Goldman Sachs underwrote $14.5 billion in CDOs in 2006 and took short positions against only 1% of the total, according to prepared testimony to be delivered today before the financial crisis inquiry commission.
Gary Cohn, president and chief operating officer at Goldman, told the commission that the firm additionally underwrote nearly $47 billion in RMBS during the same period, held $2.4 billion in bonds issued by the RMBS securitization trusts, and bought protection against an additional 1% of the underwritten total.
“During the two years of the financial crisis, Goldman Sachs lost $1.2 billion in its residential mortgage-related business,” the prepared testimony stated. “We did not ‘bet against our clients’, and the numbers underscore this fact.”
Cohn will assure the commission that the firm’s short positions reflected standard business strategy in light of the volatile housing market and does not indicate a prediction of the downturn in 2008.
“In fact, there were many different views within our firm, let alone in the wider market, as to the future direction of housing prices and the value of mortgage securities,” the testimony reads. “But, having observed a series of daily losses in our mortgages business through the daily marking to market of our positions, it seemed prudent to reduce our net exposure to the subprime residential housing market.”
Cohn added: “Again, this was not the result of any special foresight or any factor other than an adherence to our risk management protocols. When a pattern of losses occur in a business, we attempt to reduce our risk.”
He will also defend the firm’s use of derivatives, describing their function and purpose to the commission and their use in protecting against factors such as inflation and credit risk. Derivatives, according to Cohn, play an integral role in how Goldman manages risk and should not be disregarded simply on account of their complexity as financial instruments.