Fresh Air Interviews: New York Times reporter Gretchen Morgenson, 'Examining Goldman Sachs' The Securities and Exchange Commission's case against Goldman Sachs hinges on whether the Wall Street titan should have told its customers more about the derivatives it was selling them. But The New York Times' Gretchen Morgenson wonders whether the rating agencies and those who bought the derivatives should have done more homework.
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Full Disclosure And The Goldman Sachs Investigation

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Full Disclosure And The Goldman Sachs Investigation

Full Disclosure And The Goldman Sachs Investigation

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This is FRESH AIR. I'm Terry Gross.

The investment bank Goldman Sachs has been a player in several of the plot twists in the financial crisis, and we're going to try to connect the dots.

Goldman created and sold some of the mortgage investment vehicles like CDOs, collateralized debt obligations, which became toxic when the housing bubble burst. Goldman is now being investigated by the Securities and Exchange Commission, which filed a suit accusing it of fraud in a deal where the bank allegedly created and sold a CDO in conjunction with a hedge fund without telling the buyers that the CDO was designed to fail.

The Justice Department has opened a criminal investigation into Goldman. Last week, executives from Goldman testified before the Senate Subcommittee on Permanent Investigations. Goldman received $10 billion in federal bailout money, which it paid back last year.

Our guest is Pulitzer Prize-winning journalist Gretchen Morgenson, who is a financial reporter and columnist for the New York Times.

Gretchen Morgenson, welcome back to FRESH AIR.

So we're going to be talking about Goldman Sachs. Let's start with just like an overview of the role Goldman played in creating and spreading the toxic derivatives, just like a brief overview, and then we'll get into all the specifics.

Ms. GRETCHEN MORGENSON (New York Times): Well, Terry, as you know, all of Wall Street was feeding at the subprime trough during the mortgage mania. There were a couple of banks that took an extra role in creating these really kind of wacky derivative pools of mortgages that really did not contain mortgages at all but just referred to other pools of mortgages.

These were these so-called synthetic collateralized debt obligations. This was a sort of step beyond just the pooling of mortgages and slicing and dicing them and selling them to investors, as had been happening for many years.

Goldman was one of the larger creators of these. Merrill Lynch was enormous in this, Deutsche Bank also. But what has brought scrutiny to Goldman recently is the creation of a particular pool of mortgages that was really built by someone who was taking a negative stance on mortgages, someone who wanted to create a portfolio that would be more likely to fail, to collapse, to decline in value, than one that would perform well.

GROSS: This leads right into the investigation or investigations ongoing now into Goldman Sachs. The SEC, the Securities and Exchange Commission, is investigating fraud involving one of Goldman's funds. This is a civil suit for deceiving investors in mortgage-related derivatives. What exactly is the SEC investigating?

Ms. MORGENSON: What the SEC really is saying is that they have omitted a material detail in the selling of this security. Here's how it was created. It was created with a very big hedge fund that was a client of Goldman Sachs. It was called the Paulson and Company Hedge Fund, and it was run by a man named John Paulson, who has subsequently become very famous for making billions of dollars betting against subprime mortgages when people were still sort of thinking everything was fine.

Now, he and Goldman put together this portfolio of mortgages that were then sold to Goldman's clients. But the element that is at the crux of the case is Mr. Paulson had interest in this portfolio being filled with sort of toxic mortgages, mortgages that were less likely to perform well, that were really sort of on the precipice already.

So was it right for Goldman Sachs to sell such a portfolio to its clients without disclosing that this person who was selecting the portfolio had a negative bet on and was therefore opposed to the people who were buying it, who were hoping that it would perform and that the mortgages would continue to pay?

GROSS: So the suit names Fabrice Tourre, who is a vice president at Goldman, who helped create and sell these derivatives. How come the suit doesn't name the hedge fund manager who helped create the derivative and then betted against it?

