
²¹⁹⁹ 3/14/2007 Goldman email, "NC Visit," GS-MBS-E-002048050.
²²⁰⁰ Id.; see also 8/10/2007 email from Michelle Gill, "Fremont - Incremental Information," GS MBS-E-009860358 (Goldman's repurchase claims against Fremont would have amounted to a 9% ownership stake in Fremont after a proposed buyout by investor group; Goldman was not the largest purchaser of Fremont loans but its repurchase claims were 3-4 times larger than the claims of the nearest counterparty).
²²⁰¹ See Goldman Sachs response to Subcommittee QFR at PSI_QFR_GS0040.
²²⁰² 2/20/2007 Goldman memorandum to Mortgage Capital Committee, "Request for renewal of the existing $1 billion ... 1-year revolving warehouse facility," GS MBS-E-001157942. Goldman wrote that Fremont produced "revenues totaling $13.38 million in 2006 of which $620,000 came in the form of warehouse usage and commitment fees."
²²⁰³ See 2/2/2007 Goldman memorandum to the Mortgage Capital Committee, "Agenda for Monday, February 5, 2007," GS MBS-E-002201064; 2/5/2007 Mortgage Capital Committee Memorandum regarding GSAMP Trust 2007-FM2, GS MBS-E-002201055 - 58.
²²⁰⁴ 1/24/2007 S&P internal email, "Quick Question: Fremont," Hearing Exhibit 4/23-93b. See also 2/1/2007 S&P internal email, "Defaults cause Fremont to end ties to 8,000 brokers," Hearing Exhibit 4/23-93d (S&P analysts circulated an article about how Fremont had stopped using 8,000 brokers due to loans with some of the highest delinquency rates in the country).
²²⁰⁵ 1/24/2007 S&P internal email, "RE: Quick Question: Fremont," Hearing Exhibit 4/23-93c.
²²⁰⁶ 4/17/2010 S&P downgrade of GSAMP Trust 2007-FM2 containing Fremont mortgages, Hearing Exhibit 4/23-
²²⁰⁷ See 3/21/2007 Goldman spreadsheet, "RMBS CDS Trade History 19Jan06 - 19Mar07 v3," GS MBS-E- 013648130.
²²⁰⁸ See Standard & Poor's www.globalcreditportal.com.
²²⁰⁹ In some cases, Goldman used assets from its own inventory or warehouse accounts, so that it could transfer assets with falling value to the CDO and the investors who purchased the CDO securities. The Subcommittee examined seven CDOs issued by Goldman, and of those, 57% of the CDOs' assets were sourced from Goldman, including over $3 billion in synthetic assets in which Goldman was the short party, and therefore stood to profit from a decline in the value of the underlying assets.
²²¹⁰ Mezzanine subprime RMBS assets are RMBS securities that carry a credit rating of BBB or BBB- or CDS contracts that reference those types of RM BS securities. Mezzanine RM BS assets are riskier than AAA, AA, and A rated RMBS securities, but less risky than those that carry, for example, BB, B, or CCC ratings.
²²¹¹ The ABX Index tracks the performance of a designated basket of 20 subprime RMBS securitizations. It consists of five separate indices, each of which tracks a different subset of the RMBS basket, divided according to credit ratings. The indices that track the mezzanine RMBS securities, for example, track the 20 RMBS securities that carry BBB and BBB- credit ratings. In ABX assets, investors enter into CDS contracts in which one party takes the long side, essentially betting that the ABX indices tracking the mezzanine RMBS securities will increase in value, while the other party takes the short side, essentially betting that the indices will fall in value. Prior to establishing the Hudson CDO, Goldman had taken the long side in a number of CDS contracts linked to the ABX indices tracking mezzanine RMBS securities.
²²¹² 10/2006 Goldman document, "Hudson M ezzanine Funding 2006-1, Ltd.," Hearing Exhibit 4/27-87. The first Hudson CDO, Hudson High Grade, was issued in September 2006. The second, discussed here, was Hudson Mezzanine 2006-1, issued in October 2006. The third was Hudson Mezzanine 2006-2, issued in February 2007.
²²¹³ Id. For more information about Goldman's role as the liquidation agent in Hudson, see Section C(5)(b)(iii)AA, below.
²²¹⁴ In synthetic CDOs, the cash proceeds from the sales of the CDO securities were used to purchase "collateral debt securities." Later, when cash was needed to make payments to a long or short party, those collateral securities were sold, and the cash was used to make the payments. In the event the collateral securities could not be sold for face (par) value, the collateral put provider paid the difference to the CDO. For more information about the role of collateral put providers, see Section C(5)(b)(iii)BB, below.
²²¹⁵ See 2/18/2008 Goldman document, "CDO Transactions (July 1, 2006 - December 31, 2007) in which Goldman Sachs acted as underwriter," GS MBS 0000004337 at 4338. Acting as the "senior swap counterparty" meant that Goldman served as an intermediary between the Hudson CDO and the super senior investor. Acting as "credit protection buyer" meant that Goldman initially took the short side of the CDO and, in the case of Hudson 1, kept 100% of the short side during the life of the CDO.
²²¹⁶ See Goldman response to Subcommittee QFR at PSI_QFR_GS0239.
²²¹⁷ 9/20/2006 email from Arbind Jha to Josh Birnbaum, GS MBS-E-012685289. See also 9/20/2006 Firmwide Risk Committee Minutes, GS MBS 0000004472.
²²¹⁸ See 10/24/2006 email from Jonathan Sobel to Tom Montag, Dan Sparks, and others, GS MBS-E-010919930 ("CDO should price tomorrow and is in good shape. ... W e also are starting to see some short covering, which we will sell into to further reduce our risk toward your 50% goal.").
²²¹⁹ Subcommittee interview of Michael Swenson (4/16/2010). Mr. Swenson told the Subcommittee that Goldman had been long "several billion" in ABX in September 2006.
²²²⁰ 8/9/2006 Firmwide Risk Committee Minutes, GS M BS-E-009682590; Subcommittee interview of Joshua Birnbaum (10/1/2010). Mr. Birnbaum recalled a "directive" to reduce ABX exposure in the summer of 2006.
²²²¹ See, e.g., 9/21/2006 email from Jonathan Sobel to Tom Montag, "ABX wider again today," GS MBS-E- 009739145 ("Down about $10mm."); 9/12/2006 email from Jonathan Sobel to Michael Swenson and Daniel Sparks, "ABX," GS MBS-E-012681410 ("The last post you gave me was this morning when you thought things were 'firm'. Now I find out that we're down $6mm on the day. I understand things move, but you need to post me. Also, I want to reduce this position."); 9/9/2006 Firmwide Risk Committee Minutes, GS M BS 0000004468 ("Business continuing to reduce volatile ABX position."); 8/23/2006 Firmwide Risk Committee Minutes, GS MBS-E-009615593 ("Mortgages sold down another net 15% of their large ABX position.").
²²²² 9/19/2006 email from Jonathan Sobel to Daniel Sparks, Michael Swenson, and Josh Birnbaum, GS MBS-E- 012683946.
²²²³ 9/19/2006 email from Josh Birnbaum to M ichael Swenson, GS MBS-E-012683946. Mr. Sobel also informed Mr. Swenson later that day: "W e need to reach a conclusion on the viability of a structured exit." 9/19/2006 email from Jonathan Sobel to Michael Swenson, GS MBS-E-012328199.
²²²⁴ Subcommittee interview of Peter Ostrem (10/5/2010).
²²²⁵ Id.; Subcommittee interview of Darryl Herrick (10/13/2010).
²²²⁶ 9/19/2006 calendar invite from Michael Swenson, GS MBS-E-012328194.
²²²⁷ 9/19/2006 email from Peter Ostrem, GS MBS-E-01818608, Hearing Exhibit 4/27-86. Goldman later told the Subcommittee that Hudson actually offset $1.39 billion in ABX assets on its books. Goldman response to Subcommittee QFR, PSI_QFR_GS0239.
²²²⁸ 9/20/2006 email from Michael Swenson to Jonathan Sobel, GS MBS-E-012328203. See discussion of selection of 60 single names by Mr. Herrick and Mr. Salem, below.
²²²⁹ 9/20/2006 Firmwide Risk Committee Minutes, GS MBS 0000004472; 9/20/2006 email from Arbind Jha to Josh Birnbaum, GS MBS-E-012685289.
²²³⁰ 9/21/2006 email from Jonathan Sobel to Tom Montag, GS MBS-E-009739145.
²²³¹ See, e.g., 10/16/2006 email from John Li to Darryl Herrick, "Call Arbind Jha," GS MBS-E-018209595 ("Regarding Hudson Mezz Risk issue").
²²³² 9/20/2006 email from Arbind Jha to Josh Birnbaum, GS M BS-E-012685289. W hen asked about this email and Hudson 1 in general, Mr. Birnbaum told the Subcommittee that he had no specific recollection of any involvement with the Hudson 1 CDO. Subcommittee interview of Joshua Birnbaum (10/1/2010).
²²³³ 10/12/2006 email from Arbind Jha, "Re: Risk Issue," Hearing Exhibit 4/27-88.
²²³⁴ 9/20/2006 Firmwide Risk Committee Minutes, GS MBS 0000004472.
²²³⁵ See, e.g., 3/23/2007 "CDO Rating Factors: Inclusion of Tranched ABX Indices in ABS CDOs," M oody's, Document No. SF95049.
²²³⁶ The ABX 06-1 Index and the ABX 06-2 Index each tracked a completely different set of 20 RMBS securitizations. Each Index also had its own subset of five indices tracking individual securities issued by those 20 securitizations, divided by credit rating. For example, one of the RMBS securitizations tracked by the ABX 06-2 Index was called CW L 2006-8. One of the sub-indices within the ABX 06-2 Index tracked BBB rated securities that
²²³⁷ A "single name CDS" contract uses a single security as its reference obligation, such as a specific RMBS security.
²²³⁸ For simplicity, all 20 assets in each of the ABX baskets were given the same weighted price in Hudson 1.
²²³⁹ See, e.g., 4/27/2007 email from Fabrice Tourre to Michael Swenson, Deeb Salem, and Edwin Chin, GS MBS-E- 012432742.
²²⁴⁰ Mr. Swenson described this situation in his testimony before the Subcommittee: "Throughout 2006, numerous clients wanted to sell the ABX in order to express a negative view on the U.S. residential housing market. As a result of these trades, we took on long positions. In order to hedge those positions, we began to increase our short position in single-names. By November 2006, volatility in the ABX increased, pushing prices down. Because our positions in single names did not match identically the basket of securities that comprised the ABX, the positions moved at different rates and even different directions, resulting in losses for the ABS desk." Prepared statement of Michael Swenson, April 27, 2010 Subcommittee Hearing, at 208-09.
²²⁴¹ Goldman decided to price the single name assets at one point below the median ABX trading price. See 9/21/2006 email from Darryl Herrick to Deeb Salem, Michael Swenson, Joshua Birnbaum, Peter Ostrem, and Edwin Chin, GS MBS-E-012685645.
²²⁴² See 10/2/2006 email from Darryl Herrick to Michael Swenson, Joshua Birnbaum, Deeb Salem, Peter Ostrem, and Daniel Sparks, GS MBS-E-010913416 ("W e plan to announce Hudson Mezzanine Funding tomorrow in the am for Europe, Asia and the US[.] I'm circulating around to everyone the CDO portfolio and spreads we will be showing investors and agencies, based on our agreed upon amounts and levels from last week."). Mr. Swenson responded: "Darryl we should use the 265 and 245 spread for the ABX2 and ABX1 triple-B minus spreads and 145 and 130 for triple-B ABX2 and ABX1 triple-B spreads." Id.
²²⁴³ The gain generated by the CDS single name contracts was retained on the books of the ABS Desk, and created a favorable "basis" compared to the cost of the ABX long position held by the desk. See 4/27/2007 email from Fabrice Tourre to Michael Swenson, Deeb Salem, and Edwin Chin, GS MBS-E-012432742; Goldman response to Subcommittee QFR at PSI_QFR_GS0239. See also 9/19/2006 email from Michael Swenson to Thomas Cornacchia and Joshua Birnbaum, GS MBS-E-012684557 ("[ABX] Index to single-name basis is at the wides[t] (ie 40 bp at BBB- level). Index to cash is even more extreme at 70bp. Bids for cash deals remain strong and have barely widened."); Performance Review for Michael Swenson, GS-PSI-02396, Hearing Exhibit 4/27-55b (describing the mortgage trading desk's strategy of shorting single-name RMBS to offset long ABX positions: "[D]uring the early summer of 2006 it was clear that the market fundamentals in subprime and the highly levered nature of CDOs was going to have a very unhappy ending. The beauty of the CDO short was that it allowed for a very efficient method for capturing the value in the ABX to single-name basis from the short side.").
²²⁴⁴ Subcommittee interview of Darryl Herrick (10/13/2010). See also 10/8/2006 email from Darryl Herrick to a Goldman salesperson, GS MBS-E-017502983 (discussing Hudson 1: "Omar, I realize lack of manager may be tough hurdle for them [investors]. May be helpful to let Deeb and I get on a call with the investor and discuss our asset selection criteria and I can go through asset sale criteria.").
²²⁴⁵ See 9/19/2006 email from Darryl Herrick to Deeb Salem, Peter Osterm, others, GS MBS-E-011402123, with attachment GS M BS-E-011403442 (Mr. Salem wrote to Mr. Herrick: "Attached are 60 RMBS Ref Obs ... for the CDO we're discussing. On the RM BS side, we chose 30 Baa2 and 30 Baa3 CUSIPs evenly split btw 2005 and 2006 vintage. W e can add a few alt-a names as well. How many of those would you like?"). W hen interviewed by the
²²⁴⁶ See, e.g., Goldman response to Subcommittee QFR, PSI_QFR_GS0192.
²²⁴⁷ Goldman used the cash paid into Hudson 1 to purchase "collateral securities," as discussed further below.
