DiversityInc - May 2010

GOLDMAN SACHS & THE
SUBPRIME-MORTGAGE CRISIS

subprime-mortgage market,” according to subprimer.org.

And as the subprime market took off, major investment banks rushed to acquire subprime-mortgage lenders of their own in order to bring the lending operations in-house.

“Through their relationships with subprime-mortgage lenders, investment banks essentially set the underwriting criteria in the subprime market: They tell the lenders what types of mortgages they want to securitize, how much they will pay for them and how many they want,” Connor says.

“One of the things that has been frustrating … is the peculiar propensity
of quite a few observers to defend Goldman and its brethren, and to argue,
effectively, caveat emptor,” or buyer beware, writes Yves Smith, the author of
the popular financial blog “Naked Capitalism.”
Smith noted that in virtually every market in the world, sellers who hawk
defective or dangerous products or services are on the hook for damages.
“Remember those Pintos that turned into fireballs when rear-ended?” she
writes. “The pets that died from pet food laced with melamine from China?
No one suggested that the buyers of those products were at fault.”

AND TODAY?

Goldman continues to profit handsomely from the subprime- mortgage fallout. During the boom, Goldman Sachs bought housands of subprime mortgages, many of them from some of the most toxic lenders in the business, and packaged them into high-yield bonds. “Now that the bottom has fallen out of that market, Goldman finds itself in a different role: as the big banker that takes homes away from folks,” says Greg Gordon, an investigative journalist with McClatchy Newspapers who spent five months investigating Goldman Sachs and the role the firm had in the subprime meltdown.

“The primary cause of the subprime problem was a significant number of
mortgage lenders originating loans to people who subsequently were unable
to meet their payments,” says a
Goldman Sachs spokesperson. “The
firm was not involved in any mean-
ingful origination activity but did
end up losing significant amounts
of money on mortgages we bought
from others.”
In fact, Wall Street investment
banks, including Goldman Sachs,
were subprime-mortgage lenders’
single most important source of
capital and therefore had a lot of
power and influence in the sub-
prime-mortgage market, according
to a report issued by Center for
Public Integrity. While investment
banks such as Lehman Brothers
and Merrill Lynch both owned and
financed subprime lenders, “oth-
ers, like Credit Suisse First Boston
... and Goldman Sachs were major
financial backers of subprime
lenders.”
Anyone searching the Internet
or financial records for a com-
pany called MTGLQ Investors will
have a hard time finding out much
information about the firm. You
will find out it’s a Delaware limited
partnership and that it’s in the busi-
ness of purchasing and collecting

The Wall Street bonus pool topped $20.3 billion in 2009, according to a report released by New York state’s comptroller. That’s a 17 percent jump from last year and it works out to an average bonus of $123,850 for every person employed in the financial-services industry.

ING THROUGH NG THROUG

And at the three dominant Wall Street firms, Goldman Sachs, Morgan Stanley and JPMorgan Chase, compensation in 2009 rose an even greater 31 percent from the previous year, to about

$340,000 per employee, comptroller Thomas DiNapoli said recently.

Industry profits for all of Wall Street could top $55 billion for 2009, nearly triple the previous record year, DiNapoli said. In 2008, the industry lost a record $42.6 billion.

“Wall Street is vital to New York’s economy, and the dollars generated by the industry help the state’s bottom line,” DiNapoli stated. “But for most Americans, these huge bonuses are a bitter pill and hard to comprehend. There’s a lot of resentment against the industry over its role in the global economic meltdown. Taxpayers bailed them out, and now they’re back making