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Sunday, April 25, 2010 2:22 AM

Emails Suggest Goldman Made Money Betting Against Real Estate

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Goldman Sachs has made the claim it lost money on Abacus. In Senior Goldman Executives Approved the Paulson Deal; Goldman's Spin Dodges the Big Question; "Fabulous Fab" Not Feeling So Fabulous I questioned if that was the case

Goldman claims it lost money on the deal. I am very skeptical of that claim given all Goldman's side bets with AIG and others. Besides, who can say where one deal ends and the next begins when one is hedging massive pools of garbage?

On Saturday, emails noted by the Senate Subcommittee Investigating Financial Crisis Releases Documents on Role of Investment Banks suggest Goldman did not lose money, just as I suggested.

In one of the e-mails released today, Mr. Blankfein stated that the firm came out ahead in the mortgage crisis by taking short positions. In an e-mail exchange with other top Goldman Sachs executives, Mr. Blankfein wrote: “Of course we didn't dodge the mortgage mess. We lost money, then made more than we lost because of shorts.”

In a second e-mail, Goldman Sachs Chief Financial Officer David Viniar, who also will testify on Tuesday, responded to a report on the firm's trading activities, showing that – in one day - the firm netted over $50 million by taking short positions that increased in valued as the mortgage market cratered. Mr. Viniar wrote: “Tells you what might be happening to people who don't have the big short.”

In a third e-mail, Goldman employees discussed the ups and downs of securities that were underwritten and sold by Goldman and tied to mortgages issued by Washington Mutual Bank's subprime lender, Long Beach Mortgage Company. Reporting the “wipeout” of one Long Beach security and the “imminent” collapse of another as “bad news” that would cost the firm $2.5 million, a Goldman Sachs employee then reported the “good news” – that the failure would bring the firm $5 million from a bet it had placed against the very securities it had assembled and sold.

In a fourth e-mail, a Goldman Sachs manager reacted to news that the credit rating agencies had downgraded $32 billion in mortgage related securities – causing losses for many investors – by noting that Goldman had bet against them: “Sounds like we will make some serious money.” His colleague responded: “Yes we are well positioned.”
The above document does not show the exact timing of those emails, perhaps on purpose. No doubt, timing, if appropriate, will be part of Goldman's defense.

At best, those emails do not make Goldman look very good. At worst, Goldman will appear to be caught in a lie.

Regardless of what happens legally, I have a serious problem with a "bank" making 90% of its income trading its own portfolio, and screwing its customers in the process.

Mike "Mish" Shedlock
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