A real Goldman Sachs scandal

By Felix Salmon
May 19, 2010
"vampire squid" article about Goldman Sachs, people accused him of throwing everything and the kitchen sink at the company; today's broadside from the NYT feels similar. It's basically the same story, repeated many times: Goldman had clients who were invested in X going up, and yet at the same time Goldman had investments which would benefit from X going down.

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When Matt Taibbi published his famous “vampire squid” article about Goldman Sachs, people accused him of throwing everything and the kitchen sink at the company; today’s broadside from the NYT feels similar. It’s basically the same story, repeated many times: Goldman had clients who were invested in X going up, and yet at the same time Goldman had investments which would benefit from X going down.

The fact is that Goldman Sachs is an intermediary which hedges its positions and which, as a broker-dealer, will naturally be taking long and short positions in all manner of different securities at different times. This should not be a scandal at all.

On the other hand, it really would be a scandal if Goldman Sachs was deliberately and unnecessarily kicking people out of their homes, even when doing so would lose it money. And that seems to be what it’s doing in one case in Ohio.

You might recall American Homeowner Preservation, a company I wrote about last month. The idea behind their business is that they negotiate a short-sale with the bank holding a mortgage, find an investor to buy the house in question, and then lease the house back to the original homeowner, who has an option to buy it back, at a fraction of the original mortgage payments.

It’s an idea which makes a lot of sense — but which Goldman Sachs seems to have problems with. AHP’s principal, Jorge Newberry, explains:

Struggling to stay in their home of 18-years, a Windham, Ohio family is desperately trying to solve their crisis before a May 24th sheriff’s sale. Suffering from reduced income and an ever-escalating adjustable payment, the family contacted their servicer Litton Loan Servicing to obtain a loan modification, which was eventually denied. The family then contacted American Homeowner Preservation, who made an offer to purchase the home at the appraised value of $43,000. With AHP, the family would receive an affordable 5-year lease to stay in the home, plus a favorable 5-year option to repurchase…

Last week, Litton indicated that they will approve the Windham, Ohio family’s short sale, but only if the family vacates the home due to an internal policy which restricts short sales in which the purchaser provides leases and/or options to the selling families.

Litton, of course, is owned by Goldman Sachs. And right now it seems that the house will go to auction on Monday with an opening bid of $45,300, and there will almost certainly be no bids at that level. Litton will then buy the house for $45,300, and, following the standard loan-servicer playbook, will start eviction proceedings against the family in question. Once the family is homeless and the home is vacant, Litton will try to sell the home — but there are lots of vacant homes in this particular part of Ohio, and the home is realistically just going to deteriorate steadily in terms of its condition and its value. Litton, if it ends up being able to sell the home at all, will surely get less than $43,000 for it — and will have to pay a large amount of money in legal fees on top.

So why isn’t Litton accepting AHP’s offer? In a bull market, it makes sense to be wary of short sales which aren’t bona fide arm’s-length transactions, but right now it’s undeniably better for all concerned to keep the current occupants in their home. And indeed AHP has dealt successfully with Litton in the past. What’s more, Goldman Sachs spokesman Michael DuVally told me that “Litton has no such policy that requires borrowers to vacate”.

It’s true that under the latest iteration of the Home Affordable Foreclosure Alternative Program, or HAFA, short sales must be arm’s-length transactions. But this isn’t a HAFA sale, and in any case the servicer always has the option of deleting the bit of the arm’s-length language which prevents the seller from renting their home back from the buyer.

I tried calling Ceci Oliveira, of the Litton short-sale department, the person who told Newberry about the Litton policy; she didn’t get back to me, so it’s all a bit unclear whether this Litton policy exists or not, and if it exists, why it exists.

My hope is that if Litton doesn’t see sense and agree to the short sale before Monday, at the very least they’ll hold off on eviction proceedings once they take title to the house. After all, there’s really no reason for them to evict: right now, in this part of Ohio, an empty home is not more valuable than one without people perfectly willing to make regular lease payments. Instead, it just falls in value over time.

I’m going to try to keep an eye on this case — and I have to admit to a tiny bit of hope that now it’s being publicized, Litton/Goldman is going to do the right thing, for themselves and for the owners of the home, and allow this family to stay where they are. But if they don’t, and choose instead to lose money by evicting the family in question, they deserve all the opprobrium that the NYT is trying to drum up today.


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It seems odd that the lender would choose the pareto-INFERIOR solution.

felix, i’m sure you noticed in the linked article that the family owes $105k on this home that they’ve lived in for 18 years and is currently worth $43k… Without intending to kick a man when he’s down, it should be noted that it seems almost certain that they’ve withdrawn equity and spent it, and aren’t pure victims here…

again, that doesn’t explain the lender’s pareto-inferior solution.

Posted by KidDynamite | Report as abusive

As with most good stories, there are layers on layers of what happened. Even if they don’t destroy the good narratives, the facts are meat that provide nuance that gets you closer to telling the real story. This is a good start and I hope that you do stay on it.

Posted by bobbymacReuters | Report as abusive

Bobby, I spent a good 2 days looking for the layers here. And I’m increasingly coming to the conclusion that this is one of those stories where what you see is what you get. But let’s see how it plays out, for sure.

Posted by FelixSalmon | Report as abusive

Sorry Felix but your distillate of the NYT story is like English cooking: a slight case of overboiling, to the point where one wonders whether you might not realize how much you appear to be vacillating on what really makes Goldman Sachs tick.