Ms. MORGENSON: Well, John Paulson, the hedge fund manager who is involved, did not have a duty to disclose to investors his role in it because he was not selling the securities. Goldman Sachs did have a duty, perhaps - that's what the SEC is asking because it is the seller of the securities and the securities laws require full disclosure of material information when you make a sale of securities.

So it really wasn't Mr. Paulson's duty to, you know, tell the banks that were buying these securities, hey, look, I'm here, I want them to fail, I'm making a negative bet - but it might have been Goldman's duty to do so, and that is what the case will adjudicate.

GROSS: So you know, what you're saying, or I guess what the SEC is saying, is that Goldman intentionally designed derivatives to fail, knowing that the mortgage market was going to fail, or betting that the mortgage market was going to fail, and then sold it to customers without telling them that these derivatives were designed to fail.

Ms. MORGENSON: Exactly. Now, Goldman Sachs, of course, has strenuously denied that that it did anything wrong. In fact, they say we didn't know the mortgage market was going to collapse and so therefore we could have been wrong; and you know, we were not in a position to know with certainty that it was going to collapse. But yes, that's essentially the heart of the matter: should they have disclosed to their customers who were buying this portfolio that, in fact, it had been, you know, sort of almost rigged?

GROSS: So the SEC is investigating Goldman Sachs now, and a criminal investigation was just opened in New York. So what is the Justice Department investigating?

Ms. MORGENSON: We don't know with any certainty what the Justice Department is looking at in this matter, but we can really take some good ideas about where they're going. The problem is, I think, Terry, that much of Wall Street has become so riddled with conflicts of interest that there are tremendous opportunities for mischief and worse if you are a very well connected, politically connected, and powerful investment bank.

For instance, you get very crucial information from your customers about what they're doing, which may have a real impact on the market. The temptation to trade in front of that, to profit from that information ahead of it being made public is very tempting.

Even by just seeing the flow of trades that very large institutions do gives a brokerage firm immense information on where the market is going because these huge trades can really move the market, whether it's a stock, a bond, even a currency. And so just knowing what their customers are doing or are about to do is tremendously important information.

There is just all kinds of information that, say, an investment advisor who is advising a company on a merger or an acquisition or any other divestiture, any other kind of corporate finance decision, that kind of information - you know, are there very firm and strict rules against that? The firms say there are. But if you were to investigate, might you find that the so-called Chinese walls between these businesses are sort of porous? Well, you might. And so perhaps the Justice Department is looking at that.

These are very, very complex and interconnected businesses, and they might be looking to see if the large firms were taking advantage of the really important information that they were receiving.

GROSS: So what you're describing basically is variations on the theme insider trading.

Ms. MORGENSON: Insider trading, trading ahead. You're not supposed to trade ahead of your customers because that makes the market move ahead of them, gives them a worse price than they would've gotten otherwise in that security, whatever they're trading.

You know, you're supposed to keep this information to yourself and not use it and not take advantage of it or profit from it.

GROSS: So do you think either of these investigations, the SEC investigation or the criminal investigation, stand a chance? And I ask this in the sense that the instruments that are under investigation aren't regulated.

Ms. MORGENSON: But the firms that sold them are regulated, and that is the crux of the SEC case. Goldman Sachs is regulated by the SEC, and so to the degree that it, you know, does something wrong in the creating and selling of a security, then it absolutely is regulated.

It's perhaps not as well-regulated as stocks are, but, you know, it still is the creator of these kinds of securities and instruments, and it is therefore regulated.

Now, as for the fact of, you know, whether this case, this SEC case, will be won or lost by the government, it's very hard to say. I've, as you have, I'm sure, read a lot of opinions by, you know, established securities lawyers about whether or not this case has merit, will be difficult, winnable, et cetera.

