Laughing Through the Funeral:
Goldman Sachs and the Subprime-Mortgage Crisis

William Diaz of the 462nd Transportation Battalion feels like he's fighting a war on two fronts. In April, the 39-year-old U.S. Army Reserve corporal is being deployed to Kuwait for a year-long tour.

But for the past few months, Diaz has been fighting another very painful battle in his own backyard: American Servicing Corp., a division of Wells Fargo, is seeking a court order to foreclose on his two-family home in Elizabeth, N.J., a predominately Latino city.

"I am being deployed. I can't say no. If I do, I face court martial. But I feel like I am being forced to choose between my family and my duty to my country," says Diaz.

His voice sounds drained as he recounts his ordeal. He began falling behind on his $4,600 monthly mortgage payment when his employer, New Penn Motor Express, cut his hourly wages by nearly 50 percent and scaled back his hours when the economy tanked. Then, tenants who were renting the other half of his two-family house for $1,300 a month abruptly moved out, leaving him to shoulder the entire monthly payment.

Diaz wants to make sure his wife and three children—Melanie, 15; William, 5; and Ayleen, 2—are taken care of before he leaves for Kuwait, "so I don't have to keep looking back and worrying about whether my family has a roof over their heads or not."

For cash-strapped families like his, all it takes is one hiccup—a jump in interest rates, an illness, the loss of a job, a pay cut—to find themselves staring down the barrel of financial ruin.

These days, the contrast between struggling families on Main Street and bankers on Wall Street who are prospering at their expense could not be sharper. In the midst of the worst financial crisis since the Great Depression, with the U.S. unemployment rate hitting 10 percent and more than 1.4 million Americans filing for bankruptcy in 2009, Goldman Sachs celebrated one of the most profitable years in its 141-year history. In January of this year, Goldman Sachs doled out a hefty $16 billion in bonuses for the 2009 year, up from $10.9 billion in 2008—a pretty staggering feat given that a little more than a year ago, Goldman was forced to take American-taxpayer dollars just to stay alive.

The human tragedy all too frequently goes unnoticed amid the noise and finger-pointing in Washington, D.C., and Wall Street over who is to blame for the subprime debacle and its ensuing economic ramifications. But the trauma, the hardship, the heartache being felt by millions of ordinary Americans who have lost their jobs, their homes and their life savings—most of them Black and Latino—is still very real and still very raw.

"I'm thinking about all the furniture I've seen on the street on my way to and from work in recent months," says NPR "Tell Me More" host Michel Martin. "It's easy to spot; the clothes spilling out of dresser drawers, the bare mattresses, the tables on end. This isn't the thrown-off detritus of a careless mover. These are the worldly goods, no doubt painstakingly accumulated, of someone who no longer has a place to keep them." The saddest thing, Martin continues, "is the kids' stuff; the little chairs or mermaid lamps all thrown around."

Indeed, since the economic meltdown began three years ago, nearly 25 million Americans—more than 16 percent of the U.S. work force—have lost their jobs, are underemployed because they can't find full-time work, or have given up looking for work altogether.

The Staggering Statistics

"U.S. households have seen more than $13 trillion in wealth evaporate—with retirement accounts and life savings swept away as the markets declined," says Phil Angelides, chairman of the Financial Crisis Inquiry Commission.

Since 2007, 2.1 million homes have been foreclosed and sold off, and according to statistics from the Mortgage Bankers Association, nearly 6 million foreclosures have been initiated since 2007. By 2014, that number could rise to 13 million. Additionally, nearly 1 in 10 home loans (4.3 million) are delinquent by more than 30 days but are not yet in foreclosure.

"Not only will millions of people lose their home and family wealth but neighborhoods will be decimated and tens of millions of other homeowners will see their home values decline precipitously," says Julia Gordon, senior policy counsel at the Center for Responsible Lending. "A disproportionate percentage of subprime loans are made in low-income neighborhoods. Black and Latino communities were especially hard-hit by the foreclosure crisis, which has wiped out the asset base in many neighborhoods across the country."

In fact, a study by United for a Fair Economy examining housing and racial bias found the subprime-lending mess has caused the greatest loss of wealth to Blacks and Latinos in modern U.S. history. During the past eight years, Black borrowers have lost between $72 billion and $93 billion from subprime loans, while Latino borrowers have lost between $76 billion and $98 billion during that same time period, according to the report.

