What Was Goldman Sachs Thinking?

During the recession, Goldman Sachs has been in the news.  After borrowing billions from taxpayers then repaying it so they could pay outrageous bonuses to company workers, most of whom contributed to the near collapse of the financial industry, the company has used a multitude of creative products, including dark pool investing to reap huge profits.  Yet, the taxpayers are left holding the Goldman Sachs bag for billions of dollars of investment scams.


Perfect examples are the three AAA rated mortgage-backed securities issued by the firm in 2006.  Goldman sold $494 million of these mortgage-backed securities primarily to institutions that sought high rated securities and a rate of return above the U. S. Treasury bonds. 


This particular offering consisted of second mortgages.  Moody’s and S&P went along with the offerings by issuing absurd AAA ratings or the same ratings as U.S. Treasury bonds.  The three pieces were called A-1, A-2 and A-3.  Even with the strength of the housing market in 2006, second mortgages are not as secure as first mortgages.  If housing values decrease by 20%, the equity in the second mortgage is exhausted.  At least with the first mortgage, there is some value to be reclaimed.


This particular offering and the ensuing credit ratings typify the horrific lack of credibility displayed by financial institutions and credit rating agencies.  Anyone doubting the need for improved regulation of these services simply needs to check the results of these offerings.


More than one-third of the loans were California-based, a bad starting point.  Defaults started almost immediately.  By July 2008, the last of the three packages defaulted.  As they are second mortgages, the chance for realizing any money back is doubtful.


Today, the premier A-1 offering is valued at about 28% and that rate s based on market conditions in 2006.  The A-2 plan compiled more than 90% losses, in a best-case scenario.


No wonder President Obama and the American taxpayer are furious with the financial institution’s plan to distribute more than $30 billion in bonuses.  Perhaps they should hold on to that money so that when the commercial paper starts defaulting in droves, they will, not expect taxpayers to save them again.




Category: Real Estate

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