We are lucky to have a Paulson and Bernanke trying to steer us through this crisis. The crisis is here whether we like it or not. I can only imagine the debacle if Snow, the embattled former CEO of CSX railroad, was still at treasury. Hank Paulson understands how this mess was created. He was a fantastic CEO of Goldman Sachs — keeping that firm out of all of the messes that brought down Bear Stearns, Lehman Brothers, Merrill Lynch and perhaps Morgan Stanley. Paulson and Bernanke are our best chance to come out of this.
The wrong moves by the government at a time like this can easily push this crisis into a catastrophe.
The real way he kept Goldman Sachs out of that mess was with the AIG bailout.
We’re lucky to have PAULSON? You are joking, right? GS was in subprime up to their eyeballs- then they shorted them.
http://www.dailyreckoning.com.au/goldman-sachs-2/2007/10/19/
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It’s not like Goldman is barred from shorting the investment markets that it helps bring into being. Nor did it have any special insight; all of the big investment banks were busy creating and selling subprime junk in 2005-2006.
None of the other big banks, however, had the chutzpah to short the very market in junk they’d given birth to - not yet, at least. And few banks seem to have created bonds quite as toxic as Goldman did.
Take last year’s vintage, for example. In 2006, Goldman Sachs’ mortgage-bond division - Alternative Mortgage Products (known as GSAMP for short) - issued 83 home-loan-backed bonds, valued at $44.5 billion. In the subprime sector, it grew its business by 59% from 2005, unloading some $12.9 billion on to unsuspecting, stupid and/or greedy investment fund managers who thought a bond under-pinned by home-buyers with no hope of repaying might be worth having.
According to Inside Mortgage Finance, that made GSAMP the 15th biggest issuer of subprime-backed bonds in 2006. And come the start of the third quarter this year, those securities were being downgraded by the credit ratings agencies faster than anyone else’s.
Research from Citigroup, dated 22nd June, found that “portions of Goldman’s GSAMP-issued bonds, which include subprime loans from a variety of lenders, have been downgraded a combined 69 times by Standard & Poor’s and Moody’s Investors Service in the year through June 15,” as Reuters reported.
“Sixty of the GSAMP downgrades refer to classes from 2006 bonds,” Citigroup added, and one of Goldman’s 2006 crop - the GSAMP Trust 2006- S3 - may actually be “the worst deal...floated by a top-tier firm,” reckons Allan Sloane in the Washington Post.
In spring 2006, “Goldman assembled 8,274 second-mortgage loans originated by Fremont Investment & Loan, Long Beach Mortgage, and assorted other players,” explains Sloane after studying the public record. “More than one-third of the loans were in California, then a hot market. It was a run-of-the-mill deal [face-value $494 million], one of the 916 residential-mortgage-backed issues totaling $592 billion that were sold last year.
“The average equity [these] borrowers had in their homes was 0.71%...[meaning] the average loan-to-value of the issue’s borrowers was 99.29%.
“It gets even hinkier,” Sloane goes on. “Some 58% of the loans were no- documentation or low-documentation. This means that though 98% of the borrowers said they were occupying the homes they were borrowing on - ‘owner-occupied’ loans are considered less risky than loans to speculators - no one knows if that was true. And no one knows whether borrowers’ incomes or assets bore any serious relationship to what they told the mortgage lenders.”
Whatever the truth, one in every six of the 8,274 mortgages bundled together in GSAMP Trust 2006-S3 was already in default 18 months later. Whoever bought the S3 bonds will have either taken a 100% loss, or they’re now waiting - and hoping against hope - for some other schmuck to turn up and take this toxic waste off their hands at a very heavy discount.
Meantime at Goldman Sachs, the profits made by shorting the subprime market flipped Q3 ‘07 from “significant losses” to “significantly higher” net revenues. Goldman creamed it by selling ‘em twice, in other words...first as an asset...and then as a tasty short.
You don’t need to think this is more than ironic to wonder why anyone - most especially your pension or fund manager - would trust investment bankers to look out for your best interests. (More on that in Part II...)
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