And you know, I think that the bottom line is I am obviously not a lawyer, I don't know whether they will win it. But the bottom line to me is, and a very important thing is that the disclosure of this transaction, of its creation, how it was structured, the designed-to-fail element of this, is so important for people to understand that just putting it out there in the public domain as the SEC did in its civil complaint against Goldman Sachs is a huge service, because people need to know what kinds of instruments are being created.

And people are still grasping for why we got into such a, you know, disastrous situation because a couple of, you know, hundreds of millions of subprime mortgages were written. Well, how did we get to trillions of dollars in losses? Well, these kinds of securities are at the heart of why.

GROSS: So let me ask you this. Lloyd Blankfein, who's the CEO of Goldman Sachs, was on Charlie Rose Friday night, and he said we're like a machine that lets people buy and sell what they want to buy and sell. That's not the advisory business. That's just a facility for market making. Does he have a point?

Ms. MORGENSON: He has a point, but I think that if you read the emails that the Senate Permanent Subcommittee on Investigations released last week, you will see that Goldman Sachs salespeople were selling this hard.

This was not a case where the investors were coming to them begging them for exposure to this portfolio. Like other things on Wall Street, this portfolio was sold, not bought, and many of these portfolios were sold, not bought.

And you can see it in these emails. They're fascinating, Terry. They talk about let's increase the amount of money that the salesmen will get to move this merchandise. We've got to get it out. Let's move it, move it. I mean, they're just pushing it like crazy.

So, you know, I take what he says with a grain of salt because this was not stuff that was so popular it was flying off the shelves, not like a Google IPO, for instance, or an Amazon IPO, something where the interest in it from investors was so huge that you couldn't - you know, the supply was not, you know, enough for the demand. This was very complicated stuff that was sold, not bought.

GROSS: There's an email that was released by Fabrice Tourre, who was the Goldman executive involved with the creation of this fund. I'll read an excerpt of an email he wrote to a friend in 2007: When I think I had some input into the creation of this product, which by the way is a product of pure intellectual masturbation, the type of thing which you invent, telling yourself, well, what if we created a thing which has no purpose, which is absolutely conceptual and highly theoretical and which nobody knows how to price, it sickens the heart to see how it's shot down in mid-flight. It's a little like Frankenstein turning against his own inventor.

Ms. MORGENSON: Well, he speaks very eloquently about what is essentially a product that was created out of thin air, that had no social purpose, that in fact exacerbated the mortgage meltdown because it created more losses for the same amount of subprime loans. You know, you didn't create more subprime loans to build this security, but you created more losses on the same number of subprime loans because you really weren't putting new loans into this security.

So it has no social purpose. It benefits only the people who are, you know, selling it, creating it and winning from it. It doesn't create jobs. It doesn't create wealth for, you know, large numbers of people. This is just about a transfer of wealth from people who were ignorant of perhaps important details about the elements of this security, transfer of wealth from them to someone who was picking the portfolio so that they could benefit.

GROSS: My guest is Gretchen Morgenson, a financial reporter and columnist for the New York Times. We'll talk more after a break. This is FRESH AIR.

(Soundbite of music)

Ms. MORGENSON: If you're just joining us, my guest is Gretchen Morgenson. She's a Pulitzer Prize-winning journalist who's a financial columnist and reporter for the New York Times, and we're talking about the role of Goldman Sachs in the financial crisis and the investigations that are ongoing into Goldman Sachs.

Now, we're trying to trace some of the ways that Goldman Sachs shows up in the financial crisis, and one of the places that Goldman becomes a big player is in the bailout of AIG, the big financial giant that insured so many of these bets that went bad during the financial crisis.

So why you've actually described this connection between AIG and Goldman as the heart of darkness in the financial crisis? What leads you to say that?

Ms. MORGENSON: AIG and Goldman had a very, very long and very lucrative relationship. So when these mortgages started to go bad, AIG was on the hook, had to come had to start generating cash back to Goldman Sachs in the form of collateral to cover the decline in the underlying securities that they had insured.