²²⁴⁸ See 10/30/2006 email from Peter Ostrem, GS MBS-E-0000057886, Hearing Exhibit 4/27-90 ("Super senior note ($1.2bln in size) was executed in the first week of the transaction and was a key driver of this deal[']s success.").
²²⁴⁹ The $1.2 billion investment made by Morgan Stanley did not correspond to the CDO's $1.2 billion in CDS contracts referencing RM BS securities in the two ABX indices. Rather, Morgan Stanley was investing in the top tier of the CDO as a whole, which included CDS contracts referencing both the ABX and other RMBS securities.
²²⁵⁰ Subcommittee interview of Darryl Herrick (10/13/2010). See further discussion of Morgan Stanley investment in Section C(5)(b)(iii)AA, below.
²²⁵¹ 9/27/2006 email from Michael Swenson to Crystal Young, GS M BS-E-012328848. Mr. Swenson told the Subcommittee that he had no recollection of this conference call, and that it would have been unusual for him to be involved in the marketing efforts of a CDO. Subcommittee interview of Michael Swenson (10/8/2010).
²²⁵² 9/28/2006 email from Darryl Herrick, GS MBS-E-014042217, with attachments GS MBS-E-014042218 and GS MBS-E-014042220.
²²⁵³ 9/30/2006 email from Darryl Herrick to Peter Ostrem, Benjamin Case, and Matthew Bieber, GS MBS-E- 014367160, with attachment GS MBS-E-014367161; 9/30/2006 Goldman internal email chain among Darryl Herrick, Peter Ostrem, Benjamin Case, and Matthew Bieber, GS MBS-E-017504075.
²²⁵⁴ 10/2006 Hudson Mezzanine Funding 2006-1, LTD., GS MBS-E-009546963, at 966, Hearing Exhibit 4/27-87.
²²⁵⁵ Id. at 966, 978.
²²⁵⁶ See Goldman response to Subcommittee QFR, at PSI_QFR_GS0223.
²²⁵⁷ Barron's Dictionary of Finance and Investment Terms defines "the Street" as "referring to the financial community in New York City and elsewhere. It is common to hear 'The Street likes XYZ.' This means there is a national consensus among securities analysts that XYZ's prospects are favorable."
²²⁵⁸ Subcommittee interview of Andrew Davilman (9/30/2010).
²²⁵⁹ Subcommittee interview of Morgan Stanley (6/24/2010).
²²⁶⁰ The Subcommittee asked Mr. Ostrem whether he considered the Hudson 1 assets to be the RM BS securities or the credit default swaps referencing those securities, and Mr. Ostrem responded that the assets in the CDO were the RMBS securities which had been originated by a variety of financial institutions on W all Street. W hen asked why it would be important to indicate to investors that not all the underlying RM BS securities were underwritten by Goldman, given that this information would be clear to a professional reviewing the names of the reference assets in Hudson 1, Mr. Ostrem replied that he didn't know. Subcommittee interview of Peter Ostrem (10/5/2010).
²²⁶¹ Subcommittee interview of Deeb Salem (10/6/2010).
²²⁶² Subcommittee interview of David Lehman (9/27/2010); Subcommittee interview of Matthew Bieber (10/21/2010).
²²⁶³ 12/3/2006 Hudson Mezzanine 2006-1, LTD. Offering Circular, GS MBS-E-021821196.
²²⁶⁴ Id. at 021821241.
²²⁶⁵ See, e.g., 9/19/2006 email from Michael Swenson to Thomas Cornacchia and Joshua Birnbaum, GS MBS-E- 012684557 ("we are going to price an innovative full capital structure $1+bb CDO deal with 60% of the risk in ABX (no one has done this before)."); 9/21/2006 email from Darryl Herrick to Deeb Salem, Michael Swenson, Joshua Birnbaum, Peter Ostrem, and Edwin Chin, GS MBS-E-012685645.
²²⁶⁶ 9/27/2006 email from Michael Swenson to Joshua Birnbaum, GS MBS-E-012689798.
²²⁶⁷ 12/3/2006 Hudson Mezzanine 2006-1, LTD. Offering Circular, GS MBS-E-021821196, at 021821229. This disclosure related to the master credit default swap, where Goldman Sachs International served as the credit protection buyer facing the Hudson Mezzanine 2006-1, Ltd., the legal entity that issued the Hudson 1 securities. See 12/1/2006 ISDA Master Agreement, GS MBS-E-021822056. In this role, Goldman was serving as an intermediary, and was protecting the CDO from credit risk by placing the Goldman Sachs name on the transaction and assuring investors that a single credit-worthy entity would be making all required payments to the Hudson 1 trust. Having one
²²⁶⁸ Goldman intermediated between other broker-dealers and the CDO vehicle in Anderson Mezzanine Funding 2007-1, Camber 7, Hudson Mezzanine 2006-1, Hudson Mezzanine 2006-2, and Timberwolf I, among several other CDOs. See Goldman response to Subcommittee QFR, at PSI_QFR_GS0192.
²²⁶⁹ 12/3/2006 Hudson Mezzanine 2006-1, LTD. Offering Circular, GS MBS- E-021821196, at 021821251.
²²⁷⁰ 10/16/2006 email exchange between Daniel Sparks and Peter Ostrem, GS MBS-E-010916991 ("Cambridge is upset that we are delaying their deal. They know that Hudson Mezz (GS prop deal) is pushing their deal back.").
²²⁷¹ Firmwide Risk Committee meetings were often chaired by David Viniar and frequently attended by Lloyd Blankfein and Gary Cohn. See 9/20/2006 Firmwide Risk Committee Minutes, GS MBS 0000004472; 9/27/2006 Firmwide Risk Committee Minutes, GS MBS 0000004474; 10/4/2006 Firmwide Risk Committee Minutes, GS MBS 0000004476; 10/11/2006 Firmwide Risk Committee Minutes, GS MBS 0000004478; 11/1/2010 Firmwide Risk Committee Minutes, GS MBS 0000004484. See also 10/11/2006 email from Arbind Jha to Joshua Birnbaum, GS MBS-E-012695030 ("Sobel this morning in the firmwide risk committee mentioned that we have circled up the junior and some of the equity tranches").
²²⁷² 10/25/2006 email from Jonathan Sobel to David Viniar and Gary Cohn, GS MBS-E-009757821.
²²⁷³ 10/12/2006 email from Thomas Cornacchia to Peter Ostrem and others, GS MBS-E-0000066413.
²²⁷⁴ 10/26/2006 email from Arbind Jha, "MarketRisk: Mortgage Risk Report (cob 10/25/2006)," GS MBS-E- 0000056041, Hearing Exhibit 4/27-89. That same day, October 26, 2006, Mr. Swenson also described the risk transfer to Goldman executive Bill McMahon when updating him on the trading desk's ABX position: "In addition to $2bb of risk that was placed into the CDO, we have sold to retail since 4pm yesterday $2bb of BBB- risk." 10/26/2006 email from Michael Swenson to Bill McMahon, others, GS MBS-E-0000054856.
²²⁷⁵ 10/11/2006 Goldman internal email, "FW : Hudson Mezz," GS MBS-E-017502610, Hearing Exhibit 4/27-170c. (A Goldman employee asked a sales associate: "what specifically did AIB say was 'junk' about the hudson mezz deal?" The employee then forwarded the email to M r. Herrick saying: "You may want to ask [the sales associate] about this when she's there tomorrow and Friday. ... She said 'AIB are too smart to buy this kind of junk.'").
²²⁷⁶ 10/19/2006 email from Mitchell Resnick to Jonathan Egol, Darryl Herrick, and David Rosenblum, GS MBS-E- 009557391. "HGS1" refers to Abacus HGS1, a CDO 2 where Goldman, as in Hudson 1, held 100% of the short interest.
²²⁷⁷ 10/20/2006 email from Paul Carrett to Darryl Herrick, GS MBS-E-018321286 [emphasis in original].
²²⁷⁸ 10/11/2006 email from Darryl Herrick to Michael Swenson, David Lehman, and Josh Birnbaum, GS MBS-E- 0000030518. Mr. Swenson told the Subcommittee he had no recollection of being involved in the marketing of Hudson 1. Mr. Swenson said he did not work on CDOs and would not typically be involved in the marketing of CDOs. Subcommittee interview of Michael Swenson (10/8/2010).
²²⁷⁹ 10/12/2006 email from Michael Swenson to David Rosenblum and Peter Ostrem, GS MBS-E-0000030518.
²²⁸⁰ 10/25/2006 email from Jonathan Sobel to David Viniar and Gary Cohn, GS MBS-E-009757821.
²²⁸¹ Subcommittee interview of Darryl Herrick (10/13/2010).
²²⁸² Subcommittee interview of Darryl Herrick (10/13/2010). W hen asked if it was common to divide unsold securities between the CDO Desk and the ABS Desk, Mr. Herrick said unsold securities were usually split with the sponsor of a CDO. His response suggests that Goldman viewed the ABS Desk as the sponsor of Hudson 1, since it was designed to offset the risk associated with the ABS Desk's ABX assets. See also 2/28/2007 email from David Rosenblum to Peter Ostrem, GS M BS-E-001800707 ("are we still sharing 50pct of ups and downs on [Hudson].").
²²⁸³ 10/30/2006 email from Peter Ostrem, "Great Job on Hudson Mezz," GS MBS-E-0000057866, Hearing Exhibit 4/27-90.
²²⁸⁴ Goldman told the Subcommittee that Hudson experienced a gross gain of $1.697 billion offset by a loss of $1.39 billion (rather than $1.2 billion) in ABX assets on its balance sheet. 8/4/2010 email from Goldman to the Subcommittee, PSI_QFR_GS0243.
²²⁸⁵ See Goldman response to Subcommittee QFR at PSI_QFR_GS0239.
²²⁸⁶ Id.
²²⁸⁷ Id.
²²⁸⁸ Id., at PSI_QFR_GS_0280.
²²⁸⁹ 3/4/2006 email from Fabrice Tourre to George Maltezos, others, GS MBS-E-006638833.
²²⁹⁰ See Goldman response to Subcommittee QFR, at PSI_QFR_GS0211.
²²⁹¹ 11/21/2008 letter from Goldman to Morgan Stanley, HUD-CDO-00005125.
²²⁹² See Goldman response to Subcommittee QFR, at PSI_QFR_GS0223 and PSI_QFR_GS0235.
²²⁹³ "Mezzanine" CDS assets reference securities that carry a credit rating of BBB or BBB-. Mezzanine assets are riskier than AAA, AA, and A rated assets, but less risky than those that carry, for example, BB, B, or CCC ratings.
²²⁹⁴ Some documents indicate the CDO was slated to be Hudson Mezzanine 2006-2. But in December 2006, Goldman delayed Anderson in favor of issuing an ABX based CDO named Hudson Mezzanine 2006-2. Several of the documents cited in this section use the terms "Hudson" or "Hudson Mezz" when in fact they refer to Anderson. None of the Goldman employees interviewed by the Subcommittee could recall the reason for changing the name of the CDO to Anderson.
²²⁹⁵ 9/25/2006 Goldman memorandum to the Mortgage Capital Committee, GS MBS-E-013475756-62 (hereinafter "9/25/2006 MCC Memorandum"). The MCC Memorandum states that Goldman was approached by GSC, but may be using standard language reused in many MCC Memoranda. In an interview with the Subcommittee, Edward Steffelin, a Senior Trader at GSC, stated that Goldman approached GSC about partnering in the transaction, and the memorandum language was "probably backward." Subcommittee interview of Edward Steffelin (12/10/2010).
²²⁹⁶ 9/25/2006 MCC Memorandum, GS MBS-E-013475756-62.
²²⁹⁷ See Goldman response to Subcommittee QFR at PSI_QFR_GS0434. Goldman noted in its QFR response that the information used for its response had been voluntarily provided by Goldman employees.
²²⁹⁸ 5/10/2006 email from Curtis Willing to David Solomon and Dan Holland, GS MBS-E-013870906-7. The Elliot Bridge Fund eventually invested in Anderson.
²²⁹⁹ 4/17/2006 email from Curtis W illing to David Solomon and Dan Holland, GS MBS-E-013870906-7.
²³⁰⁰ 5/14/2006 and 5/10/2006 emails from Dan Sparks to Curtis W illing, GS MBS-E-013870906-7.
²³⁰¹ 9/25/2006 MCC Memorandum, GS MBS-E-013475756-62.
²³⁰² 8/8/2006 email from Edward Steffelin to Peter Ostrem and others, "GS/GSC EB Prop deal," GS MBS-E- 000904603. 8/8/2006 email from Peter Ostrem to Edward Steffelin, Joshua Bissu and others, GS MBS-E- 000904603 (M r. Ostrem writes: "Happy to source assets via GSC."). See e.g., 9/26/2006 email from Mr. Bissu to Matthew Bieber, "Names for tomorrow," GS MBS-E-014335388.
²³⁰³ Subcommittee interview of Edward Steffelin (12/10/2010).
²³⁰⁴ See 3/5/2007 emails between Matthew Bieber and Joshua Bissu, GS MBS-E-014605918.
²³⁰⁵ See 3/6/2007 email from Joshua Bissu to Matthew Bieber and Peter Ostrem, GS MBS-E-014597705.
²³⁰⁶ 8/8/2006 email from Edward Steffelin to Peter Ostrem and others, "GS/GSC EB Prop deal," GS MBS-E- 000904603. GSC frequently executed trades with Goldman's Correlation Trading Desk, and was known to have a "long/short strategy" in which it shorted assets it considered expensive and went long assets it thought were undervalued. See 9/15/2006 email from Geoffrey W illiams to Correlation Trading Desk, GS MBS-E-009471708. See e.g., 10/31/2006 email from Shelly Lin to Joshua Bissu, and Matthew Bieber, GS MBS-E-016473768.
