Wall Street and the Financial Crisis: Anatomy of a Financial Collapse


C. Failing to Manage Conflicts of Interest: Case Study of Goldman Sachs

    (2) Goldman Sachs Background

Goldman Sachs was established in 1869 as an investment bank. |1513| Originally a private partnership, in 1999, it became a publicly traded corporation. In 2008, it converted to a bank holding company. Its headquarters are located in New York City, and the firm manages about $870 billion in assets. |1514| Goldman employs about 14,000 employees in the United States and 32,500 worldwide. In 2007, it reported net revenues of $11.6 billion, of which $3.7 billion was generated by the Structured Products Group in the Mortgage Department, primarily as a result of its subprime investment activities. |1515|

Unlike other Wall Street banks, Goldman has no retail banking operations. It does not accept deposits from, nor lend to, retail customers, nor does its broker-dealer provide advice to or execute trades on behalf of retail customers. Goldman provides services only to so-called "sophisticated" institutional investors, generally large corporations, financial services firms, pension funds, hedge funds, and a few very wealthy individuals. |1516|

For most of its history, Goldman operated exclusively as an investment bank, providing investment advice to corporate clients, arranging and executing mergers and acquisitions, and arranging financing for customers through stock and bond offerings. After the 1999 repeal of the Glass-Steagall Act, which had restricted the activities that could be engaged in by investment banks, Goldman expanded its operations. |1517|

Over the last ten years, traditional investment banking activities have become a small percentage of Goldman's business. Goldman has instead become primarily a Wall Street trading house, providing broker-dealer services to institutional customers, acting as a prime broker to hedge funds, |1518| structuring and financing deals for customers from its own capital, and conducting proprietary trading activities for its own benefit. In the years leading up to the financial crisis, Goldman became an active investor and participant in the deals and transactions that it was handling for clients as well as selling to investors. |1519|

Goldman Sachs Mortgage Department. In 2006 and 2007, the time period reviewed by the Subcommittee, the most senior Goldman executives were the Chairman of the Board and Chief Executive Officer Lloyd Blankfein; Chief Operating Officer and Co-President Gary Cohn; Co-President Jon Winkelried; and Chief Financial Officer David Viniar. Goldman's Chief Risk Officer, Craig Broderick, was head of the Market Risk Management & Analysis area of the firm, which monitored and measured risk for the firm as a whole and for each business unit. Goldman's Treasurer, Sarah Smith, was in charge of the Controllers area of the firm, which was responsible for financial accounting, profit and loss statements, customer credit, collateral/margin matters, and position valuation verification. |1520|

In 2006 and 2007, Goldman Sachs' operating activities were divided into three segments: Investment Banking, Trading and Principal Investments, and Asset Management and Securities Services. |1521| The Trading and Principal Investments Segment was divided into three businesses: Fixed Income, Currency and Commodities (FICC); Equities; and Principal Investments. |1522| FICC had five principal businesses: commodities; credit products; currencies; interest rate products; and mortgage related securities and loan products and other asset backed instruments. |1523|

In its mortgage business, Goldman Sachs acted as a market maker, underwriter, placement agent, and proprietary trader in residential and commercial mortgage related securities, loan products, and other asset backed and derivative products. |1524| The Mortgage Department was responsible for buying and selling virtually all of the firm's mortgage related assets. It originated and invested in residential and commercial mortgage backed securities; developed, traded, and marketed structured products and derivatives backed by mortgages; and traded mortgage market products on exchanges. |1525|

In 2006 and 2007, the head of the Mortgage Department was Daniel Sparks. Goldman Co-Presidents Gary Cohn and Jon Winkelried, as well as CFO David Viniar, had been involved in Mr. Sparks' earlier career at Goldman, and he maintained frequent, direct contact with them regarding the Mortgage Department. |1526| In 2006, Mr. Sparks formally reported first to Jonathan Sobel, who had run the Mortgage Department prior to Mr. Sparks. |1527| He next reported to Richard Ruzika, who was then co-head of Commodities. |1528| In late 2006, Mr. Sparks began reporting directly to Thomas Montag, who was co-head of Global Securities for the Americas, which included both the FICC Division and the Equities Division. |1529| In mid-2007, Mr. Sparks began reporting to Donald Mullen, who was head of U.S. Credit Sales & Trading, and Mr. Mullen in turn reported to Mr. Montag. |1530|

The Mortgage Department was divided into seven different desks: (1) the Residential Whole Loan Trading Desk; (2) the Structured Product Group (SPG) Trading Desk; (3) the CDO Origination Desk, which also handled collateralized loan obligations (CLOs); (4) the Structured Product Syndicate and Asset Backed Security (ABS) Finance Desk; (5) the Collateralized Mortgage Obligations (CMO) and Derivatives Desk; (6) the Advisory Group Desk; and (7) the Commercial Real Estate Loan Trading Desk. |1531|

The Residential Whole Loan Trading Desk was headed by Kevin Gasvoda. |1532| It bought packages of residential whole loans; issued RMBS securities in the subprime, Alt A and prime categories; originated residential and commercial mortgages; and gave lines of credit to certain selected mortgage lenders in exchange for direct access to pools of mortgages they originated, in so-called "conduit" arrangements. |1533|