That is really what pushed AIG to the precipice. These demands for cash from Goldman and other parties, but Goldman predominantly, really was what really stressed AIG and forced the government's hand in having to come in and supply it with initially an $85 billion loan and then an additional amount that's now up to 170. So AIG and Goldman are really central to the crisis and to one of the biggest taxpayer bailouts.

Then subsequently one of the most disturbing aspects of this episode was the fact that AIG, because it had insured these bets, still had many of them on the books with its clients, such as Goldman Sachs. And what the government decided to do as a part of the bailout was to rip up these contracts and to pay the trading partners, in this case Goldman and some European banks, 100 cents on the dollar for the value of those contracts.

What makes this discouraging and dispiriting is that other transactions that were done between parties in a similar vein were done at far lower prices, like 22 cents on the dollar, 30 cents on the dollar. So the fact that the government did not negotiate harder with these counter-parties, with Goldman Sachs, and say, look, you're going to take less than 100 cents on the dollar for these contracts, we're going to give you 80, we're going to give you 75, to save the taxpayers' dime; the fact that that wasn't done is really a complete puzzlement.

GROSS: So when the housing bubble burst, and the securities that Goldman created started losing money, Goldman started asking for its insurance money from AIG and forced AIG to pay it. What's wrong with that? I mean, AIG had insured the stuff. So why, what's wrong with Goldman saying pay up immediately?

Ms. MORGENSON: Well, there's nothing wrong with it. That was actually the terms of the contract, and so it was something that was enforceable and, you know, actually did occur. But the problem with it, there are a couple of issues that I think need to be further investigated.

One is: What were the terms? Who was deciding what the valuation of these securities was? Was it Goldman Sachs? That's a question, because the collateral calls were based upon the valuations.

I think that we also really just want to know why they needed to receive 100 cents on the dollar when ripping up these contracts when other parties were receiving far less.

GROSS: So Goldman received a lot of direct bailout money, and then it also received money through the AIG bailout (unintelligible) the AIG bailout money ended up going to Goldman.

Ms. MORGENSON: That's right, and Goldman became a bank holding company, which meant that it could have access to all of the Fed's facilities, which was an extremely, you know, important sort of shelter for any kind of financial institution that felt that they were, you know, under any kind of duress to be able to, you know, use the Fed's windows and exchange securities with the Fed, and that's a very, very important thing for a bank to have.

And when it was a securities firm, it did not have access to that, but suddenly it was a bank holding company, and it did. So that was another element of government protection that Goldman Sachs received.

GROSS: For a while it was looking like Goldman was the bank that was or a bank that was going to do really well while other banks were having serious problems, right after the financial crisis and during the financial crisis. But Goldman's stock has plummeted. Its rating was downgraded. So Goldman isn't looking so good right now.

Ms. MORGENSON: Well, the reason that its stock plummeted, Terry, is because of the investigations. Goldman is extremely profitable. It just had an enormous profit in the first quarter of this year.

It did do far better than other investment banks during the period and after the crisis, and part of the reason for that was that they were so negative on mortgages and they had made tremendous bets against the mortgage market and had won big time on those bets.

They had eliminated some of their risk by selling off mortgages that they had on their books to their customers. When they realized that they felt that the mortgage market was at peril - this was in, you know, say, February, March of '07, the emails show - it was like sell everything, get rid of everything, we've got to move this stuff off our books because we think, you know, it's really going to get ugly.

GROSS: Gretchen Morgenson will be back in the second half of the show. She's a financial reporter and columnist for the New York Times. I'm Terry Gross, and this is FRESH AIR.

(Soundbite of music)

GROSS: This is FRESH AIR. I'm Terry Gross, back with Gretchen Morgenson, a financial reporter and columnist for The New York Times. We've been talking about the role of Goldman Sachs in the financial crisis and the current investigations into this investment bank. Goldman is being investigated for selling derivatives that were allegedly designed to fail because they were created in conjunction with a hedge fund that planned to bet against the derivatives, yet these derivatives received good ratings.

