WSJ: Senate Report Lays Bare Mortgage Mess
- From: sufaud <sufaud@xxxxxxxxxxx>
- Date: Thu, 14 Apr 2011 11:46:24 -0700 (PDT)
The Wall Street Journal
BUSINESS
April 14, 2011
Senate Report Lays Bare Mortgage Mess
Panel Recommends a Range of Remedies for Financial Sector; 'I Found
White Elephant, Flying Pig'
By CARRICK MOLLENKAMP And LIZ RAPPAPORT
Some call the concept of owning a home the American dream.
Wall Street bankers called it something different: "Pigs." "Crap." A
"white elephant, flying pig and unicorn."
Those descriptions of the U.S. mortgage market were highlighted in a
U.S. Senate report Wednesday that offered one view of the events
leading up to the financial crisis of 2008.
Senate investigators spent two years gathering and analyzing 5,901
pages of confidential emails and documents from Washington Mutual
Inc., Goldman Sachs Group Inc., Deutsche Bank AG, and regulators
including the Office of Thrift Supervision. Though lacking evidence of
outright fraud, the report shows Wall Street in gritty, day-to-day
detail, angling to profit from a booming mortgage market, and then
scrambling to cope with its collapse.
As the Senate wrapped up its report, the Securities and Exchange
Commission neared the end of an investigation that is likely to result
in settlements with Wall Street firms that sold mortgage-bond deals at
the heart of the financial crisis, according to people familiar with
the situation.
Unlike the politically divisive report issued by the Financial Crisis
Inquiry Commission, this report received bipartisan support, signed by
both Senate Permanent Subcommittee on Investigations Chairman Sen.
Carl Levin (D., Mich.) and the panel's ranking Republican, Sen. Tom
Coburn of Oklahoma.
The Senate panel recommended a range of financial-sector fixes. It
said bank regulators should examine mortgage-related securities to
identify any possible legal violations and use Goldman Sachs as a case
study in implementing conflict prohibitions. The panel also
recommended that the Financial Stability Oversight Council should
evaluate risky lending practices and the impact they might have on the
U.S. financial system.
The subcommittee's recommendations are aimed at enhancing certain
provisions of the Dodd-Frank financial-regulatory overhaul or
implementing the act by using the information in the Senate report.
It trains much of its ire on Goldman Sachs, which Sen. Levin said
deceived some clients by betting against home loans in 2006 and 2007,
while simultaneously selling mortgage securities. At a news conference
Wednesday, Senate staffers manned large posters with headings such as
"Goldman Conflicts of Interests" and "The Hudson Scam," in reference
to a particular Goldman bond offering.
A Goldman spokesman said that "while we disagree with many of the
conclusions of the report, we take seriously the issues explored by
the subcommittee. We recently issued the results of a comprehensive
examination of our business standards and practices and committed to
making significant changes" to strengthen its disclosure and client
relationships.
The report shows how on Dec. 14, 2006, executives gathered in a
conference room adjoining the office of Goldman Chief Financial
Officer David Viniar. They agreed the firm needed to cut its bullish
bets on mortgage bonds.
The Senate report alleges that Goldman then undertook a multibillion
dollar series of trades to hedge its bullish bets by selling mortgage-
related trades to allegedly unsuspecting investors. The head of
Goldman's mortgage unit recommended managers of Goldman's sales force
issue "ginormous" sales credits to those who could find investors
anywhere in the world.
A Goldman executive found one in Australia. On April 26, 2007, in an
email with the subject line "utopia," the executive said, "I think I
found white elephant, flying pig, and unicorn all at once."
A month later, another Goldman executive lamented his firm's
reputation after a stretch of risky mortgage deals Goldman had sold.
He described debt managers that worked with the firm as "street wh—
managers."
"It pains me to say it but citi, ubs, db [Deutsche Bank], lehman, and
ms [Morgan Stanley] have much stronger franchises—among large dealers
only ML [Merrill Lynch] is more reviled than [Goldman's] business,"
the executive wrote.