²³⁰⁷ 10/31/2006 email from Curtis W illing, GSC Trades, GSC-CDO-FCIC-0029698; 10/31/2006 email from Deeb Salem, "Re: GSC-Hudson Mezz 2," GS M BS-E-000905571. A former GSC employee interviewed by the Subcommittee also indicated that the short positions were taken on Anderson assets in an effort to hedge GSC's warehouse risk. Subcommittee interview of Edward Steffelin (12/10/2010).
²³⁰⁸ 10/31/2006 email from Shelly Lin to Joshua Bissu and Matthew Bieber, GS MBS-E-016473768. See also 10/31/2006 email from Shelly Lin to Deeb Salem, Edwin Chin, and Matthew Bieber, GS MBS-E-000905571 ("GSC wants to short into the deal the amounts listed below. They'd like to trade the ones they want to hedge with your desk as well. I think they also did this with your desk a few weeks ago."). W hen Mr. Bieber was shown this document during his 10/21/2010 interview with the Subcommittee he stated he didn't know if GSC had shorted assets and that he didn't know what Ms. Lin meant by her statement. Subcommittee interview of Matthew Bieber (10/21/2010).
²³⁰⁹ Subcommittee interview of Matthew Bieber (10/20/2010); Subcommittee interview of Edward Steffelin (12/10/2010).
²³¹⁰ Id.
²³¹¹ See Goldman response to Subcommittee QFR at PSI_QFR_GS0192.
²³¹² This number was compiled using a list of referenced securities supplied by Goldman at QFR_PSI_GS0192 and registration statements available at www.sec.gov. When looking at all mortgages underlying each reference security, New Century originated 48% by value of the underlying mortgages. However, each mortgage may have a different weight in the Anderson CDO based on the size of the reference security it is held in. Therefore, the economic effect of the New Century mortgages could be greater than or less than 48%. The next largest mortgage originator by value was Countrywide at 8%.
²³¹³ See, e.g., 1/4/2007 Goldman presentation, "Sub-Prime Mortgage Lenders - Update," GS MBS-E-009978840-59, Hearing Exhibit 4/27-169.
²³¹⁴ See discussion of Goldman's net short position, Section C(4), above.
²³¹⁶ 3/8/2007 email from Daniel Sparks to senior executives, GS MBS-E-002206279, Hearing Exhibit 4/27-75.
²³¹⁷ 2/23/2007 email from Daniel Sparks to senior executives, GS MBS-E-009759477.
²³¹⁸ 2/25/2007 email from Daniel Sparks to Tom Montag, GS MBS-E-019164799. See also 2/23/2007 email from Daniel Sparks to senior executives, GS MBS-E-009759477 ("W e liquidated 3 CDO warehouses today and started the liquidation of another. W e may liquidate one more next week.").
²³¹⁹ 2/28/2007 email from David Rosenblum to Peter Ostrem, GS MBS-E-001800707.
²³²⁰ 2/24/2007 email from Deeb Salem to Michael Swenson, Edwin Chin, and Josh Birnbaum, GS MBS-E- 018936137-38.
²³²¹ 2/24/2007 email from Peter Ostrem to colleagues, GS MBS-E-010383828-29.
²³²² 2/24/2007 email from Daniel Sparks to Peter Ostrem, others, GS MBS-E-001996601, Hearing Exhibit 4/27-95.
²³²³ 2/25/2007 Goldman internal email chain, GS MBS-E-001996601, Hearing Exhibit 4/27-97.
²³²⁴ Id.
²³²⁵ Id.
²³²⁶ 3/2/2007 email from Jon Egol to Daniel Sparks and others, GS MBS-E-010637566, Hearing Exhibit 4/27-97.
²³²⁷ 3/2/2007 email from Daniel Sparks to Jon Egol and others, GS MBS-E-010637566, Hearing Exhibit 4/27-97.
²³²⁸ 3/2/2007 email from Jon Egol to colleagues, "Re: Abacus AC1," GS MBS-E-002676413, Hearing Exhibit 4/27- 64.
²³²⁹ 3/13/2007 email from Peter Ostrem to Scott W isenbaker and M atthew Bieber, GS M BS-E-000898410, Hearing Exhibit 4/27-172.
²³³⁰ In mid-March, Mr. Ostrem informed the GSI Risk Committee that Goldman's estimated losses on the assets in the Anderson warehouse account had reached $22.9 million. 3/16/2007 Goldman Sachs International Risk Committee memorandum, "GSI W arehousing for Structured Product CDOs," GS MBS-E-001806010-16.
²³³¹ 5/31/2007 email from Goldman client to Andrew Davilman, GS MBS-E-015550857-58. Andrew Davilman relayed the message to Matthew Bieber, who suggested the client might be interested in higher rated securities. Mr. Davilman responded: "I'll check, but given the portfolio I suspect he's looking for a cleaner start."
²³³² 3/16/2007 email from Russell Brocato to Scott W isenbaker, GS MBS-E-000902498, Hearing Exhibit 4/27-172. Mr. Bieber and M r. Ostrem were also informed by a salesperson that the client was "out on Anderson – they feel like the deal will be dow[n]graded and have interest coverage issues." Mr. Ostrem instructed the Goldman salesperson to "[f]ix the miscommunication so the probability [of sale] goes up."
²³³³ 3/14/2007 email from Matthew Bieber to Scott W isenbaker and others, GS MBS-E-000908336, Hearing Exhibit 4/27-172 ("Looking like both dcp and terwin out. New Century issues.").
²³³⁴ 3/13/2007 email from W endy Rosenfeld at Rabobank to Olivia Ha at Goldman, GS MBS-E-000898417, Hearing Exhibit 4/27-172.
²³³⁵ 3/6/2007 email from Joshua Bissu to Matthew Bieber and Peter Ostrem, GS MBS-E-014597705.
²³³⁶ 3/8/2007 email from Daniel Sparks to senior executives, GS MBS-E-002206279, Hearing Exhibit 4/27-75.
²³³⁷ 3/13/2007 email from Manisha Nanik to Loren Morris, "New Century EPDs," at GS MBS-E-002146861, Hearing Exhibit 4/27-77. See also 2/2/2007 email from Matthew Nichols to Kevin Gasvoda and others, GS MBS-E- 005556331 ("NC is running a 10% drop rate [due diligence drop] at ~6 points / drop and 4% EPD rate at close to 20 points."); 2/8/2007 email from John Cassidy to Joseph Ozment, others, GS M BS-E-002045021 ("Given the current state of the company I am no longer comfortable with the practice of taking loans with trailing docs . . . that we need in order to conduct compliance testing.").
²³³⁸ 3/1/2007 email from Scott W isenbaker to Peter Ostrem and Matthew Bieber, GS M BS-E-000893661, Hearing Exhibit 4/27-172.
²³³⁹ 2/2007 Anderson Mezzanine Funding 2007-1, Ltd. Debt Marketing Book, GS MBS-E-000855351.
²³⁴⁰ 2/2007 Anderson Mezzanine Funding 2007-1, Ltd. Equity Marketing Book, GS MBS-E-000892557-598 at 560, 569.
²³⁴¹ 2/2007 Anderson Mezzanine Funding 2007-1, Ltd. Debt Marketing Book, GS MBS-E-000855351. Anderson Mezzanine Funding 2007-1, Ltd. Debt Marketing Book, GSC-CDO-FCIC-0031712 at 726. Around the time Goldman was deciding whether to underwrite Anderson, Fred Horton, head of CDOs at GSC, left the firm. While discussing whether to issue or underwrite the CDO with Matthew Bieber, Mr. Ostrem commented: "W ill need disclosure on Horton. This looks bad." 2/25/2007 email from Peter Ostrem to Matthew Bieber, GS MBS-E- 001996601, Hearing Exhibit 4/27-95.
²³⁴² Subcommittee interview of Matthew Bieber (10/21/2010).
²³⁴³ Subcommittee interview of Edward Steffelin (12/10/2010). The marketing materials also stated that the Anderson assets were "sourced from the Street." Mr. Steffelin described this as a "weird phrase," but felt it implied "it would be open, sourced from all over." See discussion of the phrase, "sourced from the Street," in the prior section on Hudson 1.
²³⁴⁴ Id. Despite GSC's not being listed as having helped select the Anderson assets, some investors appeared to be aware of its involvement, perhaps from talking to Goldman personnel. See 3/28/2007 email from Matthew Bieber to Edward Steffelin, "ACA Meeting," GS MBS-E-014419176 ("Questions on [Anderson] – but also want to do manager due diligence. They've heard the GSC team shows well – so want to meet you in person.").
²³⁴⁵ 3/12/2007 email from Robert Black to Matthew Bieber, others, GS MBS-E-000898037.
²³⁴⁶ Id.
²³⁴⁷ 3/20/2007 email from Peter Ostrem to Matthew Bieber and others, GS MBS-E-000906269, Hearing Exhibit 4/27-172.
²³⁴⁸ 3/27/2007 email from Peter Ostrem to Matthew Bieber, GS MBS-E-000907935, Hearing Exhibit 4/27-172.
²³⁴⁹ See Goldman response to Subcommittee QFR at PSI_QFR_GS0223 and PSI_QFR_GS0235.
²³⁵⁰ GSC paid a price of 108.21% for the securities. See Goldman response to Subcommittee QFR at PSI_QFR_GS0223 and PSI_QFR_GS0235.
²³⁵¹ See Goldman response to Subcommittee QFR at PSI_QFR_GS0223 and PSI_QFR_GS0235.
²³⁵² See Goldman response to Subcommittee QFR at PSI_QFR_GS0239.
²³⁵³ 1/3/2008 email from Shelly Lin to M r. Sparks, GS MBS-E-021880171 (attached file, "Deal Summary," Excel Spreadsheet showing credit ratings for Anderson).
²³⁵⁴ See Goldman response to Subcommittee QFR at PSI_QFR_GS0223 and PSI_QFR_GS0235.
²³⁵⁵ 2/2007 Timberwolf I, Ltd. Marketing Book, GS MBS-E-000676809, Hearing Exhibit 4/27-99a.
²³⁵⁶ For more information about Goldman's actions as the collateral put provider for Timberwolf, see Section (iii)(BB), below.
²³⁵⁷ 2/2007 Timberwolf I, Ltd. Marketing Book, GS MBS-E-000676809, Hearing Exhibit 4/27-99a.
²³⁵⁸ Subcommittee interview of Joseph M arconi (10/19/2010).
²³⁵⁹ Greywolf eventually purchased the entire equity tranche in Timberwolf. See Goldman response to Subcommittee QFR at PSI_QFR_GS0223 and PSI_QFR_GS0235.
²³⁶⁰ Subcommittee interview of Joseph M arconi (10/19/2010).
²³⁶¹ In some cases, Goldman was permitted to "top-up" the deal, taking the short side on an additional $5 million in the same CDO security at the same price paid by the auction winner. Greywolf's goal was for each reference asset to be $20 million in size, but often asked for bids on only $10-15 million worth of CDS protection in order to get a better spread. Goldman would then have the option of providing the remaining $5-10 million in CDS protection at the transaction price, resulting in a total position size of $20 million on the Timberwolf balance sheet.
²³⁶² Joseph Marconi told the Subcommittee that well over half the assets were obtained through auctions, while just a few were negotiated. Subcommittee interview of Joseph M arconi (10/19/2010).
²³⁶³ See Goldman response to Subcommittee QFR at PSI_QFR_GS0192.
²³⁶⁴ The Abacus securities were cash assets. However, due to the synthetic nature of the Abacus CDOs, Goldman retained a short interest in $15 million in Abacus securities.
²³⁶⁵ Timberwolf had about one dozen short parties of which Goldman was the largest. See Goldman response to Subcommittee QFR at PSI_QFR_GS0223 and PSI_QFR_GS0235.
²³⁶⁶ A total of 84 CDS contracts produced the 51 unique reference assets. See Goldman response to Subcommittee QFR at PSI_QFR_GS0192.
²³⁶⁷ 8/23/2007 email from Jay Lee to Matthew Bieber, David Lehman, and others, GS MBS-E-001927784.
²³⁶⁸ 2/26/2007 email exchange between Tom Montag and Daniel Sparks, GS MBS-E-019164799.
²³⁶⁹ 2/26/2007 email exchange between Tom Montag and Daniel Sparks, GS MBS-E-010989241.
²³⁷⁰ 3/7/2007 email from Gaelyn Sharp, GS MBS-E-001800634.
²³⁷¹ 3/2007 email chain, "Timberwolf I, Ltd. Preliminary Offering Circular," GS MBS-E-001800634.
²³⁷² 3/9/2007 email from Daniel Sparks, "Re: Help," GS MBS-E-010643213, Hearing Exhibit 4/27-76.
²³⁷³ According to Goldman personnel interviewed by the Subcommittee, the Syndicate coordinated sales efforts between the CDO Origination Desk and the CDO sales force.
²³⁷⁴ See, e.g., 4/11/2007 Goldman internal email, "GS Syndicate Structured Product CDO Axes (INTERNAL)," Hearing Exhibit 4/27-101; 4/19/2007 Goldman internal email, Hearing Exhibit 4/27-102; 6/22/2007 Goldman internal email, Hearing Exhibit 4/27-166. These "axe sheets" contained directives for selling Goldman issued securities and other financial products, as well as congratulatory and motivational notes. Some Goldman traders had a negative view of the axe sheets. One trader wrote, for example, that he was "guessing sales people view the syndicate 'axe' email we have used in the past as a way to distribute junk that nobody was dumb enough to take first time around." 10/24/2006 Goldman internal email, GS MBS-E-009557699, Hearing Exhibit 4/27-170d.
²³⁷⁵ 2/14/2007 email from Robert Black to Matthew Bieber and others, GS MBS-E-001996121.
²³⁷⁶ 3/21/2007 email from Robert Black, "Non-tradition Buyer Base for CDO AXES," GS MBS-E-003296460, Hearing Exhibit 4/27-78.
²³⁷⁷ 3/2007 Goldman internal email chain, GS MBS-E-010643213, Hearing Exhibit 4/27-76.
²³⁷⁸ 3/28/2007 Goldman email from the Syndicate, GS-MBS-E-000740958, Hearing Exhibit 4/27-100.