Let's talk about the ratings agencies. In an article that you co-wrote with your colleague at The Times, Louise Story, you wrote: One of the mysteries of the financial crisis is how mortgage investments that turned out to be so bad earned credit ratings that made them look so good.

So what would you like to add here about how this whole story wouldn't have been possible without the ratings agencies giving triple-A ratings to some of the things that have now been downgraded to junk status?

Ms. MORGENSON: The ratings agencies are really central to how this episode unwound and how many trillions of losses investors are sustaining because they really did not do the due diligence that they needed to do to be able to assign ratings that were actually reflective of what these securities' likelihood of default were. One of the things that we found in our reporting for that article was that the rating agency's models were basically shared with Wall Street. And this was done with, you know, all above board and in the best of all intentions in the idea of transparency.

But what they did was they would share their models - these were computer models that you could, you know, dump certain characteristics, put in mortgage, you know, pieces of mortgage tranches and the model would then sort of spit out a rating. So you would put in these different elements, and then you'd get your rating.

Well, what the Wall Street firms would do is that they soon learned how to massage these models, how to change one or two little inputs and then get the better rating as a result. And so the Wall Street firms sort of learned how to game the system. They learned how to game the rating agency's models so that they could put lesser quality bonds into these portfolios, still get a high rating, and then, you know, sell the junk that they might not have otherwise been able to sell.

GROSS: And you reported that Goldman and other banks hired analysts from the ratings agencies to help them game the system, to help them construct these deals so that they'd look better than they really were.

Ms. MORGENSON: Well, you know, there is always, always an element of the revolving door in these stories. And, you know, I think one thing to remember is that rating agencies paid these people far, far less than the Wall Street firms would. And so there was always this idea that that was the goal. That was the hope that rating agency analysts would have. Wow, to go to work at Goldman Sachs or Morgan Stanley or Merrill Lynch, that was a, you know, that was the Holy Grail. So, again, it was easy to bring them on, because the money was just so much greater.

GROSS: So the Senate subcommittee that's looking into Goldman Sachs uncovered an email from a Standard & Poor's employee, and S&P is one of the big ratings agencies, and the email explained that a meeting is necessary to, quote, "discuss adjusting criteria," unquote, for assessing housing-backed securities, quote, "because of the ongoing threat of losing deals," unquote.

What does that mean?

Ms. MORGENSON: Well, you know, there are three credit rating agencies, and they all compete for business. The payments that they received for rating these very complex pools of mortgages were enormous. They were very, very lucrative, and they did not want to lose business. And so, let's say you're an issuer. Let's say you're a bank. You're Goldman Sachs. You're putting together this pool, and you wanted to have, obviously, the best possible rating, because then more institutions will be able to buy it and be interested in buying it. And let's say Standard & Poor's says, I'm sorry. I'm going to give it this slightly lower rating.

Well, then you say, well, I'm going to take it to Moody's and Fitch. I'll take it to them. They'll rate it. You know, if you don't come across, then that's the outcome. You're going to lose the business. It's a very lucrative business. I can go elsewhere. And so, it became this, you know, yet again, desire for profits that really sort of made the system kind of fall down. Because if you're only worried about profits and you're not worried about what the outcome is for the buyer of the security - keep in mind Terry, it's not the buyer of the instrument that pays for the rating. It's the seller, the issuer of the instrument that pays for the rating. So, you know, to keep the issuer happy, it seems that the ratings agencies were willing to cut corners.

GROSS: Let's go back for a second to the derivative in question in the Goldman investigation, the one that was designed with the help of a hedge fund manager that was going to bet against the mortgages in the derivative.

Ms. MORGENSON: Mm-hmm. Mm-hmm.

GROSS: Did this derivative get a good rating from the rating agency?

