Saturday Financials & Economics

E-Mails: Goldman Sachs Boasted As Meltdown Began

E-mails released Saturday morning show top executives at Goldman Sachs Group Inc. boasting about the money the firm was making as the national housing market collapsed in 2007.

The e-mails suggest Goldman benefited from its bets that securities backed by subprime mortgages would lose value. The messages seem to contradict previous statements by the investment bank that it lost money on the securities.

"Of course we didn't dodge the mortgage mess," CEO Lloyd Blankfein wrote in an e-mail dated Nov. 18, 2007, according to e-mails released by the Senate's Permanent Subcommittee on Investigations. "We lost money, then made more than we lost because of shorts."

Short positions are bets that the market will go down. As the housing bubble burst, Goldman and a few powerful hedge funds took short positions on the market. Many of those bets required other investors to bet the market would rise.

When the market went bust, people with short positions cleaned up.

"We were just smaller in the toxic products," Goldman's president, Gary Cohn, writes back to Blankfein that same Sunday evening.

Critics say their bets added fuel to the financial crisis.

One of those bets is at the heart of civil fraud charges the Securities and Exchange Commission filed against Goldman this month. The SEC says Goldman let hedge fund Paulson & Co. help select investments for a portfolio that was designed to lose value, then marketed the deal to investors who were betting the portfolio's value would rise.

The SEC says Goldman did not tell the investors -- mostly European banks -- that the deal was created in part by the hedge fund and therefore was designed to fail.

The subcommittee, whose probe is not connected with the SEC's, has been investigating the causes of the financial crisis for 18 months. Its fourth and final hearing Tuesday will include testimony from Blankfein and Fabrice Tourre, a trader named in the SEC case.

Goldman has denied wrongdoing and says it will fight the charges. In a statement Saturday, spokesman Lucas Van Praag said the bank lost $1.2 billion in the residential mortgage market during 2007 and 2008.

"As a firm, we obviously could not have been significantly net short since we lost money in a declining housing market," Van Praag said in a statement. He said the Senate panel "cherry-picked" four e-mail threads out of 20 million pages Goldman provided.

Van Praag is one of the handful of top executives who contributed to the e-mails the Senate committee released Saturday.

In one, Goldman Chief Financial Officer David Viniar says that in one day the firm made more than $50 million on bets that the housing market would collapse, according to a statement from Levin's office.

Viniar, also scheduled to testify Tuesday, summed up the position of investors who had not bet against the market:

"Tells you what might be happening to people who don't have the big short," Viniar writes in the message dated July 25, 2007.

The e-mails were released by subcommittee chair Sen. Carl Levin, D-Mich. In a statement, Levin called banks like Goldman "self-interested promoters of risky and complicated financial schemes that helped trigger the crisis."

Goldman said in its 2009 annual report that its short positions sought to offset its long positions in the mortgage market and did not generate large profits. Through 2006, Goldman "generally was long in exposure" in the mortgage-backed securities market, according to the report, and after taking losses on those securities in 2006 it reduced its exposure.

"Although Goldman Sachs held various positions in residential mortgage-related products in 2007, our short positions were not 'a bet against our clients,'" according to the report.

Government Trims Bailout Cost Estimate To $87B

Treasury Secretary Timothy Geithner is telling Congress that the administration believes the final cost of the government's heavily criticized financial bailout effort could be as low as $87 billion.

Geithner made the new estimate in a letter Friday to congressional leaders.

A year ago, officials were estimating the bailout could cost as much as $500 billion.

The new estimate said the biggest losses will occur from the government's support of mortgage companies Fannie Mae and Freddie Mac. That loss was put at $85 billion followed by a loss of $49 billion from providing help to homeowners facing the threat of losing their homes through foreclosures.

Treasury estimates the cost of Fannie and Freddie's rescue will rise to $188 billion, but that amount will be offset by dividends paid by the two mortgage giants over 10 years and returns on mortgage-backed securities purchased by the government. With those two sources of income taken into account, the net cost is expected to be $85 billion.

Geithner's letter estimated that the government would lose $48 billion through the support provided to insurance giant American International Group and another $28 billion would be lost through the billions of dollars in assistance provided to General Motors, Chrysler and their auto financing arms.

The biggest offset to those losses will be earnings of $115 billion that the administration expects the Federal Reserve to realize from the extraordinary assistance it has given to provide liquidity to the financial system.

The new estimates, which President Barack Obama is expected to cite in his weekly radio address on Saturday, are part of the administration's intensified lobbying campaign to get Congress to pass sweeping financial overhaul legislation.

Democrats have set an initial showdown vote for next Monday on legislation pending in the Senate. The House has already passed its version of what would be the most sweeping overhaul of the financial system since the 1930s.

"The cost of stabilizing the financial system is likely to be significantly lower than previously expected," Geithner wrote in the letter to Democratic and Republican leaders in the House and Senate.

He said that the administration was estimating a year ago that the effort to support the financial system would cost more than $500 billion, or 3.5 percent of the total economy, as measured by the gross domestic product. He said the new lower estimate would be the equivalent of less than 1 percent of GDP.

He said because of the lower costs, the federal deficit and the total national debt will be lower than earlier projections. Administration officials said the costs could fall even further as it prepares updates to the bailout costs included in the budget Obama sent to Congress in early February.

In his letter, Geithner included some revised estimates that the administration had already released along with new projections in some areas.

The administration had already lowered the cost of the $700 billion bailout program, known as the Troubled Asset Relief Program, to $117 billion. That covers the losses from the auto, AIG and the mortgage foreclosure programs and earnings of up to $11 billion from several other programs under TARP.

In addition to the $117 billion in TARP losses, the administration is estimating losses of $85 billion from the support to Fannie Mae and Freddie Mac. Those two categories of losses would be offset by the $115 billion in earnings the administration expects will be realized from the Fed's support programs.

AP; Reuters; Wall Street Journal; Bloomberg; writers Daniel Wagner in Washington and Stevenson Jacobs in New York contributed to this report.