Finance

It Doesn't Matter Whether Goldman Was Long Or Short

Did Goldman Sachs make money or lose money when the housing market collapsed? There's been a lot of hand waving about this question in the runup to today's Senate hearings on Goldman.

But the question is largely irrelevant.

Carl Levin, who chairs the subcommittee that's holding the hearings, says Goldman made money in 2007 from betting that housing prices would fall.

"Goldman Sachs made billions of dollars from betting against the housing market, and it placed those bets in some cases at the same time it was selling mortgage related securities to its clients," Levin said in a statement.

This overview from Goldman suggests the firm did make money from the housing market in 2007 — then lost a lot of money in 2008, as the housing market continued to decline.

"During the two years of the financial crisis, while profitable overall, Goldman Sachs lost approximately $1.2 billion from our activities in the residential housing market," Lloyd Blankfein says in his testimony prepared for today's hearing.

It's possible that both men are right — Goldman may have made a profit on its mortgage bets in 2007, then lost enough in 2008 to wipe out the previous year's profits.

But it doesn't really matter who's right.

Some of Goldman Sachs's clients were betting the housing market would rise in 2007 and 2008. Some were betting it would fall. Goldman itself made some bets that would pay off if the market rose, and others that would pay off if the market fell.

In a sense, a company like Goldman — which is in the middle of all sorts of transactions, and is also making its own bets on the market — is always betting in the same direction as some of its clients, and betting in the opposite direction as others.

Somehow, this seems to inspires less ire when Goldman takes a long position — that is, when it bets that the market will go up. Suppose Goldman had been long the housing market during the entire crisis, and had clearly lost a lot of money. It seems unlikely that anyone would be saying that Goldman improperly "bet against" its clients that were short the housing market at the time.

So the key question isn't whether Goldman was net short or net long the housing market. It's whether the company told its clients everything it should have told them.

The issue of disclosure is at the center of the SEC's fraud lawsuit against Goldman. The SEC says Goldman wrongly failed to tell its clients about the role of a hedge fund that took a short position on a mortgage-related security. Goldman denies the charges.

Beyond the single transaction at issue in the SEC lawsuit, questions about what Goldman told its clients — whether it told them the truth, and whether it kept secret facts it should have disclosed — may ultimately be more important than whether the bank was short or long.

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