Sen. Levin said Wednesday that he believed some Goldman executives may
have misled Congress during a committee hearing in April 2010. He
didn't specify how.
A Goldman spokesman said bank employee testimony was "truthful and
accurate."
The beginning of the report details a breakdown in how home mortgages
were originated and how warnings went ignored.
The report alleged that in 2004 the chief risk officer at Seattle
lender Washington Mutual signaled concerns about housing prices
falling and loose lending standards. The report said the officer was
called "Dr. Doom" and issued a 2004 memo that said poor underwriting
"will come back to haunt us." His warnings went unheeded, the report
said.
Washington Mutual's senior management did nothing to stop the lending
practices at the lender's loan offices in Southern California even
after the bank conducted an internal investigation in 2005 that found
"an extensive level of loan fraud," according to a Washington Mutual
internal memo cited in the Senate report.
Instead, the bank rewarded salespeople at Washington Mutual for making
large volumes of loans, and enticing them with trips. A 2005 awards
dinner for top producers in the "President's Club" was held in Maui,
Hawaii, and hosted by Magic Johnson, the former National Basketball
Association star.A senior bank executive emceed the event and began by
saying, "I'm told that the age-old tradition here at Washington Mutual
is, 'What happens at President's Club stays at President's Club.' And
who am I to mess with tradition."
In September 2008, Washington Mutual was seized by regulators and sold
to J.P. Morgan Chase & Co.
By late 2006, loans originated by Washington Mutual and a subsidiary
called Long Beach were underpinning mortgage securities, and some Wall
Street traders were ahead in seeing the problems. In late 2006 and
early 2007, a Deutsche Bank trader named Greg Lippmann went to London
and Lisbon to tell senior officials at the German bank that it needed
to reverse course and bet against housing or end long mortgage trades.
Unlike Goldman traders who refrained from cursing in emails and
preferred an "LDL" or "let's discuss live" communication strategy, Mr.
Lippmann coarsely described his views in emails. He called troubled
mortgage bonds "pigs" and "crap." In August 2006, he told an
investment fund, "I don't care what some trained seal bull market
research person says this stuff has a real chance of massively blowing
up."
A spokesman for Mr. Lippmann declined to comment. The report said
Deutsche in 2007 and 2008 made $1.5 billion on bearish mortgage trades
while the bank, due to bullish bets, lost nearly $4.5 billion on
separate trades.
The report singles out Deutsche for what it views as a conflict of
interest: Mr. Lippmann urged clients to bet against the market while
the bank was investing or selling securities that relied on borrowers
paying their mortgage loans.
In 2005, a Wall Street trader at Deutsche Bank described the implosion
of the credit markets in a parody of a Vanilla Ice rap song titled,
"CDO, Oh Baby," which included lyrics such as, "There are never ends
to real estate booms."
A Deutsche spokeswoman said: "As the PSI report correctly states,
there were divergent views within the bank about the U.S. housing
market. Moreover, the bank's views were fully communicated to the
market through research reports, industry events, trading desk
commentary and press coverage."
----------
Related Documents
"It is highly questionable as to how strong this economy may be." --
Washington Mutual chief risk officer internal memo describing concerns
about housing market 9/2/2004
"There are never ends to real estate booms. If there is a problem, yo,
we'll solve it." --
Deutsche Bank trader in song titled, "CDO Oh Baby 11/8/2005
"This is an absolute pig." --
Bank email describing a Goldman mortgage bond backed by souring loans
12/8/2006
"I think I found white elephant, flying pig and unicorn all at once."
--Goldman Sachs email describing an Australian client that invested in
a souring mortgage structure 4/26/2007
"It pains me to say it but citi, ubs, db, lehman and ms have much
stronger franchises—among large dealers only ML is more reviled than
(Goldman's) business." -- Goldman trader describing Wall Street's view
of his firm and its mortgage business 5/19/2007
http://online.wsj.com/article/SB10001424052748703730104576261350208808130.html
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