How Goldman Sachs made money from the sub-prime mortgage crisis

Last year, as I am sure you have heard, there was some trouble in the U.S. sub-prime mortage market. Lots of financial companies on Wall Street lost billions, except Goldman Sachs (WSJ article, Guardian article). Bloomberg.com columnist Michael Lewis draws an interesting conclusion from this:

I can’t think of another example of a big Wall Street firm saying so clearly through its trading positions as Goldman Sachs did over the past year that it thinks the rest of its industry, including its own people, is a bunch of idiots. They have obviously designed their firm to take into account their idiocy — without ever having to put too fine a point on it.

(Ironically, making billions while everyone else loses money may actually get Goldman Sachs in trouble.)

This has very, very little to do with games, but I found this a fascinating story. I find it interesting how industries and big companies deal with situations like this. (I may find this a lot less interesting if civilization collapses due to this, but well, we’ll deal with that when we get there.)

(Via Kottke.)

Comments 2

  1. Mark Barrett wrote:

    “Last year, as I am sure you have heard, there was some trouble in the U.S. sub-prime mortage market.”

    A little history here.

    Way back in the mid-90’s a great, great deal of cash — piles of it, as measured in billions of dollars — began to drift into the equities markets as the dot-coms began to flourish. For five solid years more and more money moved out of other stocks, out of treasuries (debt), out of real estate, out of gold, out of everthing, in order to ride the tech-stock momentum.

    In 2000/2001, the stock market bubble(s) burst, and a lot of people lost their shirts. But a lot of other people — and a lot of banking/financial institutions on Wall St. — were left with great piles of that cash, and they weren’t exactly sure what to do with it. So they did what any good investor would do when equities go soft: they put it into real estate.

    Now, the single investor just upgraded his own home. Maybe he built an addition, maybe he tore off the roof and added a second floor, maybe he just moved up from his starter home to a three-car-garage McMansion. But the investor types, sitting on all those millions and billions invested in things like REITs, and in the business of writing and trading mortgages.

    Thus began the second investing bubble in the US, made up from the same massive pile of available capital. The housing bubble, like the stock market bubble, has now broken in the US, and the downturn is unlike anything anyone has seen before. Housing prices are actually decreasing in real terms, which hasn’t happened in forty years of tracking such statistics. Over 100 Billion dollars has already been written off by Wall St. investment firms, and more blood will flow in the coming year.

    It’s ugly. It’s going to hurt a lot of people. A lot of people are going to lose their homes — in part because of their own greed or stupidity — and there’s not a lot anyone can do about it.

    In this context, Goldman Sachs gambled and won. And in America we celebrate such things, if only as a means of ignoring all the people who gambled and lost. Because of course they’re losers.

    As to what all this might have to do with games, it’s possible that the United States may already be in a recession. If that’s the case, my bet would be that it’s going to be a bad one, simply because the bad news is still coming over here. The stock market is treading water again, but the housing market is still bleeding, and credit is getting tighter and tighter. (Look up ‘Deflation’ if you want the gist of where this is probably going.)

    All the cash that started moving around in the mid-90’s eventually went from investment vehicles to real property, and that real property is now losing value. And that means the original pile of money is getting smaller. Not forever mind you, because money never really disappears, but in the short term it’s getting harder to find and borrow money, which means, by extension, that there’s going to be less available for Americans to buy games.

    Plan accordingly for next Christmas.

    Posted 29 Jan 2008 at 8:36
  2. Jurie wrote:

    Thanks Mark! I never realized the link between the dot com crash and sub-prime mortgages.

    Posted 29 Jan 2008 at 11:17