Should brevity be required, here it is: GS is marinated in conflict of interest. Furthermore, GS doesn’t care about mortgages it happens to hold paper on; in the greater scheme of things the mortgages really do not matter to GS. The whole mortgage analogy, or recurring series of mortgage analogies, as though they actually meant something is touching, but wide of the mark.

The NYT article itemizes several salient examples of how GS massively mal-advised its own investment customers while betting agin them and goes on (but not far enough) to allude to GS’s ability to influence the outcome of enterprises its in-house bets determined ought to fail. Which they then, lo and behold, almost unanimously did. Causality is indicated.

So it is with any mortgage GS & its subs own. What you lament above is evidence of something more than poor management or lack of internal communication. It’s the epitome of not giving a hoot what happens to any fistful of mortgage deeds after the dastardly act of catapulting them into the toxic stratosphere of fraudulently-rated doomed-to-fail (and given an extra push when necessary to make fail) Goldman MBS schemes.

None of this would be legal under Glass-Steagall and none of it passes muster anywhere realistic consolidation and trading rules remain in effect. If it’s *conditionally* legal in the USA then only as a result of concerted legal book-cooking and not to the extent that federal Conflict of Interest laws are negated. The NYT underplays this aspect and makes no mention at all of GS’s biggest COI insider-trade game, the GS-HFT graft machine which is all about betting against clients left right and center 24/7.

There is more to lament than the Windham, OH family whom I, as do you, wish well with their domestic arrangements.

The evidence however points to such suffering in Windham, OH being more than incidental – collateral, even – to GS’s main thrust, which is to crush under their own weight as much of the economic system as they possibly can then, their having bet on implosion occurring, clean up as a result to the point where they (GS) don’t even remotely care what happens to the oh so (un)important mortgages with which their most notorious bets were allegedly backed. That just leaves the question of HFT, which is not (yet) at issue here.

Satisfaction in full for all of GS’s victims, in full, is required. Enough of them to make a difference were misled into believing that no house of GS’s former repute would ever be allowed to screw them. They thought GS could be trusted and that the law forbade scams such as those GS (it later transpires) had in mind from the get-go. Every right-minded person on earth is likely to agree.

Frankly, now’s not the time for you to be imagining it any other way, either. Even if it means agreeing to some extent with an NYT column.

Posted by HBC | Report as abusive

I am awestruck. Reading this was like watching a fish being gutted by someone who has done it every day for 50 years.

Goldman isn’t a vampire squid. It is the Matrix. Now where’s our Neo?

Posted by LadyGodiva | Report as abusive

Did you even read the NYT article, Salmon? The outrage is not merely based on GS’s hedging, as you claim. It is based on the evidence that GS threw its principles out the window and brutally screwed its clients. From the NYT article:

“…a former Goldman partner… said that the company’s view of customers had changed in recent years. … CONFLICT AVOIDANCE HAD SHIFTED TO CONFLICT MANAGEMENT … GS executives have come to see customers more as competitors they trade against than as clients.”

“Conflict management” is of course the polite way of saying ‘lie to the clients whenever necessary’. This assertion is backed up by GS internal memos/emails. And you say ‘this should not be a scandal at all’? That may be true about the hedging, but that’s just the beginning of the story. The main point is Goldman’s total abandonment of its own number one rule, ‘the customer comes first’.

Seriously, did you even read the NYT article? And if you did, why are you ignoring the guts of the story?

Posted by pspsps | Report as abusive

Admittedly, I have not yet read the NYT piece. That said, out of curiosity, Mr. Salmon, has anyone bothered to confirm whether the foreclosure on the Windham, OH family is even a LEGITIMATE foreclosure? Does GS, Litton and/or anyone else attempting to foreclose have legal standing to do so? Were all of the family’s payments properly timely recorded? Were there any fees levied by Litton for force-placed insurance, “property preservation fees” like Broker Price Opinions, interest on corporate advances, etc.?

What are the chances that pmi may have been in place and able to pay off at least it’s portion of this loan? If the note was securitized, has anyone bothered to see if the trust in which the note was securitized had any form of “note” insurance covering the trust against notes going belly up? Have any claims been put in against policies covering this note? Has the note holder(s) potentially recouped the face value or even the full balance of the loan as a result of CDS or CDO investment involving this note? Is the Mortgage Electronic Registration System (MERS) involved with this mortgage?

These are all questions that are absolutely relevant to this situation. The family should pursue answers to ALL of them ASAP.

Posted by Mike_Dillon | Report as abusive

I wonder if the Windham, OH family are class members of the Schaffer v. Litton Loan Servicing class action currently pending settlement approval in CA?

http://www.latefeessettlement.com/casedo cs.html

Not a bad deal for Litton and Goldman since settlement claims appear to be limited to not more than $60.00 per claim. I guess this gives a little more urgency to my previous question of whether the Windham, OH – or any other family involved with Litton – is/was facing a fraudulent foreclosure.

I wonder just how many families have lost their homes to potentially fraudulent foreclosures initiated by Litton either when C-Bass, Radian and/or MGIC owned them or since Goldman Sachs took over?

And here I thought that the USA/Curry v. Fairbanks settlement was a farce at $147.00 per claim – if the settlement had been dispersed equally across the 281,000 victim class, which it wasn’t.

Posted by Mike_Dillon | Report as abusive