Senate report reveals how Goldman Sachs stabbed investors in the back
A Senate report released last week revealed how Goldman Sachs profited billions by screwing over its clients in the months leading up to the 2008 financial crisis.
“Our investigation found a financial snake pit rife with green, conflicts of interest, and wrongdoing,” said Sen. Carl Levin (D-MI), chairman of the Senate Permanent Subcommittee on Investigations, who led the two-year probe into the causes of the 2008 financial crisis.
According to the Levin-Coburn report, Goldman Sachs aggressively capitalized on the subprime mortgage market decline and cheated its clients out of billions between December 2006 and 2007. Here’s how the Wall Street investment bank pulled off the scheme:
Step 1: Goldman Sachs packaged together a bunch of collateralized debt obligation (CDO) securities. Simply put, CDOs are bundled loans – like home mortgages – that are sold to investors on Wall Street. The investors would earn profits from the loan interests charged to homeowners, who would make regular monthly payments to service their debts. But when homeowners can no longer afford the monthly payments and default on their mortgages, the CDO securities lose value and the investors lose money. Even as the housing bubble was collapsing in 2006 and 2007, Goldman Sachs created and sold “poor quality” CDO packages made up of volatile mortgage backed securities.
Step 2: Then Goldman Sachs convinced investors to buy its CBO securities without disclosing its conflicts of interest. For example, Goldman Sachs never revealed to its clients that the company was also shorting or betting “the CDO would fall in value, and [would] profited from its short position at the expense of the clients to whom it sold the securities.” In other words, Goldman Sachs would profit when its clients’ investments performed poorly.
Step 3: Inevitably, the CDO securities declined in value and Goldman Sachs reaped the profits at the expense of its own clients. “Overall in 2007, [Goldman Sachs’] net short position produced record profits totaling $3.7 billion,” according to the report.
To sum it up, Goldman Sachs put together low quality investment packages, sold those investments to its clients, rooted for its clients’ newly-purchased investments to fail, and then made a handsome sum of money when the investments became worthless and its investors lost most – if not all – of their money.
Legal or not, Goldman Sachs’ actions were deceitful and unethical. Why shouldn’t Goldman Sachs be held accountable?
- U.S. Senate Permanent Subcommittee on Investigations: Levin-Coburn report on Wall Street and the Financial Crisis: Anatomy of a Financial Collapse (PDF) released April 13, 2011
- WashingtonPost.com: Goldman Sachs misled Congress after duping clients, Senate panel chairman says
- CNNMoney.com: Goldman blasted for conflicts of interest
- Bloomberg.com: Justice Department must decide whether Goldman violated laws, Levin says
- Sen. Carl Levin’s statement on the Levin-Coburn report
- Official website of Sen. Carl Levin (D-MI)
- Official website of Sen. Tom Coburn (R-OK)
- Goldman Sachs website