Ms. MORGENSON: The Abacus deal that's at the heart of the SEC case did get good ratings from the rating agencies. And interestingly Terry, a former executive from Moody's testified to the Senate Permanent Investigations Subcommittee that he did not know that Paulson - John Paulson - was choosing the portfolio, and that it would have certainly changed Moody's view of the portfolio had they known that this person was, you know, selecting a portfolio with an idea that it would fail or that it would be, you know, likely to decline in value. So it what was interesting that that came up at a hearing that was prior to the Goldman Sachs hearing, but by the same subcommittee, and it was very interesting to hear that person say that.

GROSS: Is there a legitimate argument in saying the people who bought the derivatives from Goldman, it was their job to investigate whether these securities were worth investing in or not? It's Goldman's job to sell them. It's the buyer's job. Buyer beware. It's the buyer's job to do due diligence and investigate the product.

Ms. MORGENSON: That's a very good question, Terry, and I think that that is a key defense that Goldman will have in its case here. This, again, gets to the point of the importance of the rating agencies in these transactions. These were securities that had thousands of loans in them, and there was absolutely no transparency about these loans for the average buyer to be able to look at. I mean, you didn't have weeks to look at this portfolio and say, yes, I'll buy it after I've examined all of the loans in it, or even a sample of the loans in it.

These investors were taking the rating agencies at their word, that the rating agencies had done the work, that these, in fact, were high-grade securities that would be likely to perform over time and not default. And so shame on the buyers for relying on the ratings agencies, but shame on the ratings agencies for not doing their work. The chain of blame is very extensive here. But it's not clear to me that an investor could actually have gotten to the bottom of all of these securities in the amount of time that they had to make their decision about whether they were going to buy it or not.

GROSS: My guest is Gretchen Morgenson, a financial reporter and columnist for The New York Times.

We'll talk more after a break.

This is FRESH AIR.

(Soundbite of music)

GROSS: If you're just joining us, my guest is Pulitzer Prize-winning journalist Gretchen Morgenson. She's a reporter and financial columnist for The New York Times. We're looking at the role of Goldman Sachs in the financial crisis and the current investigations into the investment bank.

Congress is currently debating a financial reform bill. Would any of the provisions that are on the table now have stopped what we're talking about? Would they have stopped the creation of a more mortgage-related security that was done in collaboration with a hedge fund, and it was designed to fail? Would they have stopped ratings agencies from competing with each other, and therefore maybe giving better ratings than securities deserved because they want the business of the investment bank, and it's the investment banks that hire the ratings agencies, not the people who are buying the vehicles from the banks? Would what's on the table address any of that?

Ms. MORGENSON: Unfortunately, no. The reform bills that are floating around and, I think, are up for discussion this week, you know, really don't do much about the credit rating agencies at all. And it's really very discouraging, because they did play such a central role. As far as the, you know, putting some sort of limits on the creation of these types of securities, you know, absolutely not. In fact, you know, Wall Street is known for its creativity, and I think that you would have immense pushback from investment banks, commercial banks, etcetera, if people started of prescribing all kinds of securities they could create.

And also, keep in mind Terry, it's always, you know, you're looking backwards on this kind of thing, and, you know, the next crisis will be about some other type of security. It won't be about mortgages. And so the degree to which you were prescriptive on mortgage securities may not even have any, you know, meaning for the next crisis down the road. You know, I think that the most kind of distressing aspect of these bills is that they don't really do anything about the element of too big and too politically interconnected to fail companies, and that is the heart of this matter.

And there's really very little in the bills to discourage companies from becoming large. There's certainly nothing in it to make companies smaller so that they're less threatening to the entire financial system. So it's an enormous bill, many, many, many, many, pages between the two of them, and yet some of the most crucial elements are not being addressed.

GROSS: What kind of regulation is being proposed in those bills for the kind of derivatives that are behind the financial crisis?

