http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/690...
Goldman Sachs has moved to justify spending millions of dollars short-selling some of the financial products it made and sold to clients.
In a rare statement of defence, the American investment bank has offered a detailed explanation of its dealings in mortgage-backed products, particularly regarding collateralised debt obligations (CDOs), in the years preceding the financial crisis.
The explanation was prompted by an article in the New York Times in which former Goldman employees and debt experts claimed that the bank knew the CDOs it was designing and selling to clients were highly risky. The sources claimed that rather than warning clients of the dangers, Goldman spent millions of dollars "short-selling" the instruments, reaping vast rewards when they imploded.
Sylvain Raynes, an expert in structured finance at R & R Consulting, told the New York Times: "The simultaneous selling of securities to customers and shorting them is the most cynical use of credit information that I have ever seen. When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else's house and then committing arson.''
A spokesman for Goldman said: "We respectfully disagree with this view."
The design and marketing of the disastrous instruments - and the degree to which the arranging banks understood the risks in the years up until 2007 - are the subject of an investigation by American authorities including Congress, the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority.
Proprietary trading, or the banks' practice of trading for their own gain rather than their clients', has already been widely criticised since the financial crisis. Banks are determined to avoid any suggestion that they were also betting against and at the expense of clients.
Goldman admits that it regularly took short positions in CDOs and other synthetic instruments that it designed and sold to clients, it strongly denies that it was motivated by an understanding of the dangers. Instead it says the short positions were merely a simple hedge against its large long mortgage portfolio.
In its statement Goldman said it had suffered significant losses due to its mortgage portfolio, including a $1.7bn write-down in 2008 and added that "these losses would have been substantially higher had we not hedged."
The bank pointed to the fact for every buyer of a CDO there had to be a seller, due to the way the market was designed. Goldman claims that high demand from investors meant that the arranging banks like itself and others were the "natural shorts" - and that investors were always aware of this.
The danger in the CDOs was not foreseen but instead resulted in losses for "financial institutions including Goldman, effectively putting an end to this market."
Separately, a small Chinese power generator said it is refusing to pay $80m lost on two hedging contracts as part of an on-going row that investment banks produced "extremely complicated" derivative products that were impossible to understand. Shenzhen Nanshan Power warned in a statement that the "possibility of using a lawsuit can not be ruled out."