²³⁷⁹ See, e.g., 4/11/2007 email from Daniel Sparks, GS MBS-E-010533482, Hearing Exhibit 4/27-101.
²³⁸⁰ 4/19/2007 email from Daniel Sparks to Bunty Bohra, GS MBS-E-010539324, Hearing Exhibit 4/27-102.
²³⁸¹ 3/8/2007 email from Harvey Schwartz, GS MBS-E-010643213, Hearing Exhibit 4/27-76.
²³⁸² 3/9/2007 email from Daniel Sparks, GS MBS-E-010643213, Hearing Exhibit 4/27-76.
²³⁸³ See Goldman response to Subcommittee QFR at PSI_QFR_GS0223 and PSI_QFR_GS0235.
²³⁸⁴ In fact, the decline had begun within a month after Timberwolf closed in late March. 9/17/2007 email from Christopher Creed, "RE: Timberwolf," GS MBS-E-000766370, Hearing Exhibit 4/27-106 (showing price for Timberwolf securities carrying an AAA credit rating had fallen from $94 on 3/31/2007 to $87 on 4/30/2007).
²³⁸⁵ 5/11/2007 email from Daniel Sparks to Richard Ruzika, GS M BS-E-019659221. Mr. Sparks also noted that he had a meeting with David Viniar, Don Mullen, and Gary Cohn to discuss the issue.
²³⁸⁶ 5/11/2007 email from David Lehman, GS MBS-E-003361238. For more information on this CDO valuation project, see Section C(5)(a)(iii)BB, above.
²³⁸⁷ 5/11/2007 email from Craig Broderick, "CDO's - Mortgages," GS MBS-E-009976918, Hearing Exhibit 4/27- 84.
²³⁸⁸ 5/11/2007 email from Harvey Schwartz to Daniel Sparks, Tom Montag, and others, GS MBS-E-010780864.
²³⁸⁹ 5/11/2007 email from Donald Mullen to Daniel Sparks, GS MBS-E-010780849, Hearing Exhibit 4/27-103.
²³⁹⁰ Id. at GS MBS-E-010780848-49.
²³⁹¹ 5/13/2007 email from Paul Bouchard to David Lehman, Daniel Sparks, and others, GS MBS-E-003361238.
²³⁹² Id.
²³⁹³ 5/20/2007 email from Paul Bouchard, "Materials for M eeting," GS MBS-E-001863725.
²³⁹⁴ 5/14/2007 email from Elisha W eisel, "Modeling Approaches for Cash ABS CDO/CDO^2," GS MBS-E- 001863618.
²³⁹⁵ 5/20/2007 email from Lee Alexander to Daniel Sparks, Donald Mullen, Lester Brafman, and Michael Kaprelian, "Viniar Presentation - Updated," GS MBS-E-010965211 (attached file "Mortgages V4.ppt," "Mortgages Department, May 2007," GS M BS-E-010965212).
²³⁹⁶ Id. At least two drafts of the presentation also stated about Timberwolf and Point Pleasant that "the complexity of the CDO^2 product and the poor demand for CDOs in general has made this risk difficult to sell and the desk expects it to underperform." This assessment was removed from the final version provided to senior executives. See 5/19/2007 email from Dan Sparks to Lee Alexander, and others, GS MBS-E-010973174 (attached file "Mortgages V3.ppt," GS MBS-E-010973175); 5/20/2007 9:52 a.m. draft presentation, "Mortgages V4.ppt," GS MBS-E- 010952331; 5/20/2007 email from Lee Alexander to Daniel Sparks, Donald M ullen, Lester Brafman, and M ichael Kaprelian, "Viniar Presentation - Updated," GS MBS-E-010965211 (final version) (attached file, "Mortgages Department," GS M BS-E-010965212).
²³⁹⁷ 5/20/2007 email from Lee Alexander to Daniel Sparks, Donald Mullen, Lester Brafman, and Michael Kaprelian, "Viniar Presentation - Updated," GS MBS-E-010965211 (attached file "Mortgages V4.ppt," "Mortgages Department, May 2007," GS M BS-E-010965212 at 14).
²³⁹⁸ Id. at 24.
²³⁹⁹ Polygon had already purchased Timberwolf securities prior to the drafting of the presentation, and was apparently targeted for additional Timberwolf or Point Pleasant sales. See Goldman response to Subcommittee QFR at PSI_QFR_GS0223 and PSI_QFR_GS0235. Goldman had an existing relationship with Basis Capital. Goldman had engaged Basis Capital several months earlier as a collateral manager of a CDO Goldman was underwriting called Fort Denison. Mr. Ostrem, head of the CDO Origination Desk, apparently had a low opinion of the firm, describing the firm in an email to M r. Bieber as "paranoid" and "not very sharp." He told M r. Bieber that Goldman should "be nice and just sell them stuff going forward." 1/15/2007 email from Peter Ostrem to Matthew Bieber, GS MBS-E-001125549.
²⁴⁰⁰ 5/20/2007 email from Lee Alexander to Daniel Sparks, Donald Mullen, Lester Brafman, and Michael Kaprelian, "Viniar Presentation - Updated," GS MBS-E-010965211 (attached file "Mortgages V4.ppt," "Mortgages Department, May 2007," GS M BS-E-010965212 at 31).
²⁴⁰¹ See Goldman response to Subcommittee QFR at PSI_QFR_GS0223 and PSI_QFR_GS0235.
²⁴⁰² 5/14/2007 email from Daniel Sparks to Tom Montag and Donald Mullen, GS MBS-E-019642797.
²⁴⁰³ 5/26/2007 email from Michael Swenson to others, GS MBS-E-012443166 (attached file, "ABS Sec_0525," GS MBS-E-012443167).
²⁴⁰⁴ These prices indicate a percentage of security's face (par) value. A price of $80 would be 80% of par or 80 cents on the dollar.
²⁴⁰⁵ See Goldman response to Subcommittee QFR at PSI_QFR_GS0223 and PSI_QFR_GS0235; 6/1/2007 email from David Lehman to Daniel Sparks, GS MBS-E-001866889 (indicating Goldman sold Timberwolf securities to Tokyo Star Bank for $83.90, when Goldman's own mark was 80). Goldman took similar action with respect to its other CDO 2, Point Pleasant, marking down the internal value of its A2 securities to $82.50 on May 25, 2007, while on May 24, 2007, selling $40 million of the A2 securities to a client at a price of $91.00, a difference in market value of $3.4 million. See 5/26/2007 email from Michael Swenson to others, GS MBS-E-012443166 (attached file, "ABS Sec_0525," GS MBS-012443167).
²⁴⁰⁶ See 7/12/2007 "Goldman W arehouse SP CDO positions and hedges_7-12-07," GS MBS-E-001866482; See also Goldman response to Subcommittee QFR at PSI_QFR_GS0223 and PSI_QFR_GS0235. In an interview with the Subcommittee, David Lehman explained that the bid/offer spread (the difference between the price at which a security is offered for sale ["offer price"] and the price at which a bank would buy the same security ["bid price"]) was the reason for the difference between Goldman's internal valuation of the price of the AA rated securities and price at which it sold them to Bank Hapoalim. However, in many instances during this period, it appeared as if Goldman's internal valuation price had no relationship to the bid and offer prices quoted to clients. For example, at the end of June 2007, Goldman provided Timberwolf investor M oneygram with an offer price of $86 for Timberwolf A2 securities and bid price of $83, indicating a bid/offer spread of 3 points. Meanwhile, Goldman had an internal valuation of $75 for the same securities, far different from $83 and $86 quoted to M oneygram. See Moneygram valuation, 7/5/2007 email from Goldman Sachs Operations, "MoneyGram Marks from GS as of 06/29/07," GS MBS-E-022023387; Goldman internal evaluations see "W arehouse SP CDO positions and hedges_6-29-07," GS MBS-E-010809241. See also 6/6/2007 email from Sheara Fredman, GS MBS-E-010795808 and attachment GS MBS-E-010795809. Goldman's pricing in such situations seemed consistent with the strategy articulated earlier by Mr. Sparks, the head of the Mortgage Department, that Goldman should write down the value of the assets, "but market [the CDO securities] at much higher levels," because he was concerned that Goldman was "overly negative and ahead of the market, and that [Goldman] could end up leaving some money on the table." 5/14/2007 email from Tom Montag to Daniel Sparks, GS MBS-E-019642797.
²⁴⁰⁷ 5/14/2007 email from Edwin Chin, GS MBS-E-012553986.
²⁴⁰⁸ Mr. Birnbaum responded directly to Mr. Swenson: "what a beautiful quote." Id.
²⁴⁰⁹ 6/6/2007 email from David Lehman, GS MBS-E-001936955.
²⁴¹⁰ 6/6/2007 email from Daniel Sparks, GS MBS-E-001922156. Mr. Lehman further responded: "thk abt this - if we establish a defined + healthy supply/demand dynamic in this product we can always create more CDO^2 at a significant profit vs current levels," meaning that since Goldman's internal marks were so much lower than the bids it was providing clients, if a client chose to buy additional securities at Goldman's bid price, Goldman could sell the securities by taking a short position on a CDS facing the client, and make money on the trade. 6/6/2007 email from David Lehman, GS MBS-E-001936955.
²⁴¹¹ 5/20/2007 email from George Maltezos, Goldman Australia sales, to David Lehman, "T/wolf and Basis," GS MBS-E-001863555 ("FYI – basis are back from their 2 week business trip on Monday. My focus will go to timberwolf 100mm AAA and AA block trade with them .... Pls confirm you are willing to trade this at [then-current marks] and that you are not marking these bonds any wider at moment for month end May.").
²⁴¹² 5/22/2007 email from George Maltezos to John Murphy of Basis Capital Management, JUL 000685.
²⁴¹³ See. e.g., 5/30/2007 email from George Maltezos to John Murphy and Stuart Fowler, JUL 002032.
²⁴¹⁴ See Goldman response to Subcommittee QFR at PSI_QFR_GS0223 and PSI_QFR_GS0235.
²⁴¹⁵ See 5/1/2007 email from Macdara Molloy to Phillipa Chen, GS MBS-E-002003102.
²⁴¹⁶ Id.
²⁴¹⁷ 5/30/2007 email from George Maltezos to John Murphy and Stuart Fowler at Basis Capital, JUL 002032. "From a pricing perspective, we have been trading Timberwolf AAA and AA bonds. 550 dm on AAAs and north of
²⁴¹⁸ 6/12/2007 email from Sahil Sachdev to George Maltezos, GS MBS-E-001912398.
²⁴¹⁹ 6/12/2007 email from George Maltezos, PSI-Basis_Capital_Group-03-0001. Mr. Maltezos emailed Mr. Lehman and Mr. Egol about Point Pleasant pricing, asking them "does the 75 mark reflect actual trading or overall softness in the market? I know you had indicated 70 was more like the number." 6/12/2007 email from George Maltezos to David Lehman, Jonathan Egol, and Omar Chaudhary, GS MBS-E-002002522. The Subcommittee was unable to locate Goldman's response to his question.
²⁴²⁰ The most recent Point Pleasant sale had been $40 million worth of the AAA rated A2 securities, which sold on May 24, 2007, for a price of $91. The next most recent sale had been $20 million worth of the A2 securities on April 24, 2007, for a price of $91.30. See Goldman response to Subcommittee QFR at PSI_QFR_GS0223 and PSI_QFR_GS0235.
²⁴²¹ Internally, Goldman had marked down the value of the Point Pleasant securities to $50.00. The much higher bid provided to Basis appears consistent with Goldman's strategy to "market at much higher levels." Goldman consistently offered investors bid prices that were much higher than its internal marks during the months of May and June as it attempted to sell its CDO inventory. See 5/26/2007 email from Michael Swenson to others, GS MBS-E- 012443166 (attached file, "ABS Sec_0525," GS M BS-012443167).
²⁴²² 6/12/2007 email from Stuart Fowler to George Maltezos, GS MBS-E-001912398.
²⁴²³ Id.
²⁴²⁴ 6/13/2007 email from Daniel Sparks to George Maltezos, David Lehman, and Jon Egol, GS MBS-E-002006149. The reference to the "senior guys on 30" is to Goldman's senior executives who had offices on the 30 th floor of the Goldman headquarters in New York.
²⁴²⁵ 6/13/2007 email from George Maltezos to Stuart Fowler and John Murphy at Basis Capital and others, GS MBS-E-001918603.
²⁴²⁶ 6/13/2007 email from George Maltezos, PSI-Basis_Capital_Group-02-0001.
²⁴²⁷ 6/13/2007 email from David Lehman to Tom Montag, GS MBS-E-001914580.
²⁴²⁸ Id.
²⁴²⁹ Goldman response to Subcommittee QFR at PSI_QFR_GS0223 and PSI_QFR_GS0235.
²⁴³⁰ 7/4/2007 email exchange among David Lehman, George Maltezos, and others, GS MBS-E-001990127.
²⁴³¹ Id.
²⁴³² 7/4/2007 email from David Lehman, GS MBS-E-001990127.
²⁴³³ 7/12/2007 email from Jon Egol, GS M BS-E-001866391. On the same day, Goldman's internal marks for the securities were even lower, at $60 for the AAA securities and $55 for the AA securities. As Basis Capital's financial situation became worse, Goldman responded by marking Basis Capital's securities to levels that were closer to Goldman's own internal evaluations.
²⁴³⁴ 7/13/2007 email from David Lehman, "Re: Basis," GS MBS-E-001866391 at 93.
²⁴³⁵ Id. at 91.
²⁴³⁶ 7/16/2007 email from Jon Egol, "Re: Basis," GS MBS-E-010169281. Goldman also marked down Basis Capital's Point Pleasant securities to $10, from an initial purchase price of $81.72.
²⁴³⁷ 7/12/2007 Goldman datasheet, "W arehouse SP CDO positions and hedges_7-12-07," GS MBS-E-001866482.
²⁴³⁸ 7/24/2007 email from David Lehman to others, GS MBS-E-013449641.
