Photo: US Banker
Goldman Sachs is mentioned a lot in the FCIC’s report on who caused the financial crisis, and we’re finding out even more about the role that banks like Goldman played in the crisis.All the way back in 2006, Stacy Bash-Polley, a Goldman Partner (the co-head of fixed income sales) told her subordinates to off-load the “mezz” risk — the mortgage bonds rated with a relatively low level of risk — now that the firm had gotten rid of the super risky stuff.
The best way to do so, she told them, was to, begin to re-package them into other CDOs.
Days later, Fabrice Tourre told his unit that the best customers to target were “buy and hold rating-based buyers” rather than “sophisticated hedge funds” that “will be on the same side of the trade as we will.”
Tourre was of course selling CDOs, though not necessarily the same ones Bash-Polley instructed people to create.
From the FCIC’s report (click here to download the report):
Subsequent emails suggest that the “everything else” meant mortgage-related assets.
On December 20, in an internal email with broad distribution, Goldman’s Stacy Bash-Polley, a partner and the co-head of fixed income sales, noted that the firm, unlike others, had been able to find buyers for the super-senior and equity tranches of CDOs, but the mezzanine tranches remained a challenge.
The “best target,” she said, would be to put them in other CDOs: “We have been thinking collectively as a group about how to help move some of the risk. While we have made great progress moving the tail risks—[super-senior] and equity—we think it is critical to focus on the mezz risk that has been built up over the past few months. . . . Given some of the feedback we have received so far [from investors,] it seems that cdo’s maybe the best target for moving some of this risk but clearly in limited size (and timing right now not ideal).”
It was becoming harder to find buyers for these securities. Back in October, Goldman Sachs traders had complained that they were being asked to “distribute junk that nobody was dumb enough to take first time around.” Despite the first of Goldman’s business principles—that “our clients’ interests always come first”—documents indicate that the firm targeted less-sophisticated customers in its efforts to reduce sub- prime exposure.
In a December 28 email discussing a list of customers to target for the year, Goldman’s Fabrice Tourre, then a vice president on the structured product correlation trading desk, said to “focus efforts” on “buy and hold rating-based buyers” rather than “sophisticated hedge funds” that “will be on the same side of the trade as we will.”
The “same of side of the trade” as Goldman was the selling or shorting side—those who expected the mortgage market to continue to decline. In January, Daniel Sparks, the head of Goldman’s mortgage department, extolled Goldman’s success in reducing its subprime inventory, writing that the team had “structured like mad and traveled the world, and worked their tails off to make some lemonade from some big old lemons.”
Tourre acknowledged that there was “more and more leverage in the system,” and—writing of himself in the third person—said he was “standing in middle of all these complex, highly levered, exotic trades he created without necessar- ily understanding all the implications of those monstrosities.”
Of course that last bit is from Fabulous Fab’s infamous email.