Did Goldman dump its dregs on clients? Internal emails offer clues

Goldman Sachs Group Inc., seeking to reduce assets tied to the declining U.S. housing market, urged its sales force in 2006 and 2007 to sell those products to clients, newly disclosed internal e-mails show.

The e-mails, including communications from Chief Executive Officer Lloyd Blankfein, show that employees discussed how to “arm” salespeople to shed bonds the firm found too risky to hold. The e-mails were released yesterday by Senator Carl Levin in connection with a hearing where current and former managers testified about the firm’s role in the financial crisis.

Levin, the Michigan Democrat who heads the Senate’s Permanent Subcommittee on Investigations, grilled the executives about the firm’s bets against the housing market and its disclosure to clients.

In one of the e-mails, Blankfein asked whether employees were doing enough to sell bonds backed by home loans including subprime mortgages.

“Could/should we have cleaned up these books before and are we doing enough right now to sell off cats and dogs in other books throughout the division,” Blankfein, 55, wrote in an e- mail dated Feb. 11, 2007.

Questioned about the e-mail at yesterday’s hearing, Blankfein told senators that his comment didn’t represent an opinion of the bonds.

“When I use the expression ‘cats and dogs’ I mean miscellaneous stuff,” he said. “This is part of my normal point about aged inventory. Part of the discipline of our business is to manage risk and sell inventory.”

The e-mails show that as early as the fall of 2006 clients were questioning products tied to the mortgage market. On Oct. 19, 2006, Mitchell Resnick sent an e-mail to two colleagues asking whether the firm had material about “how great” BBB bonds tied to home loans were. BBB is a credit rating from Moody’s Investors Service and Fitch Ratings that indicates an asset is two levels above junk.

“A common response I am hearing” from potential investors is “a concern about the housing market and BBB in particular,” Resnick wrote. “We need to arm sales with a bit more. Do we have anything?”

Goldman Sachs Chief Financial Officer David Viniar convened a meeting of mortgage traders and risk managers on Dec. 14, 2006, according to a document prepared by the firm that the Senate panel released yesterday.

At the time, Goldman Sachs had a “net long exposure” to the subprime-mortgage market, meaning the bank was betting the market would continue to rise. At the meeting, executives agreed that the firm should “reduce its overall exposure to the subprime mortgage market,” the document said.

Goldman Sachs’s Stacey Bash-Polley sent an e-mail to colleagues six days later with the subject line “Mezz Risk,” a reference to lower tranches of collateralized debt obligations linked to mortgages. Investors in mezzanine tranches are among the first to lose money when the asset starts souring.

“We have been thinking collectively about how to help people move some of the risk,” wrote Bash-Polley, an executive in the Goldman Sachs division that sold bonds. “We need to make sure we arm” salespeople “with our pricing and have them focus on the more difficult positions.”

In targeting clients, Bash-Polley wrote that Goldman Sachs should focus on those that “can possibly do larger size at a level that would be attractive when you take into consideration the size of risk we could move.”

“Makes sense to me,” responded Kevin Gasvoda, a Goldman Sachs colleague.

Goldman Sachs spokesman Samuel Robinson declined to comment on the e-mails.

The Senate hearing comes less than two weeks after the U.S. Securities and Exchange Commission sued the firm and employee Fabrice Tourre, 31, on claims they withheld material information from investors in a CDO. Goldman Sachs said it will vigorously contest the case, and Tourre told the senators yesterday, “I deny categorically the SEC’s allegations.”

Levin said at the hearing that Goldman Sachs “profited by taking advantage of its clients’ reasonable expectation that it would not sell products that it didn’t want to succeed, and that there was no conflict of economic interest between the firm and the customers it had pledged to serve.”

In a Sept. 26, 2007, e-mail released by the committee, Peter Kraus, Goldman Sachs’s then co-head of investment management, told Blankfein that some clients were expressing concern that the firm was making money for itself but not its customers.

Goldman Sachs had reported six days earlier that third-quarter net income rose 79 percent to $2.85 billion after the bank bet against mortgage bonds. Kraus told Blankfein he had met with more than 10 clients and “individual prospects” since the earnings announcement.

“The institutions don’t and I wouldn’t expect them to, make any comments like ur good at making money for urself but not us,” wrote Kraus, who left Goldman Sachs in September 2008 after working at the company for 22 years.

“The individuals do sometimes, but while it requires the utmost humility from us in response, I feel very strongly it binds clients even closer to the firm. The alternative of take ur money to a firm who is an under performer and not the best, just isn’t reasonable. Clients ultimately believe association with the best is good for them in the long run,” he wrote