Global Crisis/Innovation Blog

Goldman Sachs Chopped Down the Cherry Tree – And Denies It!

By Shlomo Maital

 George / Goldman Sachs

  There is a legend about George Washington, that he chopped down a cherry tree, and then, when his father queried him about it,  admitted doing the deed, saying “I cannot tell a lie!”.  Naturally historians have cast doubt on the story.  They miss the point.  The fact that the story resonated throughout American history, and was told and retold, becoming part of American culture, is far more important than whether it really happened.

   After a lengthy investigation by the U.S. Senate Permanent Subcommittee on Investigation, led by Senator Carl Levin, it is clear that while Goldman Sachs sold mortgage-backed securities short, and profited enormously from the 2007-9 global crisis,  they consistently denied doing so. “We didn’t have a massive short against the housing market”, Goldman Sachs CEO Lloyd Blankfein told Congress.  Yes, Lloyd, you did.  You chopped down the cherry tree, and then denied it.   What is hard to understand is why Goldman Sachs continues to deny turning the cherry tree into wood shavings.  Isn’t it preferable to be seen as super smart, ahead of the curve, able to anticipate trends others cannot?  Why is Goldman Sachs playing dumb?

    According to the Senate subcommittee, they found the phrase “net short” (meaning, a position in which Goldman Sachs has sold more of an asset than they actually own) some 3,400 times, according to Andrew Ross Sorkin, writing in the Global NY Times (Wed. April 20, p. 18).   Goldman Sachs wrote to the Securities Exchange Committee, in a letter, that “during most of 2007 we maintained a net short subprime position and therefore stood to benefit from declining prices in the mortgage market”. 

    Thanks, Goldman Sachs.  What the Senate report does not say, is that you not only shorted the subprime market, you kept this a closely guarded secret – because if the rest of us had found out, we might have done the same, and then the cat would have been out of the bag.  Your profits would decline, and perhaps the eventual collapse might have been precipitated earlier, and hence been much less disastrous. 

    For Goldman Sachs, 2007 was a record year because of its mortgage department. This, while everyone else was losing their shirt. 

   Take a bow, Goldman Sachs!  You put one over on us.  And now, by denying you vaporized the housing cherry tree, you are doing it again.

   Why will anything Goldman Sachs says never be credible again?   George Washington knows.