²⁴³⁹ 7/31/2007 letter from Goldman Sachs International to Basis Capital, "Event of Default Under ISDA Master Agreement," JUL 003958.
²⁴⁴⁰ 5/24/2007 email from Yusuf Aliredha to Mr. Sparks, Mr. Lehman, and others, "Priority Axes," GS MBS-E- 001934732.
²⁴⁴¹ Id.
²⁴⁴² 6/5/2007 email from Benjamin Case to David Lehman, GS MBS-E-001919861.
²⁴⁴³ Id.
²⁴⁴⁴ Id.
²⁴⁴⁵ 6/1/2007 email from Jay Lee to David Lehman, Matthew Bieber, and others, GS MBS-E-010958182.
²⁴⁴⁶ Id.
²⁴⁴⁷ Id.
²⁴⁴⁸ 6/7/2007 email from Omar Chaudhary to Daniel Sparks, David Lehman, and Bunty Bohra, GS MBS-E- 001866450, Hearing Exhibit 4/27-104.
²⁴⁴⁹ 6/7/2007 emails from Daniel Sparks and David Lehman, GS MBS-E-001866450, Hearing Exhibit 4/27-104.
²⁴⁵⁰ See Goldman response to Subcommittee QFR at PSI_QFR_GS0223 and PSI_QFR_GS0235.
²⁴⁵¹ See Goldman response to Subcommittee QFR at PSI_QFR_GS0223.
²⁴⁵² 6/10/2007 email from Daniel Sparks to Omar Chaudary and Bunty Bohra, GS MBS-E-010971809.
²⁴⁵³ 6/11/2007 email from Tom Montag, GS MBS-E-001866144.
²⁴⁵⁴ 6/11/2007 email exchange between Syndicate and David Lehman, GS MBS-E-001914921-24.
²⁴⁵⁵ 6/13/2007 email from Japan sales office, GS MBS-E-011212260.
²⁴⁵⁶ 6/22/2007 email exchange between Tom Montag and Daniel Sparks, "Few Trade posts," Hearing Exhibit 4/27- 105.
²⁴⁵⁷ Id.
²⁴⁵⁸ 6/25/2007 email from Daniel Sparks to Tom Montag, and others, GS MBS-E-010952698.
²⁴⁵⁹ 6/26/2007 email from Deeb Salem to Michael Swenson, GS MBS-E-012371112.
²⁴⁶⁰ Id.
²⁴⁶¹ Goldman's internal price was then $55, 23% less. See 7/12/2007 Goldman datasheet, "W arehouse SP CDO positions and hedges_7-12-07," GS MBS-E-001866482; see Goldman response to Subcommittee QFR at PSI_QFR_GS0223 and PSI_QFR_GS0235.
²⁴⁶² 7/6/2007 email from Mitchell Resnick to David Lehman, GS MBS-E-001866752.
²⁴⁶³ See Goldman response to Subcommittee QFR at PSI_QFR_GS0223 and PSI_QFR_GS0235.
²⁴⁶⁴ 5/7/2007 Goldman email chain between Elisha W iesel and others, "RE: Timeberwolf Analysis," GS MBS-E-003334218. Elisha Wiesel worked with Goldman's legal department on issues related to disseminating information to potential investors. On May 20, 2007, the same day the Mortgage Department presented the conclusions of its CDO valuation project to M r. Viniar and others, Mr. W iesel sent an email to M r. Bieber underscoring concerns about its valuation process: "[G]iven how complex the data is for a CDO^2, there's little chance we'll ever get fully 'comfortable' beyond a shadow of a doubt that there's nothing materially misleading in the data cuts we provide. Is best outcome in this situation to just get a big-boy letter drafted?" 5/20/2007 email from Elisha W iesel, GS MBS-E-001980637.
²⁴⁶⁵ 7/16/2007 email to David Lehman, "Carlyle," GS MBS-E-011050254.
²⁴⁶⁶ 5/7/2007 email from Elisha W iesel, GS MBS-E-004735378.
²⁴⁶⁷ 7/7/2007 email from Stuart Fowler, GS MBS-E-011183045.
²⁴⁶⁸ 7/31/2007 email from Matthew Bieber to David Lehman, "FW : Requesting Compliance Approval," GS MBS-E- 001920215.
²⁴⁶⁹ 8/7/2007 email from Jay Lee to others, GS MBS-E-001927858.
²⁴⁷⁰ 8/7/2007 email from David Lehman to others, GS MBS-E-001927858.
²⁴⁷¹ See 6/6/2007 email from David Lehman, GS MBS-E-001936955. Mr. Lehman stated: "thk abt this – if we establish a defined + healthy supply/demand dynamic in this product we can always create more CDO^2 at a significant profit vs current levels."
²⁴⁷² 7/11/2007 email from David Lehman, "CDO Marks," GS MBS-E-013427046 [emphasis in original].
²⁴⁷³ 7/16/2007 email from David Lehman to Matthew Bieber, GS MBS-E-001913775.
²⁴⁷⁴ See 7/17/2007 email from David Lehman to Daniel Sparks, GS MBS-E-010857643 (with attachment GS MBS- E-010857644).
²⁴⁷⁵ 9/17/2007 email from Tom Montag, GS MBS-E-000766371, Hearing Exhibit 4/27-106.
²⁴⁷⁶ 9/17/2007 email from Christopher Creed, GS MBS-E-000766370, Hearing Exhibit 4/27-106.
²⁴⁷⁷ Id.
²⁴⁷⁸ Performance Review for Joshua Birnbaum, GS-PSI-01972, Hearing Exhibit 4/27-55c. See also 6/26/2007 email from Deeb Salem to Michael Swenson, GS MBS-E-012371112.
²⁴⁷⁹ See Goldman response to Subcommittee QFR at PSI_QFR_GS0030.
²⁴⁸⁰ Id. at PSI_QFR_GS0239.
²⁴⁸¹ Id. at PSI_QFR_GS0030.
²⁴⁸² See 3/23/2007 Goldman document, "Abacus 2007-AC1," at 11, GS MBS-E-002807082, Hearing Exhibit 4/27- 120; Securities and Exchange Commission v. Goldman Sachs, Case No. 10-CV-3229 (S.D.N.Y.), Complaint (April 16, 2010), at 1, 6 (hereinafter "SEC Complaint against Goldman Sachs").
²⁴⁸³ 4/2/2007 email from Fabrice Tourre, "ABACUS 07-AC1," GS MBS-E-002011152 (Abacus 2007-AC1 assets are "fully-identified, with no reinvestment, removals, substitutions or discretionary trading").
²⁴⁸⁴ Goldman internal documents sometimes describe it as the underwriter for Abacus 2007-AC1, and sometimes as the placement agent. Compare 2/18/2008 Goldman document, "CDO Transactions (July 1, 2006 - December 31, 2007) in which Goldman Sachs acted as underwriter," GS M BS 0000004337, to 3/12/2007 Goldman memorandum to Mortgage Capital Committee, "ABACUS Transaction sponsored by ACA," at 2, GS M BS-E-002406025, Hearing Exhibit 4/27-118 ("Goldman is solely working as agent but retains the option to underwrite the risk as principal.").
²⁴⁸⁵ 2/27/2007 email from Curtis W illing, "ABACUS 2007 AC1, Ltd. -- New Issue Announcement (144a/RegS)," GS MBS-E-009209654.
²⁴⁸⁶ 3/12/2007 Goldman memorandum to Mortgage Capital Committee, "ABACUS Transaction sponsored by ACA," at 6, GS MBS-E-002406025, Hearing Exhibit 4/27-118 ("Goldman is acting as principal as a protection buyer . . . as well as taking other principal roles.").
²⁴⁸⁷ Goldman's additional roles included acting as the basis swap counterparty, the basis swap calculation agent, the collateral put provider, the collateral put calculation agent, the collateral disposal agent, the credit default swap calculation agent, and the initial purchaser. 2/18/2008 Goldman document, "CDO Transactions (July 1, 2006 - December 31, 2007) in which Goldman Sachs acted as underwriter," GS MBS 0000004337; 3/12/2007 Goldman Sachs memorandum to Mortgage Capital Committee, "ABACUS Transaction sponsored by ACA," GS MBS-E- 002406025, Hearing Exhibit 4/27-118.
²⁴⁸⁸ 3/12/2007 Goldman memorandum to Mortgage Capital Committee, "ABACUS Transaction sponsored by ACA," GS MBS-E-002406025, Hearing Exhibit 4/27-118; April 27, 2010 Subcommittee Hearing at 421.
²⁴⁸⁹ Goldman considered its Abacus platform, which commenced in 2004, to be "market-leading." 4/2/2007 email from Fabrice Tourre, "ABACUS 07-AC1," GS MBS-E-002011152; 2/27/2007 Goldman email, "ABACUS-2007- AC1 – M arketing Points (INTERNAL ONLY) [T-Mail]," GS MBS-E-008042545, Hearing Exhibit 4/27-116. See also 6/2007 Goldman document, "CDO Platform Overview," at 31, GS M BS-E-001918722 ("ABACUS is the Goldman brand name for single-tranche CLN [credit linked note] issuances referencing portfolios comprised entirely of structured products."); 4/2006 Goldman presentation "Overview of Structured Products," GS MBS-E-016067482.
²⁴⁹⁰ "Subordination" is "[t]he measure of losses that must occur within a portfolio before a tranche is at risk to loss." Tranche size "[r]eflects the notional (value-at-risk) of a structured credit investment" and "is also a measure of leverage." 7/2006 Goldman presentation, "Structured Credit Investments," at 54, GS MBS-E-002055378; 4/2006 Goldman presentation, "Overview of Structured Products," GS M BS-E-016067482. Goldman contended that, in a single-tranche CDO, investors could customize the tranche risk/return profile by specifying the tranche subordination and tranche size, and that investors could create "credit enhanced" credit exposure through the use of subordination. 4/2006 Goldman presentation, "Overview of Structured Products," at 52, GS MBS-E-016067482. "Combined with tranche size, varying levels of subordination enable investors to tailor both the structural leverage and the risk/return profile of their investment." "Investors are "[n]ot limited by new issuance calendar and bond allocations," are "[n]ot limited by cash bonds in dealer inventory," can "customize[] by sector (e.g. RM BS, CM BS, ABS), rating, vintage, servicer, etc.," and can "meet various investment objectives via structure." 7/2006 Goldman presentation, "Structured Credit Investments," at 54, GS MBS-E-002055378.
²⁴⁹¹ 3/12/2007 Goldman memorandum to Mortgage Capital Committee, "ABACUS Transaction sponsored by ACA," GS MBS-E-002406025, Hearing Exhibit 4/27-118.
²⁴⁹² Goldman trading datasheet, GS MBS 0000004276 (showing closing dates and trade details on various CDOs, including Abacus).
²⁴⁹³ 3/12/2007 Goldman memorandum to Mortgage Capital Committee, "ABACUS Transaction sponsored by ACA," GS MBS-E-002406025, Hearing Exhibit 4/27-118.
²⁴⁹⁴ Id.
²⁴⁹⁵ 2/7/2007 email from Fabrice Tourre, GS MBS-E-003277939, Hearing Exhibit 4/27-114.
²⁴⁹⁶ See also 12/18/2006 email from Fabrice Tourre, "Re: Paulson," GS MBS-E-003246145 (a series of email communications regarding the Abacus 2007-AC1 CDO in which Mr. Tourre referred to the asset portfolio that Paulson was proposing for the CDO as "a weak quality portfolio.").
²⁴⁹⁷ Subcommittee interview of Fabrice Tourre (4/24/2010). Mr. Tourre also told the SEC that he believed Paulson's selection criteria, such as interest-only mortgages and high loan-to-value ratios, were based on Paulson's view that securities meeting those criteria were "weaker from the credit quality standpoint than other obligations that did not have those characteristics." SEC deposition of Fabrice Tourre (3/3/2009), GS MBS 0000022785, at 813-14.
²⁴⁹⁸ Subcommittee interview of Fabrice Tourre (4/24/2010).
²⁴⁹⁹ See, e.g., 12/10/2006 email from Fabrice Tourre to David Lehman, GS MBS-E-003453843, Hearing Exhibit 4/27-142.
²⁵⁰⁰ Subcommittee interview of Fabrice Tourre (4/24/2010); 2/21/2007 email from Fabrice Tourre to David Lehman, GS MBS-E-011359460-61, Hearing Exhibit 4/27-115.
²⁵⁰¹ SEC deposition of Paolo Pellegrini (12/3/2008), PSI-Paulson-04 (Pellegrini Depo)-0001, at 82-85, 175.
²⁵⁰² 12/18/2006 email from Fabrice Tourre, "Paulson," GS MBS-E-003246145; 12/20/2006 email from Fabrice Tourre, GS MBS-E-002534649.
²⁵⁰³ 1/10/2007 Goldman internal email, GS MBS-E-002480520, Hearing Exhibit 4/27-108; 1/9/2007 email from Fabrice Tourre, "For ACA," GS MBS-E-002480516.
²⁵⁰⁴ 12/18/2006 Goldman internal email, GS MBS-E-003246145-46.
²⁵⁰⁵ Mr. Egol also suggested HBK as a possible portfolio selection agent. 12/18/2006 email from Fabrice Tourre, "Re: Paulson," GS MBS-E-003246145.
²⁵⁰⁶ Id. An email indicates that, in late December 2006, Mr. Tourre was contemplating several possible portfolio selection agents, including "Aladdin, DRCM, Greywolf, and . . . GSC." He also suggested Investec and TCW as possible candidates. 12/18/2006 email from Fabrice Tourre, "Re: Paulson," GS MBS-E-003246145.
²⁵⁰⁷ See, e.g., 1/4/2007 email from Fabrice Tourre to Daniel Sparks, "Paulson post," GS MBS-E-002526707 (On January 4, 2007, Goldman "reached out [to] GSC, Greywolf and ACA today re: acting as portfolio selection agent for a Paulson-sponsored trade.").