Ms. MORGENSON: Well, I think one of the pieces that is out there is that they would require companies that pool mortgages into securities to keep a portion of those securities on their balance sheet, sort of skin-in-the-game type of a mentality. So it gets rid of this idea that you're just offloading things to somebody else and you have no interest in doing due diligence and no interest in really making sure that the mortgages will perform.

GROSS: So, finally, how do you think the investigation into Goldman Sachs and the revelations that are coming out of those investigations is affecting Wall Street in general?

Ms. MORGENSON: I think that the investigations are shedding light on Wall Street practices, and that's very, very good for the public to pay attention to. You know, these are very powerful companies who like to maintain that they are, you know, pillars of the community, that they are creating jobs, that they're creating capital, helping to facilitate capital raising for companies. You know, but the degree to which you see creation of securities that really have no purpose other than to benefit either the firm itself or one of its favorite clients I think is a good education for people to see.

I think it's important that we understand, you know, sort of how far afield from the idea of raising capital for companies to create jobs -which is Wall Street's, you know, supposed reason for being - how far afield from that we have come. And I think that's a really important piece for people to understand. So it's devastating Wall Street. Goldman Sachs's stock has declined tremendously since the SEC's case was filed. And I think that people are worried about possible other, you know, headline risk, as they call it, going forward.

But I think that it is not simply limited to Goldman Sachs. Other firms did these kinds of things, and I think that the degree to which it brings scrutiny to these practices so that we can have a real airing and a real discussion about what is - what are their purposes? What were they designed for? Is it good for America? I think that's good. I think that's a wonderful conversation to have, and we really must have it.

GROSS: Gretchen Morgenson, thank you so much for talking with us and for explaining some of what's going on now. Thank you.

Ms. MORGENSON: You're welcome.

GROSS: Gretchen Morgenson is a financial reporter and columnist for The New York Times.

There's now a great song about CDO's and the financial crisis, thanks to our friends at Chicago Public Radio's THIS AMERICAN LIFE. They recently featured a story about people making money off the financial crisis in a vain strikingly similar to the recent news about Goldman Sachs. That story about a hedge fund called Magnetar was investigated by reporters at ProPublica for NPR's Planet Money.

Here's the song written especially for that story, "Bet Against the American Dream," with music and lyrics by Robert Lopez, produced by Stephen Oremus.

(Soundbite of song, "Bet Against the American Dream")

Mr. JOHN TREACY EAGAN (Singer): Step 1: We write a check for $10 million dollars, hand the check to a Wall Street bank and ask them to make us a CDO. Step 2: They create the CDO using risky stuff, very risky stuff -extremely risky stuff. Step 3: Other investors commit hundreds of millions of dollars to the CDO. Step 4: We bet against the CDO using a credit default swap. Step 5: The housing market crashes. The CDO's value drops to zero. Our bet pays off, and we make hundreds of millions of dollars. And before you can say step six, we're rich.

(Singing) We're going to bet against the American dream, we're going to be on the winning team, purchase risky debt on a massive scale. Then place a bet that the debt will fail.

Mr. CHRISTIAN BORLE (Singer): (Singing) Hundreds of millions for Magnetar, the economy collapsing like a dying star.

Mr. EAGAN: (Singing) No one will know till it's on NPR.

Mr. EAGAN and Mr. BORLE: (Singing) And who cares?

Mr. EAGAN: (Singing) It's time to hit the town.

Mr. BORLE: (Singing) This sucker could go down.

Mr. EAGAN and Mr. BORLE: (Singing) The housing market's losing steam. And all we got to do to make our dreams come true is bet against the American dream.

GROSS: Thanks again to THIS AMERICAN LIFE for that song. You'll find a link to it, along with links to some of Gretchen Morgenson's articles on Goldman Sachs, on our Web site:

Coming up: We listen back to an interview with actress Lynn Redgrave. She died of cancer Sunday.

This is FRESH AIR.

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