Goldman Sachs says it didn’t bet against clients before US housing market crash

By Stevenson Jacobs, AP
Wednesday, April 7, 2010

Goldman Sachs denies betting against clients

NEW YORK — Goldman Sachs Group Inc. is denying that it bet against clients by selling them mortgage-backed securities while reducing its own exposure to such investments before the U.S. housing market crashed.

In an annual letter to shareholders released Wednesday, Goldman said it bought and sold mortgage-backed securities and other financial instruments every day prior to the crisis as part of its role as one of Wall Street’s biggest market makers.

The investment bank said it remained generally bullish on the housing market through 2006 until it began seeing losses on its mortgage-related investments at the end of that year. In response, Goldman said it began reducing its exposure to the U.S. mortgage market, either by selling positions or buying hedges, a form of insurance that pays out if the value of an underlying asset declines.

Those hedges, also known as short positions, proved prophetic for Goldman; As the housing market began cratering in the summer of 2008 and losses piled up for the nation’s biggest banks, Goldman suffered minimal damage relative to its competitors.

That led to intense criticism that the New York-based bank benefited at the expense of clients who bought mortgage-backed securities that later became toxic — a claim Goldman denied.

“Our short positions were not a ‘bet against our clients,’” Goldman said in the letter. “Rather, they served to offset our long positions. Our goal was, and is, to be in a position to make markets for our clients while managing our risk within prescribed limits.”

Goldman also rejected claims that it profited from the mortgage market meltdown.

“Rather, our relatively early risk reduction resulted in our losing less money than we otherwise would have,” the bank said.

Goldman has emerged from the financial crisis as one of the nation’s strongest banks. It earned a record $4.79 billion profit in the last three months of 2009 on strong trading of risky assets and gains in its investment banking division.

Goldman also filed its annual proxy statement on Wednesday. According to an Associated Press calculation of the compensation data in the filing, CEO Lloyd Blankfein received pay valued at $9.86 million for 2009, including a restricted stock bonus worth $9 million on the day it was granted, a $600,000 salary and $262,657 in other compensation and perks including car service and retirement benefits.

While Blankfein’s stock-based award was to reward his work in 2009, the award was not included in the calculation of total compensation that Goldman presented in its proxy statement since it was approved 2010. The pay amount included in the proxy only reflects what was granted and paid in the fiscal year 2009. Blankfein’s latest stock award will be included in calculations of his total pay for 2010.

The AP’s executive pay calculation aims to isolate the value the company’s board placed on the CEO’s total compensation package. The figure includes salary, bonus, incentives, perks and the estimated value of stock options and awards.

The calculations don’t include changes in the present value of pension benefits, and they sometimes differ from the totals companies list in the summary compensation table of proxy statements filed with the SEC, which reflect the size of the accounting expense taken for the executives compensation in the previous fiscal year.

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