Goldman Sachs Expects Federal Subpoenas On Mortgage Business

05/20/2011 10:43 am ET | Updated Jul 20, 2011

Goldman Sachs executives expect federal prosecutors to demand to see internal documents, as the government ramps up its investigation into the way the firm handled mortgage products, the Wall Street Journal reports.

The subpoenas would come in response to the lengthy report on the financial crisis released by the Senate Permanent Subcommittee on Investigations last month, the WSJ notes, citing sources. The report, which was referred to the Justice Department, alleges that Goldman executives deceived clients in order to profit at their expense, and then misled Congress when asked to explain their behavior.

A Goldman spokesperson last month said the firm disagreed with many of the Senate panel's conclusions, adding that executives were truthful in their testimony.

The investigation into Goldman comes as the federal government is working with all 50 state attorneys general to reach a settlement with the nation's biggest banks over accusations of illegal foreclosures and fraudulent mortgage practices. This week, the inspector general at the Department of Housing and Urban Development concluded that the nation's five largest mortgage companies defrauded taxpayers in their handling of foreclosures, The Huffington Post reported. It's now up to the Department of Justice to decide whether to file charges.

The Senate financial crisis report from the committee led by Senators Carl Levin (D-Mich.) and Tom Coburn (R-Okla.) uses exhaustive documented evidence to accuse Goldman of maintaining an overall bet against the mortgage products it was selling to investors. Not only that, but the firm also tried to manipulate the market for derivatives linked to such investment products, attempting to drive down the price of bearish bets it wanted to make, the report alleges.

A portrait emerges from the report of a firm intent on making a profit above all else, even when its actions might harm clients. The Senate panel offers a trove of email evidence in which, for instance, Goldman traders discuss selling "shitty" deals, or a head trader says the firm wanted "to cause maximum pain" by manipulating a market for derivatives.

The report identified four securities the firm sold to clients without fully disclosing key information, according to the Senate panel. In one such deal, known as Hudson, Goldman said its interests were "aligned" with those of its clients, when it actually held "100 percent of the short side" of the security, according to the report.

Even as other banks suffered massive losses when the housing market collapsed, Goldman Sachs made out relatively well.

"Tells you what might be happening to people without the big short," reads a July 2007 email from Goldman's chief financial officer David Viniar to the firm's chief operating officer, Gary Cohn.

Goldman officials have denied the Senate panel's accusations, saying the firm did not try to squeeze the market for derivatives and did not bet against clients.

"We didn't have a massive short against the housing market, and we certainly did not bet against our clients," Goldman chief Lloyd Blankfein said in testimony before the Senate panel last year.

Levin, though, disagreed. "That is simply not true," he said last month. "They clearly misled their clients and they misled the Congress."

In a closely watched case last year, the Securities and Exchange Commission said Goldman helped set up a mortgage investment for a favored client, designing it to fail, and then selling it to unsuspecting investors so that the favored client made a handsome profit by betting against it.

The firm settled that case for $550 million, without admitting or denying wrongdoing.