The SPG Trading Desk was headed by Michael Swenson. |1534| It was further subdivided into three different desks: the ABS Desk, the Correlation Trading Desk, and the Commercial Mortgage Backed Securities (CMBS) Desk. The ABS Desk was also headed by Michael Swenson and traded mainly synthetic asset backed securities, particularly RMBS and CDO securities and single name CDS contracts related to RMBS and CDOs. The ABS Desk also had an important sub-desk called the ABX Trading Desk, which was headed by Joshua Birnbaum, and traded synthetic mortgage backed securities based on the ABX Index. The Correlation Trading Desk was headed by Jonathan Egol. It structured, marketed, and traded complex synthetic structured finance products, including a series of 23 CDOs known as Abacus. |1535| The CMBS Desk was headed by David Lehman and traded commercial mortgage backed securities. With the exception of the Correlation Desk, the SPG Trading Desk was primarily devoted to "secondary trading," meaning the buying and selling of pre-existing asset backed securities. The SPG Trading Desk was also sometimes referred to as the "Mortgage Secondary Trading Desk."

The CDO Origination Desk was headed by Peter Ostrem. |1536| This desk structured and originated most of Goldman's CDOs and CLOs, excluding Abacus. The CDO Desk was primarily an underwriting desk that arranged for the issuance of new securities which had not yet been sold in the marketplace. Because of its underwriting focus, the CDO Desk's activities required a higher level of disclosure to customers regarding newly issued securities than was ordinarily required of a secondary trading desk, which buys and sells only pre-existing securities. |1537| Goldman maintained an inventory of RMBS and CDO securities to carry out activities for its clients and proprietary trading for the firm.

The Structured Product (SP) Syndicate and ABS Finance Desk was headed by Bunty Bohra and Curtis Probst. |1538| This desk was often referred to simply as the "Syndicate." It coordinated Goldman's sales efforts and the issuance of different securities across different desks.

In the middle of 2007, the Mortgage Department was restructured. One key change was that the CDO Origination Desk was moved into the secondary trading area under the SPG Trading Desk. Mr. Lehman was designated as head of the CDO Origination Desk, with assistance from Mr. Swenson. |1539| As a result, the SPG Trading Desk had responsibility for selling new Goldman-originated CDO securities as well as engaging in secondary trading of preexisting CDOs and RMBS securities, related credit default swaps (CDS), ABX trading, correlation trading, property derivatives, CMBS, and other asset backed securities. |1540|

In 2006 and 2007, the Residential Whole Loan Trading Desk underwrote 93 RMBS worth $72 billion. |1541| The CDO Origination Desk acted as a placement agent and underwrote approximately 27 mortgage based CDOs worth $28 billion. |1542| Of the 27 CDOs, 84% were hybrid CDOs, 15% were synthetic, and only about 1% were cash CDOs with physical assets. |1543| The mortgage-based CDOs included 8 CDOs on the Abacus platform, with $5 billion in issued securities; |1544| a $2 billion synthetic CDO known as Hudson Mezzanine 2006-1; a $300 million synthetic CDO known as Anderson Mezzanine 2007-1; and $1 billion hybrid CDO known as Timberwolf I.


1513. The background information about Goldman in this section was taken f 1513 rom 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," Wall Street Journal; 1/2010, "The Bank Job," Vanity Fair (written with cooperation of Goldman Sachs). [Back]

1514. During 2006 and 2007, Goldman's headquarters were at 85 Broad Street in Manhattan. In 2010, the firm moved its headquarters to 200 West Street in Manhattan. See "Morgan Stanley May Lease Old Goldman Sachs Building," Bloomberg (10/18/2010). [Back]

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 Weekly Metrics 30-November-2007," GS MBS-E-015646485. [Back]

1516. See supra note 1513. [Back]

1517. Id. [Back]

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. [Back]

1519. See supra note 1513. [Back]

1520. Subcommittee interview of David Viniar (4/13/2010); 1520 Craig Broderick (4/9/2010); and Daniel Sparks (4/15/2010). [Back]

1521. 2/6/2007 Goldman Sachs Form 10-K filing with the SEC. [Back]

1522. Id. [Back]

1523. Id. [Back]

1524. Id. [Back]

1525. Id. [Back]

1526. Subcommittee interview of Daniel Sparks (4/15/10). [Back]

1527. Id. [Back]

1528. Id. [Back]

1529. Id. [Back]

1530. Id. [Back]

1531. "North America Mortgages," chart prepared by Goldman Sachs, GS MBS-E-007818849 (showing organization of Mortgage Department). [Back]

1532. Id. [Back]

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. [Back]

1534. Subcommittee interview of Michael Swenson (4/16/2010). [Back]

1535. 4/22/2010 Goldman Sachs Form 8-K filing with the SEC. Of the 23 Abacus CDOs, 16 contained primarily mortgage related assets. [Back]

1536. "North America Mortgages," chart prepared by Goldman, 1536 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. [Back]

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. [Back]

1538. "North America Mortgages," chart prepared by Goldman, GS MBS-E-007818849 (showing organization of Mortgage Department). [Back]

1539. "Mortgages Organizational Structure," chart prepared by Goldman Sachs, GS MBS-E-010872812. [Back]

1540. Id. [Back]

1541. Undated chart prepared by Goldman for the Subcommittee, GS-PSI-00172. [Back]

1542. Undated chart prepared by Goldman for the Subcommittee, GS MBS 0000021129 and GS MBS 0000004276. [Back]

1543. Id. [Back]

1544. Id. [Back]

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(1) Subcommittee Investigation and Findings of Fact (3) Overview of Goldman Sachs Case Study

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