Goldman/Wall Street Profiting From Housing Market's Collapse, Erosion of Municipal Bonds, Explosion in Oil Prices

Well, the beat goes on. The New York Times on Sunday front paged "Goldman Cited Serious Profit on Mortgages". The article goes into detail on the profits Goldman made shorting the housing markets with positions taken as far back as 2007, with emails boasting that "some serious money" would be made having bet on the deterioration of the housing market. Certainly these directional bets on a housing market collapse helped achieve exactly that.

One needs to recall that after September 2008 Goldman had become a Bank Holding Company with its government guarantees of "too big to fail" inherent in that designation as well as its access to near limitless funding at the Fed window at close to zero cost. Isn't that what a bank is supposed to do? Profit from loans made to millions of home-buyers that have gone sour and were facing foreclosure, because in essence that is what Goldman and several other Bank Holding Companies were doing.

But it wasn't just shorting the housing market. In November 2008 with the nation's economy unraveling, Morgan Stanley and Goldman, now both vested with the mantle as Bank Holding Companies were recommending the purchase of credit default swaps (CDS) and themselves placing proprietary bets against the municipal bonds issued by eleven states including California, Florida, New Jersey, Ohio, Wisconsin and on. Being among the largest U.S. Municipal Bond underwriters, many of these bonds were underwritten by the very banks that were now shorting them through the purchase of CDS's. CDS's are of course in essence insurance policies, that became in the parlance of the Street "derivatives". They were insurance against the bankruptcy or inability of municipalities throughout the country to meet their debt obligations. Nice work if you can get it and be so inclined- first you unload the municipal bonds as underwriter. Then you bet against them. In a time of crisis, as was then/is the case, not very different than pouring kerosene on a fire.

Interestingly the insurance company that stood ready to sell the likes of Goldman these insurance policies (CDS) was none other than A.I.G. And we all know, as the markets collapsed it was good ole' Uncle Sam that rode the cavalry over the hill to save the day and made sure that Goldman collected the billions of dollars owed them on their CDS bets with A.I.G. As Frank Rich in his Sunday New York Times Op-ed pointed out, "That we still haven't seen the e-mail and documents that would illuminate A.I.G.'s machinations with Goldman and the rest of its counterparties amounts to a cover-up."

Nor, for that matter, has the question ever come up in Congressional Committee Hearings, "What was the nature of then Treasury Secretary Hank Paulson and Goldman Chairman Blankfein's conversations back in September 2008, and was the issue of A.I.G. counterparty obligations to Goldman ever discussed?" Please see; "The Question Unasked Again and Again of Goldman Sachs, Lloyd Blankfein and Hank Paulson"- 02.08.10.

But being aware of a counterparty trading positions can bring huge profits as well as disaster. There is the case of Semgroup Holdings, a private firm in Tulsa that entered into some enormous trades with J. Aron & Co., Goldman Sach's oil trading arm. In February 2008 Semgroup accorded options for 500,000 barrels of oil to Aron for July 2008 delivery at $96 a barrel. As prices shot past $96/bbl in June 2008 on their way to $147/bbl on July 12, Semgroup was caught in a massive short squeeze to the point that Forbes would comment "there was the smell of blood in the water".
Then quoting a John Tucker, attorney for one of the interested parties, "Nothing's been proven, but if someone has your book and knows every trade, it would not be difficult to bet against that book and put the company into a terrific liquidity squeeze".

The Forbes article goes on, "What's known for sure is that Goldman Sachs, through J. Aron & Co its commodities trading arm, was in a prime position to use such data- and profited handsomely from Semgroup's fall. J. Aron & Co was Semgroup's biggest counterparty trading both physical oil flowing through the pipelines and paper oil in the form of options and futures." A thought, did we see $147/bbl oil and $4.00 gasoline in 2008 because of Goldman's short squeeze on Semgroup??

Sadly, for our once respected and emulated financial system, playing a double sided game for single sided profit seems all too often the norm of the day. It just seems some are better at it than others.