Traders at Goldman Sachs Banked Big Profits Betting on Mortgage Meltdown

Have you been wondering why Goldman Sachs have been avoiding the punishment that is being meted out to other big brokerages this year? Wonder why Bear Stearns, Merrill Lynch and Lehman Brothers have all seen their share prices crushed while Goldman Sachs has traded higher?

The reason why Goldman Sachs has been doing well is because the firm netted huge profits betting against the subprime mortgage market. Sure, other departments in the Goldman Sachs empire had exposure to the subprime mortgage market, but the gains generated by the structured-products trading group easily offset the losses generated by the firm's overall exposure to subprime paper.

The group's bet that the subprime mortgage market would collapse netted the firm an estimated $4 billion dollars in profits, compared to a loss of $1.5 - $2 billion dollars in losses elsewhere in the firm (source: WSJ).

This is why Goldman Sachs is about to report record annual net income of $11 billion dollars this year, while other big firms have gotten crushed due to their exposure to subprime paper. Other firms either didn't bet against the subprime mortgage market or covered their positions too early, underestimating the amount that the subprime market was about to slide.

In Q3, Goldman Sachs earned $2.9 billion dollars, a ridiculous amount of money considernig the turmoil due to the mortgage meltdown, and a testament to just how much money they made shorting the subprime mortgage market.

The question is: is this right? How do you feel about this?

How do you feel about one department at Goldman Sachs selling a customer a product that results in heavy losses, while another department at Goldman Sachs (presumably full of extremely smart traders) bets against that exact same product and predicts that there will be terrible losses to come for whoever buys those products? If you were a customer that had bought a CDO (collateralized debt obligation) from Goldman Sachs and had taken a beating, how would you feel to know that their structured-products trading group had profited over $4 billion dollars in one year betting against these exact same products?

And people have been wondering why Goldman Sachs is still planning on doling out massive bonuses even though the credit markets have been in turmoil..

Filed under: The Economic Meltdown | Stock Market Scandals | General Knowledge