Investors Lost, Goldman Won on WaMu Deal
Washington Mutual Inc. and its Long Beach Mortgage Co.
subprime-lending unit rang up one of the worst failures in U.S. history.
Left in the wake were billions of dollars of soured loans and
questionable lending practices.
But when times were better, the two companies had a powerful partner on Wall Street:
Goldman Sachs Group Inc.
GS -1.31%
Beached
- May 10, 2007: Goldman and WaMu underwrite bonds backed by $532.6 million in mortgages.
- May 16, 2007: WaMu unit says $49.3 million in loans are worthless.
- May 17, 2007: 'Good news,' Goldman trader writes in an email, 'we make $5mm' because the firm shorted the bonds.
Recently
released emails and other documents, including securities filings, show
how Goldman, considered one of Wall Street's most elite banks, built
its mortgage business by closely working with lenders such as Washington
Mutual and Long Beach, two firms that "polluted the financial system"
with souring loans, according to a Senate review of Washington Mutual on
April 13.
"Long Beach…was not a responsible lender," Sen. Carl Levin (D.,
Mich.), chairman of the Senate Permanent Subcommittee on Investigations,
said in his opening remarks April 13. "Its loans and mortgage-backed
securities were among the worst performing of the subprime industry."
Goldman declined to discuss its business with Washington Mutual or
the communications in the emails released by the Senate panel.
Goldman was one of several Wall Street firms that helped sell bonds
backed by Washington Mutual loans. Over the weekend, the Senate
subcommittee released internal Goldman emails, including one showing
that the firm made a $5 million trading profit by betting against
securities Goldman sold in a Long Beach bond offering that lost money
for its investors, raising a potential conflict with its clients. On
Tuesday, the panel plans to question Goldman executives in a separate
hearing.
The emails and others like them highlight "the importance of
transparency, the importance of things being in the open, the importance
of it being known who is in a position to benefit from what," senior
White House adviser Lawrence Summers said Sunday on CBS's "Face the
Nation."
Much has been written about Washington Mutual's failure. In September 2008, the Seattle lender was forced to sell itself to
J.P. Morgan Chase & Co.
JPM -0.87%
at the height of the crisis in the largest-ever U.S. bank failure. But
there has been less scrutiny of the ties between Washington Mutual and
Goldman, which emerged stronger than rivals after the mortgage market's
collapse.
J.P. Morgan said the Washington Mutual loans and
securities being investigated were issued before J.P. Morgan's purchase
of Washington Mutual. A lawyer for former Washington Mutual Chief
Executive Kerry Killinger couldn't be reached.
At times, executives at Washington Mutual discussed seeking out
Goldman for its reputation for excellence, according to Washington
Mutual emails. But Washington Mutual executives also were wary of their
partner because of concerns about how the Wall Street firm traded.
"We always need to worry a little about Goldman because we need them
more than they need us and the firm is run by traders," a Washington
Mutual executive wrote in an email released by the Senate panel in its
probe of the lender.
Long Beach was founded in 1979 as Long Beach Savings & Loan by
Roland Arnall, a Los Angeles developer who got his start in business in
Los Angeles selling flowers on a Los Angeles street corner. A unit
called Long Beach Financial Corp., based in Orange, Calif., was sold to
Washington Mutual in 1999.
Aided by mortgage brokers who channeled loans to Long Beach, Washington
Mutual and Long Beach ended up bundling subprime home loans into $77
billion worth of securities, according to the Senate inquiry.
Some
Long Beach bonds were ultimately used to allow Wall Street firms and
hedge funds to bet against the U.S. mortgage market. Long Beach bonds
were among those underpinning subprime-mortgage indexes—assembled by
Goldman and other Wall Street firms—that allowed those firms and hedge
funds to bet against the housing industry, according to data provided by
Markit Group Ltd., which helps run the indexes.
The Long Beach loans ended up being among the worst performing in the
indexes, according to a Nomura Holdings report. Separately, some Long
Beach bonds also underpinned the Abacus 2007-AC1 debt pool now at the
center of a Securities and Exchange Commission securities-fraud case
against Goldman, which the firm is fighting.
By 2005, Long Beach was in trouble. According to the Senate report
released April 13, Long Beach had to buy back $875 million of
nonperforming loans from investors. Problems persisted.
Behind one sale of Long Beach securities was Goldman. In 2006,
Goldman teamed with a Washington Mutual unit to sell a debt pool called
Long Beach Mortgage Loan Trust 2006-A. Both firms agreed to buy some of
the securities with the intention of reselling them or making a
secondary market for them, according to a prospectus for them. Of the
$496 million deal, Goldman was expected to purchase about $322 million
of the securities with the intention of reselling them.
Washington Mutual executives appeared troubled by loans at Long Beach.
In an April 2006 email, a Washington Mutual executive told Mr. Killinger that
Long Beach's "delinquencies are up 140% and foreclosures close to 70% ... It is ugly."
By early 2007, Goldman bankers also were growing anxious about their
business dealings with Washington Mutual and Long Beach, according to
emails released as part of the Senate investigation into Washington
Mutual.
A Goldman banker raised questions about the performance of Long Beach
loans that were "performing dramatically worse" than other similar
deals in 2006. "As you can imagine, this creates extreme pressure, both
economic and reputational, on both organizations," the Goldman banker
said.
In May 2007, Goldman executives were discussing problems facing the
debt deal it had helped underwrite called Long Beach Mortgage Loan Trust
2006-A, according to emails released by the Senate panel.
Among the Senate documents is an email from a Goldman executive to
Michael Swenson, then a Goldman managing director in the firm's mortgage
group, about the 2006-A bond deal. In an 8 a.m. email, Goldman
executives circulated a securities report that showed loans inside the
pool had soured.
Six minutes later, a Goldman executive wrote, "bad news…(the price
decline in the bonds) costs us about 2.5 mm," adding, "good news…we make
$5mm" on a derivatives bet against the bonds.
The Senate panel, in a statement over the weekend, said the email
showed how the soured Long Beach bonds "would bring [Goldman] $5 million
from a bet it had placed against the very securities it had assembled
and sold."
Mr. Swenson declined to comment through a Goldman spokesman. He is
among the Goldman executives set to appear at Tuesday's hearing. A
Goldman spokesman said in a statement: "It's our standard, prudent
practice to hedge exposures."
Despite the close relationship between Washington Mutual and Goldman,
Washington Mutual wondered which side Goldman was on. In October 2007,
Mr. Killinger wrote in an email about a situation with Goldman: "I don't
trust Goldy on this. They are smart, but this is swimming with the
sharks. They were shorting mortgages big time."
This is the link to SEC info
http://www.sec.gov/Archives/edgar/data/1355515/000127727706000388/form8kpsa20063.htm
http://www.sec.gov/Archives/edgar/data/1119605/000127727706000409/fwptermsheet_longbeach2006a.pdf
