Goldman takes on critics in shareholder note

Goldman Sachs in Bangkok. As a market maker, we execute a variety of transactions with clients, Goldman Sachs said. (GETTY IMAGES)

Goldman Sachs Group issued a spirited defense in its annual shareholder letter against allegations that it had benefited unduly from government help and bet against its own clients during the financial crisis.

The dominant Wall Street firm said it did not intentionally "bet against" securities in the mortgage market during the financial crisis, dismissing suggestions that it unfairly made money by placing bets against its clients.

In the letter introducing its annual report, Goldman also defended its relationship with the bailed-out US insurer American International Group. Goldman was one of AIG's largest trading counterparties and received full payment on credit default swaps on which the insurer was a counterparty thanks to the government rescue.

The letter, signed by CEO Lloyd Blankfein and Gary Cohn, President and Chief Operating Officer, also addressed criticism about overly generous pay. It marks Goldman's most thorough effort yet to rebut a rising chorus of criticism over the past year as the bank enjoyed a year of record profits after benefiting from government programmes and policies.

"As a market maker, we execute a variety of transactions with clients and other market participants... which may result in long or short risk exposures to thousands of different instruments at any given time," said the letter.

Goldman said it did not generate enormous net revenue or profit by betting against residential mortgage-related products.

However, following its decision to reduce its exposure to risky mortgage securities, the bank said it lost less money than it otherwise would have when the residential housing market began to deteriorate rapidly.

In January, Blankfein faced harsh questioning from the chairman of the Financial Crisis Inquiry Commission, who accused Goldman of knowingly creating shoddy subprime-backed securities for customers, and then betting they would default.

Goldman said it bought protection on super-senior collateralized debt obligation (CDO) risk from AIG only as part of a trading relationship.

"This protection was designed to hedge equivalent transactions executed with clients taking the other side of the same trades. In so doing, we served as an intermediary in assisting our clients to express a defined view on the market," Goldman said.

Many banks, including Goldman, were among the recipients of tens of billions of federal bailout dollars that were funnelled through the insurer at the height of the crisis, saving them from potential losses and causing a public uproar.

 

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