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EARLY : SPREADING SUBPRIME WORRIES
GOLDMAN: “LET’S BE AGGRESSIVE DISTRIBUTING THINGS”
In December , following the initial decline in ABX BBB indices and after con-
secutive days of trading losses on its mortgage desk, executives at Goldman Sachs de-
cided to reduce the firm’s subprime exposure. Goldman marked down the value of its
mortgage-related products to reflect the lower ABX prices, and began posting daily
losses for this inventory.
Responding to the volatility in the subprime market, Goldman analysts delivered
an internal report on December , , regarding “the major risk in the Mortgage
business” to Chief Financial Officer David Viniar and Chief Risk Officer Craig Brod-
erick. The next day, executives determined that they would get “closer to home,”
meaning that they wanted to reduce their mortgage exposure: sell what could be sold
as is, repackage and sell everything else. Kevin Gasvoda, the managing director for
Goldman’s Fixed Income, Currency, and Commodities business line, instructed the
sales team to sell asset-backed security and CDO positions, even at a loss: “Pls refo-
cus on retained new issue bond positions and move them out. There will be big op-
portunities the next several months and we don’t want to be hamstrung based on old
inventory. Refocus efforts and move stuff out even if you have to take a small loss.”
In a December email, Viniar described the strategy to Tom Montag, the co-head
of global securities: “On ABX, the position is reasonably sensible but is just too big.
Might have to spend a little to size it appropriately. On everything else my basic mes-
sage was let’s be aggressive distributing things because there will be very good oppor-
tunities as the market goes into what is likely to be even greater distress and we want
to be in position to take advantage of them.”
Subsequent emails suggest that the “everything else” meant mortgage-related as-
sets. On December , in an internal email with broad distribution, Goldman’s Stacy
Bash-Polley, a partner and the co-head of fixed income sales, noted that the firm, un-
like others, had been able to find buyers for the super-senior and equity tranches of
CDOs, but the mezzanine tranches remained a challenge. The “best target,” she said,
would be to put them in other CDOs: “We have been thinking collectively as a group
about how to help move some of the risk. While we have made great progress moving
the tail risks—[super-senior] and equity—we think it is critical to focus on the mezz
risk that has been built up over the past few months. . . . Given some of the feedback
we have received so far [from investors,] it seems that cdo’s maybe the best target for
moving some of this risk but clearly in limited size (and timing right now not ideal).”
It was becoming harder to find buyers for these securities. Back in October, Gold-
man Sachs traders had complained that they were being asked to “distribute junk that
nobody was dumb enough to take first time around.” Despite the first of Goldman’s
business principles—that “our clients’ interests always come first”—documents indi-
cate that the firm targeted less-sophisticated customers in its efforts to reduce sub-
prime exposure. In a December email discussing a list of customers to target for
the year, Goldman’s Fabrice Tourre, then a vice president on the structured product
correlation trading desk, said to “focus efforts” on “buy and hold rating-based buyers”