"The spillover effect from the wholesale writing of bad loans is that communities are torn apart," the report says. "As one house after another in a neighborhood goes vacant, squatters move in, crime and the likelihood of fires spike, local stores and businesses close."

Despite creating the worst financial crisis since the Great Depression and being bailed out by billions of taxpayer dollars, banks such as Goldman Sachs have bounced back from the financial crisis with bumper profits and are handing out record-breaking bonuses.

Goldman Sachs Breaks Record

Goldman Sachs just handed out $16 billion in bonuses. Try to imagine what $16 billion really means: President Obama is asking for $1.027 billion to fund the Securities and Exchange Commission for 2010. So, Goldman Sachs' $16-billion bonus pool for just one year is enough to run the SEC for the next 16 years.

That $16-billion pot of gold at the end of Goldman Sachs' subprime rainbow is more money than the gross domestic product of nearly half the countries in the world.

If it were split equally among Goldman Sachs' 32,500 employees, it comes out to well over $500,000 in bonus money alone—nearly 10 times the median U.S. household income ($50,303).

And some time during the first half of 2010, men and women who call 85 Broad Street, New York, N.Y., their home are going to get another perk. While struggling homeowners such as Diaz are facing possible eviction, Goldman Sachs is scheduled to move into a new, state-of-the-art, steel-and-glass skyscraper located directly across the street from the World Trade Center site-a $2.1-billion project, heavily subsidized by New York taxpayers as a way to keep the investment bank in lower Manhattan after the Sept. 11, 2001, terrorist attacks. Because its new headquarters was built near the World Trade Center, New York City and state qualified the firm to sell $1.65 billion of tax-free Liberty Bonds and threw in about $66 million of job-grant funds, tax exemptions and energy discounts.

Goldman Sachs, which has never participated in The DiversityInc Top 50 Companies for Diversity® survey, states on its web site that the buyers of its synthetic collateralized debt obligations "were large, sophisticated investors who had the resources to do their own research. These investors had significant in-house research staff to analyze portfolios and structures and to suggest modifications. They did not rely upon the issuing banks in making their investment decisions."

Additionally, Goldman says on its web site that its portfolios were fully disclosed to customers. "Potential buyers could simply decide not to participate if they did not like some or all the securities referenced in a particular portfolio," the company says.

Goldman says it suffered losses because of the deterioration of the housing market and disclosed $1.7 billion in residential mortgage exposure write-downs in 2008. These losses would have been substantially higher had it not hedged, the company says. Goldman described activities as prudent risk management.

Nobody is suggesting Goldman Sachs was singlehandedly responsible for the financial cataclysm that grounded the American economy and vaporized billions of dollars in wealth. According to a report issued by Bernstein Research in November of 2007, Merrill Lynch was largest issuer of these exotic C.D.O.'s, accounting for 17.2 percent of the C.D.O. market share, followed by Citigroup, UBS, Wachovia and ABN AMRO. Goldman Sachs ranked sixth on the list, accounting for 5.4 percent of the market share. In the public's eyes, however, Goldman Sachs has become the de facto poster child for Wall Street excess and greed.

"Ever since the bank crossed paths with U.S. taxpayers, getting saved with at least $10 billion in government aid last year and then parlaying that into [billions of dollars in profits in 2009], the firm has been seen as the ugly essence of capitalism at its most cynical by Washington—by the public, by the financial press, even by some of its clients," writes Joe Hagan, a contributing editor at New York magazine.

Goldman Sachs sold billions of dollars of toxic derivatives, known as synthetic collateralized debt obligations, or C.D.O.'s, and simultaneously placed bets against them—the financial equivalent of giving someone poison and then betting they will get sick.

Or worse: It's like buying fire insurance on someone else's house and then committing arson, explains Sylvain Raynes, an expert in structured finance at R&R Consulting, who was interviewed in a New York Times article exposing the practice.

"The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen," Raynes says.

Public outrage at Goldman Sachs, whose name has suddenly become as toxic as the assets it used to peddle, has started cropping up in the most unlikely places. Recently, Rolling Stone magazine tore into Goldman Sachs, calling the firm "a giant vampire squid wrapped around the face of humanity, repeatedly jamming its blood funnel into anything that smells like money."

It was the insult heard around the world, partly because comparing Goldman Sachs to a small, deep-sea cephalopod just seemed so odd. (Vampire squids pose no actual threat to humans, incidentally.)

