Just as the housing market was tanking in 2007, Goldman Sachs tried to shove out investors who were betting against it, to secure the best price for itself, a Senator alleged Wednesday.
An email in which a Goldman trader encouraged a colleague to "kill" other pessimistic bets -- as he tried to strengthen the bank's own short position -- prompted Carl Levin, chairman of the Senate permanent subcommittee on investigations, to say Goldman perpetrated "trading abuse" and used a "short squeeze strategy" the Financial Times reports. Levin has accused Goldman, essentially, of attempting to artificially drive down the price of bets it wanted to make.
After housing prices started to decline in 2006, and borrowers across the nation began a wave of defaults, the securities based on their mortgages began to lose value. Meanwhile, the price of insurance on these securities, which allowed investors effectively to bet against them, was rising.
When the housing market tanked, Wall Street investors who had placed bets against it profited handsomely. Investors who kept piles of these mortgage-backed securities on their books, however, lost billions. Few understood just how explosive these securities were.
Goldman's response to Levin's allegation: "This type of language sounds awful and is very disappointing, but it does not reflect the reality of what happened."
In the spring, when the SEC pursued civil fraud charges against Goldman, flamboyant emails from Goldman trader Fabrice "Fabulous Fab" Tourre caused some embarrassment for the bank and added evidence to the accusation that Goldman willfully sold bad deals to investors. (Goldman internal emails called these deals "sh--ty".)
Goldman paid $550 million to settle the SEC lawsuit -- a record sum, but peanuts for a bank that earned $13.4 billion last year. The case against Tourre is ongoing.
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