Goldman Sachs Accused of Manipulating Subprime Market
Goldman Sachs manipulated the subprime mortgage derivative market in 2007 for its own benefit, to the disadvantage of its clients, according to an article in Bloomberg which cites a U.S. Senate Report. According to the article, Goldman Sachs was reporting record earnings while Citigroup and Merrill Lynch were reporting huge losses on mortgage backed securities (MBS) in 2007, due to the fact that Goldman was making bets against MBS while acting as a market maker and selling them to clients. A Senate subcommittee found that Goldman placed their own needs and interests ahead of its clients by selling them poor quality investments it was betting against.
According to company documents, Goldman traders engineered a “short squeeze” by pricing credit default swaps (CDS) artificially low with the purpose of driving investors to panic to sell them to Goldman at those artificially low prices. A trader, Deeb Salem, was quoted as saying in a 2007 evaluation, “we began to encourage this squeeze, with plans of going very short again” and Salem’s supervisor urged traders to “cause maximum pain and have people totally demoralized.” The Senate Report revealed that Goldman immediately changed its CDS short evaluations after the squeeze and began increasing their value.