But the memorable insult made people sit up and take notice for one other reason: It appeared on the pages of Rolling Stone, the music-industry bible known more for its coverage of sex, drugs and rock n' roll—not high finance.

Suddenly, the general public, the average Joe, the mom-and-pop, was sitting up and taking notice and asking questions. How come Treasury Secretary Hank Paulson, who used to be the CEO at Goldman Sachs, called Lloyd Blankfein, Goldman's current CEO, 24 times in six days just before bailing out bankrupt insurer AIG to the tune of $85 billion? Was it because Goldman Sachs was AIG's largest client?

And while negotiating how much loss large banks like Goldman Sachs would have to swallow on credit default swaps with AIG, why did the Federal Reserve Bank of New York insist Goldman Sachs get paid 100 cents on the dollar? Other banks, such as Merrill Lynch, that bought credit default swaps from other failed insurers only got 13 cents on their dollars in deals moderated by the New York insurance regulators. 

Since then, news reports have surfaced saying the decision to make Goldman whole wasn't AIG's. It was made by the Federal Reserve Bank of New York, back when its president was current U.S. Treasury Secretary Timothy Geithner, and its chairman was Stephen Friedman, a Goldman Sachs director who held a substantial stake in the firm. (He has since resigned.)

"Before AIG was seized, its executives had been negotiating for months with the banks, trying to get them to accept discounts of as much as 40 cents on the dollar," according to a Bloomberg report.

Neel Kashkari, a former Goldman Sachs banker in his 30s, was tapped by Paulson to oversee the Treasury's $700-billion bailout fund. And Edward Liddy, the former Goldman board director, was tapped by Paulson to head the AIG rescue. (He too, has resigned.)

Homeowners Continue to Lose

Ironically, the tax dollars that supported the bailout of Wall Street's "too-big-to-fail" banks and helped pad their bonus coffers came largely from struggling middle-class families—from people like Diaz, already working hard to make ends meet.

Back in 2006, Diaz and his wife, Liliana, purchased their $554,000 two-family house in Elizabeth, N.J. To finance his home, he took out a $436,000 30-year balloon mortgage with an interest rate of 7.5 percent. The catch: At the end of his term, he must pay the bank a whopping $247,162 lump sum.

His $109,000 second mortgage is structured the same way, with an interest rate of 12.5 percent, a balloon payment of $96,000 to be paid to the lender at the end of 20 years, according to Phyllis Salowe-Kaye, executive director of New Jersey Citizen Action, a consumer-advocacy group that is trying to help save Diaz from losing his home.

"Nobody can afford that," she says.

Somehow, between his steady union job as a truck driver, his wife's salary as a bus driver and the rental income he was collecting from his tenants, Diaz was able to cover his $4,600 in monthly mortgage expenses for several years.

Then, the trapdoor shut. The housing bubble burst, the economy hit the skids, his trucking company scaled back his hours and cut his wages by nearly 50 percent, and his tenants moved out.

"I'm about to lose my house," says Diaz, who emigrated from Peru in 1994 and joined the Reserve a few months after the Sept. 11, 2001, terrorist attacks, he says. "I'm working half the time here at [Fort Dix, training for deployment], and half the time at my civilian job trying to support my family. My worry is, if I get deployed, if my family is going to have a place to stay."

"Today, 6.5 million Americans are suffering sleepless nights, every night, wondering if they will have a home tomorrow," Center for Responsible Lending's Gordon said in testimony on Jan. 13 before the Financial Crisis Inquiry Commission, established by Congress eight months ago to investigate the causes of the financial and economic crisis. 

And it's not over yet. "Our data shows that by the end of 2014, 13 million Americans will lose their homes," she said.

Gordon told the commission that despite pocketing billions of dollars from taxpayers, many of these same banks are failing to modify loans at any meaningful rate and often pursue modification plans without stopping foreclosure procedures.

The end result: Hopeful homeowners are often surprised at the door by sheriffs' deputies ready to kick them to the curb.

Wall Street Banks Cheered Lenders

As the real-estate market pushed to its peaks in 2005 and 2006 and home prices across the nation literally doubled, new homes couldn't be built fast enough. This voracious demand encouraged lenders to loosen their guidelines by offering loans to borrowers with even the shakiest credit. Wall Street banks cheered them on, extending generous credit terms to lenders and offering loan officers extra money to push subprime mortgages.

"Wall Street investment banks were subprime mortgage lenders' single most important source of capital and therefore had a tremendous amount of power in the subprime mortgage market," according to subprimer.org.