²⁵⁰⁸ 1/6/2007 Goldman email, GS MBS-E-003445985, Hearing Exhibit 4/27-152.
²⁵⁰⁹ 1/29/2007 email from Fabrice Tourre, GS MBS-E-003248998, Hearing Exhibit 4/27-112.
²⁵¹⁰ 2/27/2007 email from Ed Steffelin to Peter Ostrem, "FW : ABACUS 2007-AC1, Ltd. -- New Issue Announcement (144a/RegS)," GS MBS-E-009209654.
²⁵¹¹ Subcommittee interview of Edward Steffelin (12/10/2010).
²⁵¹² 3/12/2007 Goldman memorandum to Mortgage Capital Committee, "ABACUS Transaction sponsored by ACA," GS M BS-E-002406025, Hearing Exhibit 4/27-118 (The memorandum also stated: "W e expect the strong brand-name of ACA as well as our market-leading position in synthetic CDOs of structured products to result in a successful offering." "Partnering with ACA on this innovative, franchise-building transaction will enhance our leadership in the market for structured product synthetic CDOs. W e expect that the role of ACA as Portfolio Selection Agent will broaden the investor base for this and future ABACUS offerings." "W e intend to target suitable structured product investors who have previously participated in ACA-managed cashflow CDO transactions or who have previously participated in prior ABACUS transactions."). See also SEC Complaint against Goldman at 8. W hen asked to confirm that Mr. Tourre "suggested that it would be easier to market or to find sort of a counterparty to [Paulson's] short trade if there was a portfolio selection agent involved," Mr. Pellegrini responded, "Right." SEC deposition of Paolo Pellegrini (12/3/2008), PSI-Paulson-04 (Pellegrini Depo)-0001, at 113. Mr. Tourre told the Subcommittee that having an agent gives comfort to potential investors. Subcommittee interview of Fabrice Tourre (4/24/2010).
²⁵¹³ At the Subcommittee hearing, Mr. Tourre testified that Paulson produced the portfolio selection criteria. Senator Levin then asked Mr. Tourre, "And did those criteria which Paulson gave to you, were they plugged into your model? Did they generate a list of possible reference securities for that portfolio?" Mr. Tourre responded: "Yes." They "were used to actually trim down the universe of RM BS." April 27, 2010 Subcommittee Hearing at 82.
²⁵¹⁴ Subcommittee interview of Fabrice Tourre (4/24/2010).
²⁵¹⁵ Paolo Pellegrini told the SEC that Paulson's selection criteria for Abacus 2007-AC1 included RMBS with a maximum weighted average FICO score of 640 and a minimum percentage (80%) of adjustable rate mortgages. Paulson also sought a minimum portfolio size of $750 million. SEC deposition of Paolo Pellegrini (12/3/2008), PSI- Paulson-04 (Pellegrini Depo)-0001, at 140-142. Sihan Shu, an analyst working for Paulson on the Abacus 2007- AC1 reference asset selection, told the Subcommittee that Paulson's selection criteria generally included large percentages of adjustable rate mortgages; high concentrations of mortgages in areas such as California and Florida, where Paulson believed the housing bubble was greater than in other areas; and limited due diligence. Subcommittee interview of Sihan Shu (2/24/2010). See also SEC deposition of Sihan Shu (12/4/2008), PSI-Paulson-04 (Shu Depo)-0001, at 26-28. Similarly, the SEC Complaint listed Paulson's selection criteria as favoring "RMBS that included a high percentage of adjustable rate mortgages, relatively low borrower FICO scores, and a high concentration of mortgages in states like Arizona, California, Florida and Nevada that had recently experienced high rates of home price appreciation." SEC Complaint against Goldman Sachs at 9. However, Goldman's initial submission to the SEC listed Paulson's criteria as only 2006-vintage subprime RMBS rated Baa2 by Moody's. In the Matter of Abacus 2007-AC1 CDO, File No. HO-10911 (SEC), Submission on behalf of Goldman Sachs (September 10, 2009), at 11 (hereinafter "Goldman Sachs Submission"). Goldman's supplemental submission disclosed that Goldman did use additional criteria listed in draft engagement letters between Goldman and Paulson "to guide Goldman Sachs' preliminary search for potential reference securities" that complied with Paulson's criteria, which confirms what Mr. Tourre told the Subcommittee in his testimony at the April 27, 2010 Subcommittee Hearing. In the Matter of ABACUS CDO, File No. HO-10911 (SEC), Supplemental Submission on behalf of
²⁵¹⁶ 1/29/2007 email from Fabrice Tourre to Peter Ostrem and others, GS MBS-E-003248998, Hearing Exhibit 4/27- 112; Goldman Sachs Submission at 12 (citing Gerst Tr. 13-14).
²⁵¹⁷ See 1/9/2007 email from Gail Kreitman to Laura Schwartz, GS MBS-E-007974381.
²⁵¹⁸ Id.
²⁵¹⁹ See 3/22/2007 email from Sihan Shu to Fabrice Tourre and David Gerst, GS MBS-E-003010587.
²⁵²⁰ 3/12/2007 Goldman memorandum to Mortgage Capital Committee, "ABACUS Transaction sponsored by ACA," GS MBS-E-002406025, Hearing Exhibit 4/27-118; 3/23/2007 Goldman presentation, "ABACUS 2007- AC1," GS MBS-E-002807082, Hearing Exhibit 4/27-120; SEC Complaint against Goldman Sachs at 11; Goldman Sachs Submission at 13.
²⁵²¹ 3/12/2007 Goldman internal memorandum to M ortgage Capital Committee, "ABACUS Transaction sponsored by ACA," GS MBS-E-002406025, Hearing Exhibit 4/27-118.
²⁵²² See "Abacus 2007-AC1 Reference Portfolio," chart prepared by Subcommittee. See also 1/5/2007 email from Sihan Shu to Ed Steffelin, Fabrice Tourre, and others, GS M BS-E-002483408; 1/6/2007 email from Fabrice Tourre to Ed Steffelin and others, GS MBS-E-002754054; 1/9/2007 email from Gail Kreitman to Laura Schwartz, GS MBS-E-007974381; 1/22/2007 email from Laura Schwartz to Fabrice Tourre and others, GS MBS-E-002522389; 1/22/2007 email from David Gerst to Paolo Pellegrini and Sihan Shu, GS MBS-E-002480574; 1/28/2007 email from Fabrice Tourre to Gail Kreitman and David Gerst, GS MBS-E-002444359; 1/31/2007 email from David Gerst to Laura Schwartz, GS MBS-E-002620419; 2/1/2007 email from Laura Schwartz to David Gerst, GS MBS-E- 003026086; 2/2/2007 email from Paolo Pellegrini to Laura Schwartz and Sihan Shu, GS MBS-E-002483499; 2/2/2007 email from Laura Schwartz to Paolo Pellegrini and Sihan Shu, GS MBS-E-002483496; 2/5/2007 email from Paolo Pellegrini to Laura Schwartz, GS MBS-E-003062009; 2/5/2007 email from Laura Schwartz to Paolo Pellegrini and others, GS MBS-E-002856966; 2/5/2007 email from David Gerst to Paolo Pellegrini and Sihan Shu, PAULSON-ABACUS 0253248; 2/26/2007 email from Fabrice Tourre to Keith Gorman, GS MBS-E-002444961; 3/22/2007 email from Sihan Shu to Fabrice Tourre and David Gerst, GS MBS-E-003010587; 3/23/2007 Goldman document, "ABACUS 2007-AC1," GS M BS-E-002807082, Hearing Exhibit 4/27-120. Goldman asserted: "The record in this investigation is clear that the overwhelming majority of the securities were identified by ACA." Goldman Supp. Submission at 13. However, the Goldman and Paulson documents reviewed by the Subcommittee show otherwise.
²⁵²³ Goldman Supp. Submission at 10, 13.
²⁵²⁴ Id. at 10.
²⁵²⁵ SEC deposition of Paolo Pellegrini (12/3/2008), PSI-Paulson-04 (Pellegrini Depo)-0001, at 175-76.
²⁵²⁶ 3/12/2007 Goldman memorandum to Mortgage Capital Committee, "ABACUS Transaction sponsored by ACA," at 3, GS MBS-E-002406025, Hearing Exhibit 4/27-118.
²⁵²⁷ 5/8/2007 email from Fabrice Tourre to Josh Birnbaum, GS MBS-E-003611826, Hearing Exhibit 4/27-123.
²⁵²⁸ 3/23/2007 Goldman document, "Abacus 2007-AC1," at 11-12, GS MBS-E-002807082, Hearing Exhibit 4/27- 120.
²⁵²⁹ 4/26/2007 Goldman Sachs Offering Circular, "Abacus 2007-AC1, Ltd.," at 2, GS MBS-E-001918034.
²⁵³⁰ 3/12/2007 email from Jorg Zimmerman (IKB) to Michael Nartey, GS MBS-E-002683134.
²⁵³¹ 3/12/2007 email from Fabrice Tourre to Jonathan Egol, GS MBS-E-002648826.
²⁵³² April 23, 2010 Subcommittee Hearing at 63-64.
²⁵³³ See 3/23/2007 Goldman document, "Abacus 2007-AC1," at 14, GS MBS-E-002807082, Hearing Exhibit 4/27- 120. Moody's rating of Aaa is equivalent to a AAA rating. Standard and Poor's also rated the Abacus Class A-1 notes and the Class A-2 notes as AAA.
²⁵³⁴ Subcommittee interview of Laura Schwartz (ACA) (4/23/2010).
²⁵³⁵ 2/12/2007 "CDO Asset 'Management' Proposal for Abacus 2007-AC1," submitted to ACA Commitments Committee, at 2, ACA-ABACUS-0000121560-66.
²⁵³⁶ 2/23/2007 handwritten notes of Laura Schwartz, ACA Managing Director of CDO asset management, ACA ABACUS 00004171 at 173.
²⁵³⁷ 4/10/2007 email from ACA Managing Director Laura Schwartz, ACA-ABACUS-0000006327.
²⁵³⁸ 1/10/2007 email from Fabrice Tourre to Laura Schwartz, GS MBS-E-002480520, Hearing Exhibit 4/27-108.
²⁵³⁹ Subcommittee interview of Laura Schwartz (4/23/2010). See also Statement of Laura Schwartz, ACA ABACUS 00004406 at 408.
²⁵⁴⁰ Id. See also 1/10/2007 email from Fabrice Tourre to Laura Schwartz, "Transaction Summary," GS MBS-E- 002480520, Hearing Exhibit 4/27-108; SEC Complaint against Goldman Sachs at 14, 15; Goldman Sachs Submission at 32 (citing 1/10/2007 email from Fabrice Tourre to Laura Schwartz, "Transaction Summary," GS MBS-E-003504901).
²⁵⁴¹ 3/23/2007 ACA/Goldman document, "Abacus 2007-AC1," ACA-ABACUS-002807082, Hearing Exhibit 4/27- 120; Statement of Laura Schwartz, ACA ABACUS 00004406 at 408.
²⁵⁴² Statement of Laura Schwartz, ACA ABACUS 00004406 at 408.
²⁵⁴³ Subcommittee interview of Fabrice Tourre (4/24/2010).
²⁵⁴⁴ April 27, 2010 Subcommittee Hearing at 44.
²⁵⁴⁵ Id. at 86.
²⁵⁴⁶ ACA Financial Guaranty Corp. v. Goldman Sachs & Co., Index No. 650027/2011 (N.Y. Sup.), Complaint (January 6, 2011), at 1, 23 (hereinafter "ACA Complaint against Goldman Sachs).
²⁵⁴⁷ April 27, 2010 Subcommittee Hearing at 86.
²⁵⁴⁸ See 3/12/2007 Goldman memorandum to Mortgage Capital Committee, "ABACUS Transaction sponsored by ACA," GS MBS-E-002406025, Hearing Exhibit 4/27-118 ("Goldman will receive an upfront premium from Paulson for distributing risk at or within specified strike spreads." "If Goldman succeeds in placing a given Targeted Tranche inside the related Strike Spread, Goldman will receive from Paulson a fee on the notional amount of such Targeted Tranche distributed. Such fee will have a floor component (the 'Minimum Fee Rate') and an upside sharing component, under which Goldman will share with Paulson any execution delivered at levels tighter than the Strike Spreads."). See also 1/18/2007 email from Fabrice Tourre to David Lehman and others, GS MBS-E-002483446 (detailing the additional fees Goldman could earn by executing trades within the strike spread of each tranche); 3/14/2007 email from Paolo Pellegrini to Sihan Shu with "ACA ABACUS Paulson Fee Illustration" spreadsheet attached (the spreadsheet provides details of the incentive-based fees paid to Goldman, including for Goldman's pricing of spreads), PAULSON-ABACUS 0250401. Mr. Pellegrini told the SEC that Goldman and Paulson had discussions regarding Goldman's compensation, resulting in "a formula that tied their compensation to sort of kind of the spread that they sort of presented to or that they would present to us." SEC deposition of Paolo Pellegrini (12/3/2008), PSI-Paulson-04 (Pellegrini Depo)-0001, at 118-19. Mr. Tourre described the compensation agreement in an email to Mr. Sparks, writing that if Goldman could place super senior risk inside a certain spread, Paulson would pay Goldman an upfront fee and periodic fees reflecting the money Goldman saved Paulson. 9/8/2006 email from Fabrice Tourre to Dan Sparks, GS MBS-E-009516671. Mr. Tourre told the SEC that Paulson was
²⁵⁴⁹ SEC Complaint against Goldman Sachs at 18. See Credit Default Swap Insurance Policy, ACA ABACUS 00001593. ACA complaint against Goldman Sachs at 15, 16.
²⁵⁵¹ 5/8/2007 email exchange between Joshua Birnbaum and Fabrice Tourre, "Post on Paulson and ABACUS 07- AC1," GS MBS-E-003352815; 4/13/2007 email exchange between Fabrice Tourre and Charlie Remnant, "ABACUS 07-AC1," GS MBS-E-002485172; 5/9/2007 email to Fabrice Tourre, "ABN Amro," GS MBS-E-002461503. ABN AMRO Bank N.V. (ABN), a large European bank, intermediated the swap between Goldman and ACA Financial Guaranty Corp.
