By Phil Mattera, Dirt Diggers Digest
Goldman Sachs, which has long prided itself on being one of the
smartest operators on Wall Street, has apparently decided that the best
way to defend itself against federal fraud charges is to plead incompetence. The
firm is taking the position that it is not guilty of
misleading investors in a 2007 issue of mortgage securities because it
allegedly lost money — more than $90 million, it claims — on its own
stake in the deal.
In fact, Goldman would have us believe that it took a bath in the
overall mortgage security arena. This story line is a far cry from the
one put forth a couple of years ago, when the firm was being celebrated
for anticipating the collapse in the mortgage market and shielding
itself — though not its clients. In a November 2007 front-page article headlined “Goldman Sachs Rakes in
Profit in Credit Crisis,” the New York Times reported that the
firm “continued to package risky mortgages to sell to investors” while
it reduced its own holdings in such securities and bought “expensive
insurance as protection against further losses.” In 2007 Goldman posted a
profit of $11.6 billion (up from $9.5 billion the year before), and CEO
Lloyd Blankfein took home $70 million in compensation (not counting another $45 million in
value he realized upon the vesting of previously granted stock awards).
Some bath.
Goldman is not the only one rewriting financial history. Many of the
firm’s mainstream critics are talking as if it is unheard of for an
investment bank to act contrary to the interests of its clients, as
Goldman is accused of doing by failing to disclose that it allowed hedge
fund operator John Paulson to choose a set of particularly toxic
mortgage securities for Goldman to peddle while Paulson was betting
heavily that those securities would tank.
In fact, the history of Wall Street is filled with examples in which
investment houses sought to hoodwink investors. Rampant stock
manipulation, conflicts of interest and other fraudulent practices
exposed by the Pecora Commission prompted the regulatory reforms of the
1930s. Those reforms reduced but did not eliminate shady practices. The
1950s and early 1960s saw a series of scandals involving firms on the
American Stock Exchange that in 1964 inspired Congress to impose
stricter disclosure requirements for over-the-counter securities.
The corporate takeover frenzy of the 1980s brought with it a wave of
insider trading scandals. The culprits in these cases involved not only
independent speculators such as Ivan Boesky, but also executives at
prominent investment houses, above all Michael Milken of Drexel Burnham.
Also caught in the net was Robert Freeman, head of risk arbitrage at
Goldman, who in 1989 pleaded guilty to criminal charges. When players
such as Freeman and Milken traded on inside information, they were
profiting at the expense of other investors, including their own
clients, who were not privy to that information.
During the past decade, various major banks were accused of helping
crooked companies deceive investors. For example, in 2004 Citigroup agreed to pay $2.7 billion to settle such charges
brought in connection with WorldCom and later paid $1.7 billion to former Enron investors. In 2005
Goldman and three other banks paid $100 million to settle charges in connection
with WorldCom.
In other words, the allegation that Goldman was acting contrary to
the interest of its clients in the sale of synthetic collateralized debt
obligations was hardly unprecedented.
What’s not getting much attention during the current scandal is that
in late 2007 Goldman had found another way to profit by exploiting its
clients, though in this case the clients were not investors but
homeowners.
Goldman quietly purchased a company called Litton Loan Servicing, a
leading player in the business of servicing subprime (and frequently
predatory) home mortgages. “Servicing” in this case means collecting
payments from homeowners who frequently fall behind in payments and are
at risk of foreclosure. As I wrote
in 2008, Litton is “a type of collection agency dealing with those in
the most vulnerable and desperate financial circumstances.” At the end
of 2009, Litton was the fourth largest subprime servicer, with a
portfolio of some $52 billion (National Mortgage News
4/5/2010).
Litton has frequently been charged with engaging in abusive
practices, including the imposition of onerous late fees that allegedly
violate the Real Estate Settlement Procedures Act. It has also been
accused of being overly aggressive in pushing homeowners into
foreclosure when they can’t make their payments.
Many of these complaints have ended up in court. According to the Justia database,
Litton has been sued more than 300 times in federal court since the
beginning of 2007. That year a federal judge in California granted class-action status to a group of plaintiffs, but
the court later limited
the scope of the potential damages, resulting in a settlement in which
Litton agreed to pay out $500,000.
Meanwhile, individual lawsuits continue to be filed. Many of the more
recent ones involve disputes over loan modifications. Complaints in
this area persist even though Litton is participating in the Obama
Administration’s Home Affordable Modification Program and is thus
eligible for incentive payments through an extension of the Toxic Assets
Relief Program.
There seems to be no end to the ways that Goldman manages to make
money from toxic assets. On Wall Street, as in Las Vegas, the house
always wins.
BONUS FEATURE: Federal regulation of business leaves
a lot to be desired, but it is worth knowing where to find information
on those enforcement activities that are occurring. The Dirt Diggers
Digest can help with our new Enforcement
page, which has links to online enforcement data from a wide range
of federal agencies. The page also includes links to inspection data,
product recall announcements and lists of companies debarred from doing
business with the federal government.