GOLDMAN SACHS’S trading activities in the credit insurance market in 2007 have come under attack from a US senator after e-mails showed a senior trader urged colleagues to “kill” some investors’ positions.
Carl Levin, chairman of the Senate permanent subcommittee on investigations, told a hearing that the alleged activity “looks like a trading abuse to me”, although he added that at the time the credit insurance market was unregulated.
Mr Levin said that in May 2007 Goldman adopted a “short squeeze strategy” to drive down the price of credit default swaps on troubled mortgage-backed securities. Mr Levin alleged that the move, which Goldman denies, would have enabled the bank “to purchase the CDSs for itself at artificially low prices”.
The subcommittee’s probe uncovered a document showing a second trader saying Goldman “began encouraging a squeeze” – a strategy that never materialised due to market conditions.
Mr Levin’s attack opens a potential new front in the controversy over Goldman’s trading practices. In July, Goldman paid $550 million (€415 million) to settle fraud charges from the Securities and Exchange Commission over an MBS sold during the financial crisis.
Mr Levin produced e-mails in which Michael Swenson, an executive in Goldman’s fixed-income trading division, told colleagues to offer cut-price credit default swaps on MBSs. As the housing market collapsed in 2007, investors, including Goldman, were rushing to buy default swaps to short MBSs that were losing value.
“We should start killing the . . . shorts in the street,” Mr Swenson wrote in an e-mail to Deeb Salem, a trader, in May 2007. “This will have people totally demoralised.” In another e-mail, he said Goldman should reduce prices on CDSs to “cause maximum pain” on existing holders of credit insurance.
Goldman said on Thursday: “This type of language sounds awful and is very disappointing, but it does not reflect the reality of what happened. There was no short squeeze.” – (Copyright The Financial Times Limited 2010)