²⁵⁵² The CDS contracts were executed between Goldman Sachs International and Paulson Credit Opportunities Master II Ltd., one of the Paulson hedge funds. 4/9/2007 email from Nicholas Friedman to Fabrice Tourre and others, "Re: ABACUS 07-AC1," GS MBS-E-002449178. Shortly before the Abacus 2007-AC1 transaction closed, Goldman agreed to take the long side of a CDS contract on the performance of a small portion of Abacus' underlying assets when Paulson wanted to increase its short position at the last minute. Although Goldman ended up retaining this long investment, it did so only because it could not find an investor who would buy it. Mr. Tourre admitted this fact in the April 27, 2010 Subcommittee Hearing. Senator Levin: Did Goldman intend to keep a long stake in that transaction when the deal was structured? I know it ended up with a piece. Was it intended that it end up with a piece of that deal? Mr. Tourre: W e tried to hedge our risk by selling that piece as well, but were not successful in doing so. Senator Levin: So it was intended to sell that piece? Mr. Tourre: For prudent risk management reasons, we were trying – Senator Levin: Oh, I am sure for all the right reasons. But it was intended that Goldman not have any long stake on that piece. Is that correct? Mr. Tourre: Yes. See also 6/5/2007 email from David Gerst to Jonathan Egol, GS MBS-E-002469912, Hearing Exhibit 4/27-126.
²⁵⁵³ SEC Complaint against Goldman Sachs at 3.
²⁵⁵⁴ 10/26/2007 email from Goldman salesman to Michael Swenson, "ABACUS 2007-AC1 – Marketing Points (INTERNAL ONLY) [T-Mail]," GS MBS-E-016034495.
²⁵⁵⁵ SEC Complaint against Goldman Sachs at 3.
²⁵⁵⁶ See SEC Complaint against Goldman Sachs.
²⁵⁵⁷ Pursuant to 15 U.S.C. §78j(b) and 17 C.F.R. §240.10b-5, the SEC alleged that Goldman and Mr. Tourre, "in connection with the purchase or sale of securities or securities-based swap agreements, by the use of means or instrumentalities of interstate commerce or of the mails, directly or indirectly (a) employed devices, schemes or artifices to defraud; (b) made untrue statements of material facts or omissions of material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or (c) engaged in transactions, practices or courses of business which operated or would operate as a fraud or deceit upon persons." SEC Complaint against Goldman Sachs at 20-21. The SEC alleged that Goldman and Mr. Tourre "knowingly or recklessly misrepresented in the term sheet, flip book and offering memorandum for ABACUS 2007- AC1 that the reference portfolio was selected by ACA without disclosing the significant role in the portfolio selection process played by Paulson, a hedge fund with financial interests in the transaction adverse to IKB, ACA Capital and ABN. Goldman&Co and Tourre also knowingly or recklessly misled ACA into believing that Paulson invested in the equity of ABACUS 2007-AC1 and, accordingly, that Paulson's interests in the collateral section process were closely aligned with ACA's when in reality their interests were sharply conflicting." SEC Complaint against Goldman Sachs at 21. Similar charged were filed pursuant to 15 U.S.C. § 77q(a)(1), (2) and (3). See SEC Complaint against Goldman Sachs at 19.
²⁵⁵⁸ SEC Complaint against Goldman Sachs at 2, 20, 21.
²⁵⁵⁹ Securities and Exchange Commission v. Goldman, Sachs & Co. and Fabrice Tourre, Case No. 10-CV-3229, (S.D.N.Y.), Consent of Goldman Sachs, (July 14, 2010), at 1, 2, 10 (hereinafter "Consent of Goldman Sachs").
²⁵⁶⁰ Consent of Goldman Sachs at 2. Despite this acknowledgment by Goldman as part of the settlement, when asked during the Subcommittee hearing if "a non-biased person [could] look at the facts [of Abacus 2007-AC1] as you see them and say there is a question of unethical behavior here," David Viniar, the executive vice present and chief financial officer for Goldman, stated he "didn't believe so." April 27, 2010 Subcommittee Hearing at 125.
²⁵⁶¹ Some of the administrative roles that Goldman filled in its CDOs, as described in its CDO agreements, included: Initial Purchaser, Synthetic Security Counterparty, Senior Swap Counterparty, Credit Protection Buyer, Liquidation Agent, Calculation Agent under U.S. Dollar Cash Flow Swap Transaction, Collateral Put Provider, CP Note Placement Agent, Portfolio CDS Counterparty, Hedge Counterparty - Cashflow Swap, Collateral Disposal Agent, Credit Default Swap Calculation Agent, Basis Swap Counterparty, and Basis Swap Calculation Agent. 2/18/2008 document prepared by Goldman Sachs, outlining the parties serving each role in Goldman underwritten CDOs, GS MBS 0000004337.
²⁵⁶² 2/18/2008 Goldman presentation, "CDO Transactions (July 1, 2006 - December 31, 2007) in which Goldman Sachs acted as underwriter," GS M BS 0000004337, at 4340; 7/19/2007 Goldman document, "GS Liquidation Agent Role in ABS CDOs," GS MBS-E-014055117.
²⁵⁶³ Subcommittee interview of Darryl Herrick (10/13/2010).
²⁵⁶⁴ Subcommittee interview of Peter Ostrem (10/5/2010).
²⁵⁶⁵ Id. Although Mr. Ostrem helped design the liquidation agent feature, he was not employed by Goldman when its CDO assets were downgraded and triggered its liquidation agent duties.
²⁵⁶⁶ See 7/17/2006 Goldman memorandum to the Mortgage Capital Committee, "Placing debt and equity on a static high grade structured product CDO Squared with Investec (UK) Limited," GS MBS-E-013458155.
²⁵⁶⁷ Id.
²⁵⁶⁸ Id.
²⁵⁶⁹ Id.
²⁵⁷⁰ 7/19/2007 Goldman document, "GS Liquidation Agent Role in ABS CDOs," GS MBS-E-014055117.
²⁵⁷¹ 7/23/2007 email from Mr. Case to Mr. Bieber, "CDO Liquidation Agent Role - Draft Talking Points - INTERNAL USE ONLY," GS MBS-E-015240358.
²⁵⁷² 7/17/2006 Goldman memorandum to Mortgage Capital Committee, GS MBS-E-013458155, at 57. A "mezzanine" CDO is one in which the underlying assets carry credit ratings such as BBB or BBB-.
²⁵⁷³ 10/2006 "Hudson Mezzanine 2006-1 Flipbook," GS MBS-E-009546963, Hearing Exhibit 4/27-87.
²⁵⁷⁴ Goldman Sachs Hudson Mezzanine Funding 2006-1, LTD Preliminary Termsheet, GS MBS-E-001557869.
²⁵⁷⁵ 12/3/2006 Hudson Mezzanine 2006-1, LTD. Offering Circular, GS MBS-E-021821196 at 234.
²⁵⁷⁶ 10/2006 "Hudson Mezzanine 2006-1 Flipbook," GS MBS-E-009546963, Hearing Exhibit 4/27-87.
²⁵⁷⁷ See Goldman Sachs response to Subcommittee QFR at PSI_QFR_GS0239.
²⁵⁷⁸ 10/6/2006 email from Michael Halevi to Olivia Ha, GS MBS-E-014338525.
²⁵⁷⁹ Subcommittee interview of Darryl Herrick (10/13/2010).
²⁵⁸⁰ Id. Mr. Herrick was not employed by Goldman when its CDO assets were downgraded and triggered its liquidation agent duties.
²⁵⁸¹ 1/3/2008 email from Shelly Lin to Mr. Sparks, GS MBS-E-021880171 (attached file, "Deal Summary," GS MBS-E-021880172).
²⁵⁸² Id.
²⁵⁸³ 10/15/2007 email from Naina Kalavar, "NAB/Hudson Mezz Update 2," GS MBS-E-015738973. Mr. Case used this email to circulate his notes of the two telephone conversations.
²⁵⁸⁴ Id. at 2. The notes included the following: "[C]urrent distressed nature of the assets has been fully priced in and has not moved over the past 2 months – if unwound those cds would be at 80-90 points, that is % points to be paid up front to unwind swap – equiv of 20 cents to dollar in cash bond terms ... Across entire universe of loans already in liquidation – been generally se[e]n 50-60-70 % recovery rates. Rates are not coming back high enough to make the market opt[i]mistic that bonds will come back to recover princi[pal]. ... Our view that there is upside in waiting an[d] evaluating mtkt conditions before liquidating. ... W e think that the shorts may get impatient – minor rallies from short covering – domino effect/momentum creates a rally b/c shorts get nervous at little rally – this provides potential upside to waiting to liquidate."
²⁵⁸⁵ Id. at 3. Such an amendment would require investor consent.
²⁵⁸⁶ 10/15/2007 email from Naina Kalavar, "NAB/Hudson Mezz Update 2," GS MBS-E-015738973.
²⁵⁸⁷ Id. at 75.
²⁵⁸⁸ Id. at 76.
²⁵⁸⁹ Id.
²⁵⁹⁰ 11/9/2007 email from Mr. Case to Mr. Lehman, GS MBS-E-021876334.
²⁵⁹¹ 2/29/2008 letter from Morgan Stanley to Goldman, HUD-CDO-00006877.
²⁵⁹² Reference asset OOM LT 2006-2 M8. See 1/3/2008 email from Shelly Lin to Mr. Sparks, GS MBS-E- 021880171 (attached file, "Deal Summary," GS MBS-E-021880172).
²⁵⁹³ Reference asset MSAC 2006-W MC2 B3. See 1/3/2008 email from Shelly Lin to Mr. Sparks, GS MBS-E- 021880171 (attached file, "Deal Summary," GS MBS-E-021880172).
²⁵⁹⁴ See 11/29/2007 email from Mr. Case to Mr. Sparks, Mr. Lehman, and others, GS MBS-E-021876502.
²⁵⁹⁵ Subcommittee interview of David Lehman (9/27/2010).
²⁵⁹⁶ 12/18/2007 email from Lira Lee to [investor], GS MBS-E-021878556.
²⁵⁹⁷ See discussion of Hudson 1, above.
²⁵⁹⁸ 12/19/2007 email from Mr. Case to Nicole Martin of Morgan Stanley, GS MBS-E-021876172.
²⁵⁹⁹ Subcommittee interview of Morgan Stanley (8/6/2009).
²⁶⁰⁰ Id.
²⁶⁰¹ 1/3/2008 email from Shelly Lin to Mr. Sparks, GS MBS-E-021880171 (attached file, "Deal Summary," GS MBS-E-021880172).
²⁶⁰² Id.
²⁶⁰³ See, e.g., 1/16/2008 email from Nicole Martin to Mr. Lehman, GS MBS-E-022164848.
²⁶⁰⁴ Due to the extensive losses experienced by Hudson 1, by January 2008, Morgan Stanley was likely the only long investor whose investment was not completely extinguished.
²⁶⁰⁵ 1/16/2008 email from John Pearce of Morgan Stanley to Michael Petrick, HUD-CDO-00004851.
²⁶⁰⁶ 2/5/2008 email from Mr. Pearce to Mr. Lehman and Nicole Martin, HUD-CDO-00004852.
²⁶⁰⁷ 2/6/2008 email from Mr. Pearce to Michael Petrick, HUD-CDO-00005146.
²⁶⁰⁸ 2/7/2008 email from Mr. Pearce to Mr. Lehman, HUD-CDO-00005147.
²⁶⁰⁹ Transcript of 2/13/2008 telephone call between Morgan Stanley and Goldman, HUD-CDO-00006894. See also 2/28/2008 email from Sue Fertel-Kramer to Mr. Case and others, GS MBS-E-021881029.
²⁶¹⁰ Transcript of 2/13/2008 telephone call between Morgan Stanley and Goldman, HUD-CDO-00006894.
²⁶¹¹ Id.
²⁶¹² 2/21/2008 email from Vanessa Vanacker to M r. Pearce, HUD-CDO-00004882. 2/29/2008 letter from Morgan Stanley to Goldman, HUD-CDO-00006877.
²⁶¹³ 12/3/2006 Hudson Mezzanine 2006-1, LTD. Offering Circular, section entitled, "Disposition of CDS Transactions by the Liquidation Agent Under Certain Circumstances," GS MBS- E-021821196 at 241. See 2/29/2008 letter from Morgan Stanley to Goldman, HUD-CDO-00006877.
²⁶¹⁴ 2/29/2008 letter from Morgan Stanley to Goldman, HUD-CDO-00006877 [emphasis in original].
²⁶¹⁵ 3/10/2008 letter from Goldman to M organ Stanley, HUD-CDO-00006881. The letter also states: "Morgan Stanley's lack of standing even to advance many positions that are within the exclusive province of Hudson, and the preclusive effect on Morgan Stanley's contentions of the Agreement's broad exculpation and conflict waiver provisions provide sufficient response."
²⁶¹⁶ See 3/27/2008 email from Morgan Stanley to Goldman, HUD-CDO-00004378. On March 24, 2008, Goldman offered to unwind the Hudson 1 trade with Morgan Stanley by paying it 9% of the face (par) value of the Hudson securities. 3/24/2008 email from Goldman to Morgan Stanley, GS MBS-E-022012805.
²⁶¹⁷ See, e.g., 3/27/2008 email from Morgan Stanley to Goldman, HUD-CDO-00004378. See also 3/20/2008 email from Mr. Case, GS MBS-E-021880596.
²⁶¹⁸ See 6/6/2008 letter from Goldman as liquidation agent, "Hudson Mezzanine Funding 2006-1, Ltd. - Certain Dispositions of Assets," HUD-CDO-00003155.
²⁶¹⁹ See 11/21/2008 letter from Goldman to Morgan Stanley, HUD-CDO-00005125.
