Posted on 14 Apr 2011
A U.S. Senate report on the mortgage market crisis released on Wednesday shows Wall Street bankers angling to profit from a booming market and then scrambling to cope with its collapse, although no evidence of outright fraud. The Senate panel in the report also makes a range of financial-sector recommendations.
Senate investigators spent two years gathering and analyzing 5,901 pages of confidential emails and documents from Washington Mutual Inc., Goldman Sachs Group Inc., Deutsche Bank AG, and regulators including the Office of Thrift Supervision. And as the Senate wrapped up its report, the Securities and Exchange Commission neared the end of an investigation that is likely to result in settlements with Wall Street firms that sold mortgage-bond deals at the heart of the financial crisis, according to people familiar with the situation.
Unlike the politically divisive report issued by the Financial Crisis Inquiry Commission, this report received bipartisan support, signed by both Senate Permanent Subcommittee on Investigations Chairman Sen. Carl Levin (D., Mich.) and the panel's ranking Republican, Sen. Tom Coburn of Oklahoma.
The Senate panel in its recommendations said bank regulators should examine mortgage-related securities to identify any possible legal violations and use Goldman Sachs as a case study in implementing conflict prohibitions. The panel also recommended that the Financial Stability Oversight Council should evaluate risky lending practices and the impact they might have on the U.S. financial system.
The subcommittee's recommendations are aimed at enhancing certain provisions of the Dodd-Frank financial-regulatory overhaul or implementing the act by using the information in the Senate report.
It trains much of its ire on Goldman Sachs, which Sen. Levin said deceived some clients by betting against home loans in 2006 and 2007, while simultaneously selling mortgage securities. At a news conference Wednesday, Senate staffers manned large posters with headings such as "Goldman Conflicts of Interests" and "The Hudson Scam," in reference to a particular Goldman bond offering.
A Goldman spokesman said that "while we disagree with many of the conclusions of the report, we take seriously the issues explored by the subcommittee. We recently issued the results of a comprehensive examination of our business standards and practices and committed to making significant changes" to strengthen its disclosure and client relationships.
The report shows how on Dec. 14, 2006, executives gathered in a conference room adjoining the office of Goldman Chief Financial Officer David Viniar.
They agreed the firm needed to cut its bullish bets on mortgage bonds.
The Senate report alleges that Goldman then undertook a multibillion dollar series of trades to hedge its bullish bets by selling mortgage-related trades to allegedly unsuspecting investors. The head of Goldman's mortgage unit recommended managers of Goldman's sales force issue "ginormous" sales credits to those who could find investors anywhere in the world.
A Goldman executive found one in Australia. On April 26, 2007, in an email with the subject line "utopia," the executive said, "I think I found white elephant, flying pig, and unicorn all at once."
A month later, another Goldman executive lamented his firm's reputation after a stretch of risky mortgage deals Goldman had sold. He described debt managers that worked with the firm as "street wh— managers."
It pains me to say it but citi, ubs, db [Deutsche Bank], lehman, and ms [Morgan Stanley] have much stronger franchises—among large dealers only ML [Merrill Lynch] is more reviled than [Goldman's] business," the executive wrote.
Sen. Levin said Wednesday that he believed some Goldman executives may have misled Congress during a committee hearing in April 2010. He didn't specify how.
A Goldman spokesman said bank employee testimony was "truthful and accurate."
The beginning of the report details a breakdown in how home mortgages were originated and how warnings went ignored.
The report alleged that in 2004 the chief risk officer at Seattle lender Washington Mutual signaled concerns about housing prices falling and loose lending standards. The report said the officer was called "Dr. Doom" and issued a 2004 memo that said poor underwriting "will come back to haunt us." His warnings went unheeded, the report said.
Washington Mutual's senior management did nothing to stop the lending practices at the lender's loan offices in Southern California even after the bank conducted an internal investigation in 2005 that found "an extensive level of loan fraud," according to a Washington Mutual internal memo cited in the Senate report.
Instead, the bank rewarded salespeople at Washington Mutual for making large volumes of loans, and enticing them with trips. A 2005 awards dinner for top producers in the "President's Club" was held in Maui, Hawaii, and hosted by Magic Johnson, the former National Basketball Association star.A senior bank executive emceed the event and began by saying, "I'm told that the age-old tradition here at Washington Mutual is, 'What happens at President's Club stays at President's Club.' And who am I to mess with tradition."
In September 2008, Washington Mutual was seized by regulators and sold to J.P. Morgan Chase & Co.
By late 2006, loans originated by Washington Mutual and a subsidiary called Long Beach were underpinning mortgage securities, and some Wall Street traders were ahead in seeing the problems. In late 2006 and early 2007, a Deutsche Bank trader named Greg Lippmann went to London and Lisbon to tell senior officials at the German bank that it needed to reverse course and bet against housing or end long mortgage trades.
Unlike Goldman traders who refrained from cursing in emails and preferred an "LDL" or "let's discuss live" communication strategy, Mr. Lippmann coarsely described his views in emails. He called troubled mortgage bonds "pigs" and "crap." In August 2006, he told an investment fund, "I don't care what some trained seal bull market research person says this stuff has a real chance of massively blowing up."
A spokesman for Mr. Lippmann declined to comment. The report said Deutsche in 2007 and 2008 made $1.5 billion on bearish mortgage trades while the bank, due to bullish bets, lost nearly $4.5 billion on separate trades.
The report singles out Deutsche for what it views as a conflict of interest: Mr. Lippmann urged clients to bet against the market while the bank was investing or selling securities that relied on borrowers paying their mortgage loans.
In 2005, a Wall Street trader at Deutsche Bank described the implosion of the credit markets in a parody of a Vanilla Ice rap song titled, "CDO, Oh Baby," which included lyrics such as, "There are never ends to real estate booms."
A Deutsche spokeswoman said: "As the PSI report correctly states, there were divergent views within the bank about the U.S. housing market.
Moreover, the bank's views were fully communicated to the market through research reports, industry events, trading desk commentary and press coverage."