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FINANCIAL CRISIS INQUIRY COMMISSION REPORT
rather than “sophisticated hedge funds” that “will be on the same side of the trade as
we will.” The “same of side of the trade” as Goldman was the selling or shorting
side—those who expected the mortgage market to continue to decline. In January,
Daniel Sparks, the head of Goldman’s mortgage department, extolled Goldman’s suc-
cess in reducing its subprime inventory, writing that the team had “structured like
mad and traveled the world, and worked their tails off to make some lemonade from
some big old lemons.” Tourre acknowledged that there was “more and more leverage
in the system,” and—writing of himself in the third person—said he was “standing in
middle of all these complex, highly levered, exotic trades he created without necessar-
ily understanding all the implications of those monstrosities.”
On February , Goldman CEO Lloyd Blankfein questioned Montag about the
million in losses on residual positions from old deals, asking, “Could/should we
have cleaned up these books before and are we doing enough right now to sell off cats
and dogs in other books throughout the division?”
The numbers suggest that the answer was yes, they had cleaned up pretty well,
even given a million write-off and billions of dollars of subprime exposure still
retained. In the first quarter of , its mortgage business earned a record mil-
lion, driven primarily by short positions, including a billion short position on the
bellwether ABX BBB index, whose drop the previous November had been the red
flag that got Goldman’s attention.
In the following months, Goldman reduced its own mortgage risk while continu-
ing to create and sell mortgage-related products to its clients. From December
through August , it created and sold approximately . billion of CDOs—
including . billion of synthetic CDOs. The firm used the cash CDOs to unload
much of its own remaining inventory of other CDO securities and mortgage-backed
securities.
Goldman has been criticized—and sued—for selling its subprime mortgage secu-
rities to clients while simultaneously betting against those securities. Sylvain Raynes,
a structured finance expert at R&R Consulting in New York, reportedly called Gold-
man’s practice “the most cynical use of credit information that I have ever seen,” and
compared it to “buying fire insurance on someone else’s house and then committing
arson.”
During a FCIC hearing, Goldman CEO Lloyd Blankfein was asked if he believed
it was a proper, legal, or ethical practice for Goldman to sell clients mortgage securi-
ties that Goldman believed would default, while simultaneously shorting them.
Blankfein responded, “I do think that the behavior is improper and we regret the re-
sult—the consequence [is] that people have lost money” The next day, Goldman is-
sued a press release declaring Blankfein did not state that Goldman’s “practices with
respect to the sale of mortgage-related securities were improper. . . . Blankfein was re-
sponding to a lengthy series of statements followed by a question that was predicated
on the assumption that a firm was selling a product that it thought was going to de-
fault. Mr. Blankfein agreed that, if such an assumption was true, the practice would
be improper. Mr. Blankfein does not believe, nor did he say, that Goldman Sachs had
behaved improperly in any way.” 