²⁶²⁰ The amount of assets in the default swap collateral account was required to equal the total face ("notional") value of the CDS entered into by the CDO. This arrangement provided assurance to the short parties that funds would be available if and when payments were due to them under the CDS. CDO agreements often required that the cash placed in the default swap collateral account be kept in very secure, short term, cash-like instruments such as Treasury notes or Certificates of Deposit (called "Eligible Investments") until the cash was used to acquire default swap collateral or make payments to a short party. If any credit event resulted in payments from the default swap collateral account to the short parties under the CDS contracts, the long parties might not receive all of their principal investment at the maturity of the deal.
²⁶²¹ The parameters governing the type of default swap collateral securities that could be purchased with investor funds were generally outlined in the CDO agreement documents and offering memorandum. Typical criteria included: a AAA credit rating; a yield slightly greater than LIBOR; limitations on the maturation dates of the securities; and limited exposure to a single counterparty. Generally, the CDO agreement required that some of the default swap collateral be retained in Eligible Investments in order be able to fulfill any obligations or payments due in the short term. In CDOs reviewed by the Subcommittee, the default collateral securities were sometimes RMBS or CDO securities bearing AAA ratings. These securities often lost substantial value which the collateral put provider then had to absorb.
²⁶²² The Timberwolf Indenture agreement referred to this role as the "Synthetic Security Counterparty." See 3/27/2007 Timberwolf I, LTD. Indenture Agreement, at § 12.5(b), GS MBS-E-021825583 at 711.
²⁶²³ Typically a shell company incorporated in a foreign jurisdiction (often the Cayman Islands) and a shell company incorporated in the United States (often Delaware) served as the "Issuer" and "Co-Issuer," respectively of the CDO. Generally, the financial institution that was underwriting the CDO, in this case Goldman, would arrange for the establishment of those entities. For simplicity, this section will refer to both companies as the "Issuer" of the CDO securities.
²⁶²⁴ Another option was for Goldman to take physical possession of the security.
²⁶²⁵ In a typical put agreement, the put provider guarantees to pay to the put purchaser the face (par) value of a specified security upon delivery of the security, or pay to the put purchaser the difference between the security's par value and actual market price when sold. In exchange for that protection, the put purchaser typically pays a fee to the put provider. In many of the CDS contracts associated with synthetic CDOs, as described above, GSI fulfilled the role of a put provider, by absorbing any shortfall between the face (par) value and market price of any default swap collateral securities sold to pay amounts owing to the short party in the CDS contract.
²⁶²⁶ See 3/27/2007 Timberwolf I, LTD. Indenture Agreement, at § 12.5(b), GS MBS-E-021825583 at 712. For accounting purposes, Goldman established a CDO Put Reserve, to account for potential losses that might result from its role as a collateral put provider in CDOs.
²⁶²⁷ Any subsequent losses resulting from Goldman's role as the collateral put provider would reduce the profit resulting from that fee. In responses to Subcommittee questions for the record regarding 7 CDOs (Fort Denison, Camber 7, Timberwolf, Anderson Mezzanine, Point Pleasant, Hudson Mezzanine 2006-1, and Hudson Mezzanine 2006-2), Goldman reported that for most of the CDOs, the net profit was less than $500,000. One exception was Hudson Mezzanine 2006-1, which yielded a profit of approximately $1 million. See Goldman response to
²⁶²⁸ Timberwolf used this reduced premium approach, but in a few other instances, such as Hudson Mezzanine 2006-
²⁶²⁹ One reason Goldman was so concerned about the value of the default swap collateral securities was because those securities included AAA rated RMBS securities whose values were declining in line with the entire mortgage market.
²⁶³⁰ 6/20/2007 email from Matthew Bieber to Goldman colleagues, GS MBS-E-001912772 ("Below are the deals I recall us having significant exposure to in terms of default swap collateral. W ho is responsible for each of the deals? W e need to get Dan a list this morning. If there are any missing, please let me know.").
²⁶³¹ Id. Mr. Bieber listed the following CDOs: Adirondack 1; Adirondack 2; Coolidge Funding; Broadwick; Hudson High Grade; Hudson Mezzanine 1; Hudson Mezzanine 2; Fortius I; Fortius II; Camber 7; Hout Bay; Point Pleasant; Timberwolf; Anderson Mezzanine; Altius I; Altius III; and Altius IV.
²⁶³² Subcommittee interview of Matthew Bieber (10/21/2010).
²⁶³³ 7/18/2007 email from Alfa Kiflu, GS M BS-E-001866507. The six CDOs in which Goldman had large short positions were: Hudson Mezzanine 1; Timberwolf; Camber 7; Hudson Mezzanine 2; GSC ABS Funding 2006-3G; and Anderson Mezzanine.
²⁶³⁴ 7/19/2007 email from Matthew Bieber to David Lehman, GS MBS-E-011178225.
²⁶³⁵ 7/19/2007 email from Patrick W elch, GS MBS-E-001866507.
²⁶³⁶ 7/25/2007 email from Fabrice Tourre, GS MBS-E-001989091.
²⁶³⁷ Id. Greywolf Capital was the collateral manager of the Timberwolf CDO.
²⁶³⁸ 7/25/2007 email from Matthew Bieber, GS MBS-E-001989091.
²⁶³⁹ 7/26/2007 email from Shelly Lin, GS MBS-E-015232129.
²⁶⁴⁰ 7/30/2007 email from Matthew Bieber to David Lehman, GS MBS-E-001867239.
²⁶⁴¹ See 8/6/2007 email from Connie Kang to David Lehman, GS MBS-E-001992556; 8/9/2007 email from Mahesh Ganapathy to David Lehman, Matthew Bieber, and Jonathan Egol, GS MBS-E-001930307; 8/12/2007 email from Mahesh Ganapathy to David Lehman and Matthew Bieber, GS MBS-E-001930343; 8/13/2007 email from Mahesh Ganapathy to Matthew Bieber, David Lehman, and Jonathan Egol, GS MBS-E-001930571.
²⁶⁴² In addition, since the yield of most default swap collateral securities was linked to their "face (par) value," when the same securities could be obtained at a price lower than their par value, their yield (return on investment) increased as long as they continued to meet their scheduled principal and interest payments. This was another potential benefit to the long investors which conflicted with the interest of Goldman, the short party.
²⁶⁴³ 8/21/2007 email from Matthew Bieber to David Lehman, GS MBS-E-011273913.
²⁶⁴⁴ See 9/21/2007 email from Marty Devote of Aladdin Capital Management to Benjamin Case, GS MBS-E 022138816 ("W e, at the direction of Connie and Roman [Goldman employees], have not been reinvesting CDS collateral as it matures. W e've brought the topic up a few times over the past few months with your team. Last I heard, you were re-evaluating the market, and would come back to us with a breakdown of acceptable replacements. As the cash balances continue to grow, I'd like to address this issue, as the amount of cash drag is beginning to become meaningful.").
²⁶⁴⁵ 9/6/2007 email from Roman Shimonov to Matthew Bieber, GS MBS-E-000765873.
²⁶⁴⁶ 9/6/2007 email from Joe Marconi to David Lehman, GW 107909.
²⁶⁴⁷ Subcommittee interview of Joseph M arconi (Greywolf Capital) (10/19/2010).
²⁶⁴⁸ 9/7/2007 email from Joe Marconi to David Lehman, GW 107909.
²⁶⁴⁹ Subcommittee interview of Joseph Marconi (Greywolf Capital) (10/19/2010).
²⁶⁵⁰ Id.
²⁶⁵¹ Section 12.5(b) of the Timberwolf Indenture agreement stated: "The Synthetic Securities shall be structured as 'pay-as-you-go' credit default swaps. As part of the purchase of each Synthetic Security on or before the Closing Date, the Issuer will be required to purchase Default Swap Collateral which satisfies the Default Swap Collateral
²⁶⁵² 7/25/2007 email from Matthew Bieber, GS MBS-E-001989091.
²⁶⁵³ 1/7/2011 email from Goldman counsel to the Subcommittee.
²⁶⁵⁴ 9/7/2007 email from Matthew Bieber to Tim Saunders, Susan Helfrick, and Jordan Horvath, GS MBS-E- 021881077.
²⁶⁵⁵ Id.
²⁶⁵⁶ 9/7/2007 email from Susan Helfrick to Matthew Bieber, Tim Saunders, and Jordan Horvath, GS MBS-E- 021881084.
²⁶⁵⁷ Mr. Saunders, Ms. Helfrick, and Mr. Horvath provided signed statements to the Subcommittee to the same effect. See written statements submitted to the Subcommittee by Timothy Saunders (12/22/2010), Susan Helfrick (1/7/2011), and Jordan Horvath (1/7/2011). Although Mr. Lehman was not invited to the meeting, he told the Subcommittee that he generally recalled having discussions with his colleagues, including Goldman's legal department, about the general issue of default swap collateral, but did not recall his conversation with Mr. Marconi. He also submitted a statement to the Subcommittee saying he had no recollection of whether the meeting took place or, if a meeting was held, what was discussed or decided. W ritten statement of Mr. Lehman (1/26/2011). Mr. Sparks, the head of the Mortgage Department, told the Subcommittee that while he had a general knowledge of the issue regarding default swap collateral securities, he had no recollection of any meeting or decisions made. Subcommittee interview of Daniel Sparks (1/13/2011).
²⁶⁵⁸ Subcommittee interview of Matthew Bieber (10/21/2010).
²⁶⁵⁹ 9/7/2007 email exchange between David Lehman and Matthew Bieber, GS MBS-E-000766414. The reference to "slmas" is to asset backed securities that were issued by Sallie M ae and backed by pools of student loans.
²⁶⁶⁰ Id.
²⁶⁶¹ 9/7/2007 email from Jonathan Egol to Michael Swenson and David Lehman, GS MBS-E-000765854.
²⁶⁶² See 9/7/2007 email from Matthew Bieber to David Lehman, GS MBS-E-000766414 ("I need to speak with dan... we're thinking about offering some 1-3 year SLMAs.").
²⁶⁶³ 9/10/2007 email from Matthew Bieber to David Lehman, GS MBS-E-000765316. "SLM A" refers to asset backed securities that were issued by Sallie M ae and backed by pools of student loans.
²⁶⁶⁴ 9/25/2007 email from Matthew Bieber to Joe Marconi, GS MBS-E-000766338. The action taken by Goldman to stop the purchase of new default swap collateral securities was not the only instance in which it attempted to exert control over the collateral in the CDOs it constructed. In the case of the Broadwick CDO, for example, when some investors were entitled to the return of some collateral, Goldman attempted to have the CDO pay them with securities rather than cash, so that the CDO would preserve the cash in its collateral account. The Broadwick collateral manager objected and complained in an email sent to Mr. Sparks, stating in part: "In case I wasn't clear on the call, our three main points would be: 1. The aim of the collateral account was to provide LIBOR and not add additional risk to the deal. 2. GS said they would take market risk and clearly represented that to us and to the ratings agencies. 3. The only way the deal works, and the way the deal was marketed and explained to us, is that paydowns are equivalent to partial terminations. W e do not believe you have any right to refuse to release excess cash that is no longer needed as collateral, and we do not believe you have the right to release bonds into the waterfall ever, and certainly not when cash exists. Perhaps the way you did these deals changed over time and you are comparing our deal to ones which you marketed or structured later/differently? I look forward to hearing from you." 11/20/2007 email from Ron Beller to Matthew Bieber, GS MBS-E-013746516.
²⁶⁶⁵ Documents show that a list of assets was sent to Aladdin Capital Management and Trust Company of the W est. See 9/24/2007 email from Benjamin Case to Marty Devote of Aladdin Capital Management, GS MBS-E 022138816; 9/20/2007 email from Matthew Bieber to Vincent Fiorillo of Trust Company of the W est, GS MBS-E-022141026- 27.
²⁶⁶⁶ 10/15/2007 email from Matthew Bieber to Matthew Verrochi, GS M BS-E-015732147. The list had one more RMBS security than the lists sent to the collateral managers.
²⁶⁶⁷ 9/27/2007 email from Joe Marconi to Matthew Bieber, GW 108645.
²⁶⁶⁸ W ritten statement of David Lehman (1/26/2011).
²⁶⁶⁹ Subcommittee interview of Daniel Sparks (1/13/2011).
²⁶⁷⁰ The seven CDOs were Fort Denison, Camber 7, Timberwolf, Anderson Mezzanine, Point Pleasant, Hudson Mezzanine 2006-1, and Hudson Mezzanine 2006-2. Goldman lost $1.018 billion from acting as the collateral put provider for their default swap collateral securities. See Goldman response to Subcommittee QFR at PSI_QFR_GS0280.
²⁶⁸⁶ See, e.g., SEC v. Czuczko, Case No. CV06-4792 (USDC CD Calif.), Order Granting Plaintiff's Unopposed Motion for Summary Judgment (Dec. 5, 2007). In Czuczko, the defendant, who offered online investment advice, included a disclaimer on his website advising that officers, directors, employees and members of their families "may, from time to time, trade in these securities for their own accounts" [emphasis in original]. Id. at 8. Relying on SEC v. Blavin, 760 F.2d 706 (6th Cir. 1985), the court held such an assertion "is itself a material misstatement because the Defendant knew he, his father, and his business partner did trade in the stocks and had a biased interest in the recommended stocks" [emphasis in original]. Czuczko, at 8.
²⁷²⁹ See Goldman response to Subcommittee QFR at PSI_QFR_GS0223.
²⁷³⁸ See discussion of Goldman's net short positions, section C(4)(b), above.
²⁷⁵⁵ Securities and Exchange Commission v. Goldman Sachs, Case No. 10-CV-3229 (S.D.N.Y.), Complaint (April 16, 2010).
²⁷⁶⁶ 3/13/2007 email from Manisha Nanik, "New Century EPDs," GS MBS-E-002146861, Hearing Exhibit 4/27- 77.
²⁷⁶⁷ 3/14/2007 Goldman email, "NC Visit," GS MBS-E-002048050.