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In late 2007, as
the mortgage crisis gained momentum and many banks were suffering
losses, Goldman Sachs executives traded e-mail messages saying that
they would make “some serious money” betting against the housing
markets.

The messages,
released Saturday by the Senate Permanent Subcommittee on
Investigations, appear to contradict statements by Goldman that left
the impression that the firm lost money on mortgage-related
investments.

In the messages,
Lloyd C. Blankfein, the bank’s chief executive acknowledged in November
2007 that the firm had lost money initially. But it later recovered by
making negative bets, known as short positions, to profit as housing
prices plummeted.

“Of course we didn’t dodge the mortgage mess,” he wrote. “We lost money, then made more than we lost because of shorts.”

He added: “It’s not over, so who knows how it will turn out ultimately.”

Hurting our economy

Actions taken by
Wall Street firms during the housing collapse have become a major
factor in the contentious debate over financial reform. In his weekly
radio address on Saturday, President Obama said Wall Street had “hurt
just about every sector of our economy” and again pressed the case for
tighter regulation.

On Monday, Senate
Democrats will try to prevent a Republican filibuster in the first
major test of the administration’s effort to push through legislation.

Goldman on Saturday
denied it made a significant profit on mortgage-related products in
2007 and 2008. It said the subcommittee had “cherry-picked” e-mail
messages from the nearly 20 million pages of documents it provided.
This sets up a showdown between the Senate subcommittee and Goldman,
which has aggressively defended itself since the Securities and
Exchange Commission filed a security fraud complaint against it nine
days ago.

On Tuesday, seven
current and former Goldman employees, including Mr. Blankfein, are
expected to testify at a Congressional hearing. Carl Levin, Democrat of
Michigan and head of the Permanent Subcommittee on Investigations, said
that the e-mail messages contrasted with Goldman’s public statements
about its trading results.

“The 2009 Goldman
Sachs annual report stated that the firm ‘did not generate enormous net
revenues by betting against residential related products,’” Senator
Levin said in a statement Saturday. “These e-mails show that, in fact,
Goldman made a lot of money by betting against the mortgage market.”

Big profits

At first, Goldman
openly discussed its prescience in calling the housing downfall. In the
third quarter of 2007, the investment bank reported publicly that it
had made big profits on its negative bet on mortgages. But by the end
of 2007, the firm curtailed disclosures about its mortgage trading
results. Its chief financial officer told analysts that they should not
expect Goldman to reveal whether it was long or short on the housing
market.

By late 2008,
Goldman was emphasising its losses, rather than its profits, pointing
regularly to write-downs of $1.7 billion on mortgage assets in 2008 and
not disclosing the amount it made on its negative bets.

Goldman has said it
added shorts to balance its mortgage book, not to make a directional
bet on a market collapse. But the messages released by the subcommittee
Saturday appear to show that in 2007, at least, Goldman’s short bets
were eclipsing the losses on its long positions.

In May 2007, for
instance, Goldman workers e-mailed one another about losses on a bundle
of mortgages issued by Long Beach Mortgage Securities. Though the firm
lost money on those, a worker wrote, there was “good news”: “we own 10
mm in protection.”

That meant Goldman had enough of a bet against the bond that, over all, it profited by $5 million.

On October 11,
2007, one Goldman manager in the trading unit wrote to another, “Sounds
like we will make some serious money,” and received the response, “Yes
we are well positioned.”

Documents released
by the Senate subcommittee appear to indicate that in July 2007,
Goldman’s accounting showed losses of $322 million on positive mortgage
positions, but its negative bet – what Mr. Viniar called “the big
short” – brought in $373 million.

‘We did not know’

As recently as a
week ago, a Goldman spokesman emphasised that the firm had tried only
to hedge its mortgage holdings in 2007. The firm said in its annual
report this month that it did not know back then where housing was
headed, a sentiment expressed by Mr. Blankfein the last time he
appeared before Congress.

“We did not know at
any minute what would happen next, even though there was a lot of
writing,” he told the Financial Crisis Inquiry Commission in January.

In its response
Saturday, Goldman Sachs released an assortment of internal e-mail
messages. They showed workers disagreeing at some junctures over the
direction of the mortgage market. In 2008, Goldman was stung by some
losses on higher-quality mortgage bonds it held, when the crisis
expanded from losses on risky bonds with subprime loans to losses in
mortgages that were given to people with better credit histories.

Still, in late
2006, there are messages that show Goldman executives discussing ways
to get rid of the firm’s positive mortgage positions by selling them to
clients. In one message, Goldman’s chief financial officer, Mr. Viniar,
wrote, “Let’s be aggressive distributing things.”

Several traders from that group will testify on Tuesday.