And as the subprime market took off, major investment banks rushed to acquire subprime-mortgage lenders of their own in order to bring the lending operations in-house.

"Through their relationships with subprime-mortgage lenders, investment banks essentially set the underwriting criteria in the subprime market: They tell the lenders what types of mortgages they want to securitize, how much they will pay for them, and how many they want," Connor says.

 "One of the things that has been frustrating …is the peculiar propensity of quite a few observers to defend Goldman and its brethren, and to argue, effectively, caveat emptor," or buyer beware, writes Yves Smith, the author of the popular and trenchant financial blog "Naked Capitalism."

Smith noted that in virtually every market in the world, sellers who hawk defective or dangerous products or services are on the hook for damages. "Remember those Pintos that turned into fireballs when rear-ended?" she writes. "The pets that died from pet food laced with melamine from China? No one suggested that the buyers of those products were at fault."

And today?

Goldman continues to profit handsomely from the subprime-mortgage fallout. During the boom, Goldman Sachs bought thousands of subprime mortgages, many of them from some of the most toxic lenders in the business, and packaged them into high-yield bonds. "Now that the bottom has fallen out of that market, Goldman finds itself in a different role: as the big banker that takes homes away from folks," says Greg Gordon, an investigative journalist with McClatchy Newspapers who spent five months investigating Goldman Sachs and the role the firm had in the subprime meltdown.

"The primary cause of the subprime problem was a significant number of mortgage lenders originating loans to people who subsequently were unable to meet their payments," says a Goldman Sachs spokesperson. "The firm was not involved in any meaningful origination activity but did end up losing significant amounts of money on mortgages we bought from others."

In fact, Wall Street investment banks, including Goldman Sachs, were subprime-mortgage lenders' single most important source of capital and therefore had a lot of power and influence in the subprime-mortgage market, according to a report issued by Center for Public Integrity. While investment banks such as Lehman Brothers and Merrill Lynch both owned and financed subprime lenders, "others, like Credit Suisse First Boston ... and Goldman Sachs were major financial backers of subprime lenders."

Anyone searching the Internet or financial records for a company called MTGLQ Investors will have a hard time finding out much information about the firm. You will find out it's a Delaware limited partnership and that it's in the business of purchasing and collecting no-performing mortgage notes at deep discounts.

Dig deeper, however, and you discover that MTGLQ is an obscure subsidiary of Goldman Sachs that has been tangling with defaulting homeowners unable to meet their current housing obligations. MTGLQ Investors recently filed more than 50 lawsuits in Las Vegas courts against individual homeowners during a one-month span last year. 

Meanwhile, Goldman also sunk its teeth into the extremely profitable subprime-mortgage servicing business in 2007 with its purchase of Litton Loan Servicing, based out of Houston.

Mortgage servicing, which involves the collection of monthly payments and subsequent late fees, has been one of the few profitable areas of the mortgage industry of late. Loan servicers, such as Goldman's Litton, act as middlemen between borrowers paying their loans and investors who own the mortgages.

They are responsible for monitoring delinquencies and managing billions of dollars in monthly payments and cash flow. And they have no regulatory oversight.

"Concern about servicer integrity is heightened by the key role that the Obama administration is hoping they'll play in the costly unwind of the subprime mortgage mess. The plan is for servicers to modify delinquent loan to more affordable levels, incentivized by taxpayer funds," according to a recent Forbes article.

Unfortunately, mortgage servicers make the bulk of their money on late fees, "so there is a perverse incentive for them not to work out solutions," says Gordon of the Center for Responsible Lending. "There is zero incentive for them to help a family stay in their home."

A Goldman spokesperson says the company purchased Litton because it was recognized as a leading subprime and sub-performing loan servicer. "Given the stress in the U.S. residential mortgage market at the time, a premium was placed on quality workout servicing capabilities," he says.

In December 2009, Huffington Post founder Arianna Huffington launched an initiative called "Move Your Money," urging Americans to do just that: move their money from big banks that helped trigger the financial crisis into smaller community banks.

"Think of the message it will send to Wall Street—and to the White House," she writes on her blog. "That we have had enough of the high-flying, no-limits-casino banking culture that continues to dominate Wall Street and Capitol Hill. That we won't wait on Washington to act, because we know that Washington has, in fact, been a part of the problem from the start. We simply can't count on Congress to fix things. We have to do it ourselves—and the big banks are the core of the problem."