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Goldman accused of profiting from US sub-prime mortgage collapse

A new report by the US Senate Sub-committee of Investigations calls Goldman Sachs to account for its contribution to the financial crisis.

A case study in the report focuses on how the investment bank used net short positions to benefit from the downturn in the US mortgage market, designing and selling collateralised debt obligations (CDOs) in ways that allowed the bank to profit from the same products that caused “substantial losses” for its clients.

The paper, entitled “Wall Street and the Financial Crisis: Anatomy of a Financial Collapse”, claims that from 2004 to 2008, Goldman was a major player in the US mortgage market but in December 2006, when it saw that the high-risk mortgages underlying many residential mortgage backed securities (RMBS) and CDO securities were headed for default, the bank sold off or wrote down the bulk of its subprime RMBS and CDO portfolio and began building a short position that would allow it to profit from the decline of the US mortgage market.

Furthermore, the sub-committtee states: “Throughout 2007, Goldman sold RMBS and CDO securities to its clients without disclosing its own net short position against the subprime market or its purchase of CDS [credit default swap] contracts to gain from the loss in value of some of the very securities it was selling to its clients”.

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