Goldman Denies Betting Against Clients

Goldman Sachs is going on the offensive to defend itself against allegations that it was "betting against" its own clients during the financial crisis. In a letter to shareholders released Wednesday, Goldman executives offered a different way to look at it: The firm had simply hedged its real estate exposure, even as some clients chose to stick with more bullish bets on real estate.

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Goldman Sachs didn't just survive the financial meltdown, it emerged from the crisis bigger and stronger than almost any other U.S. bank. And it racked up a healthy profit last year. But the company has also faced sharp criticism over its bonuses, its relationship to AIG, and its ties to Washington.

Well today, the company fired back at its critics, and NPR's Jim Zarroli reports.

JIM ZARROLI: Goldman's annual letter to shareholders is usually short and perfunctory, but this year it runs eight pages, and the bank uses it to address some of the more pointed criticisms that have been lobbed its way.

For instance, there's the charge that it made money by betting against its own clients in the real estate crash. Way back in 2007, the bank figured out that housing prices were falling and started shorting mortgage-backed securities.

Charles Jones is a professor of finance at Columbia University.

Professor CHARLES JONES (Finance, Columbia University): If they were overall short, they would basically be making money if residential real estate prices fell.

ZARROLI: Critics say that's a big conflict of interest because Goldman was also helping some of its clients, who tend to be big institutional investors, put money into real estate. In the letter, Goldman says it had indeed shorted mortgage assets, but only in limited amounts as a way of containing its potential losses.

Prof. JONES: Their defense is that we're not betting against our clients, we're basically managing our risk.

ZARROLI: Jones says this is the kind of complex risk management banks do all the time to protect and conserve their capital. Goldman is just particularly good at it.

In the letter, Goldman also tries to explain its controversial relationship with AIG, the insurance giant bailed out by the federal government in 2008. AIG used part of its bailout funds to pay off contracts it had with Goldman, sparing it huge losses. Critics have long charged that Goldman got a break because of its close ties to Washington officials like former Treasury Secretary Henry Paulson. Goldman insisted today it never needed special favors from Washington. Because of the way the AIG contracts were set up, its money was protected either way.

Christopher Whalen of Institutional Risk Analytics says Goldman has already addressed its relationship with AIG before.

Mr. CHRISTOPHER WHALEN (Cofounder, Institutional Risk Analytics): The fact that they felt the need to address it as well as some other issues in the letter tells me that they're still feeling very insecure.

ZARROLI: And Whalen says Goldman isn't alone. With Washington barreling toward financial regulation, several other big banks have written shareholder letters this year that take a distinctly defensive tone.

Mr. WHALEN: They are apologizing a little bit for some of the bad acts attributed to the industry. But at the same time, they are not really taking full responsibility.

ZARROLI: Whalen says banks like Citigroup and JPMorgan Chase have been using their shareholder letters to do a little spin.

Mr. WHALEN: They're saying that we are a necessary part of the economy, and almost that you should tolerate these bits of volatility from time to time, because we're so useful and so essential. And they smile as they say it, of course.

ZARROLI: Jim Zarroli, NPR News, New York.

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