Who (or What) Was Behind The Mortgage Market Collapse?

Things have gotten interesting on the mortgage brokerage front. The New York Times released a bombshell article on its Web site last night, reporting that top management at Goldman Sachs oversaw the mortgage unit and took an active role in overseeing the mortgage unit as the housing bubble was on the brink of popping.

According to the NYT article, in 2005, there was debate between two camps under the Goldman Sachs tent as to what would happen in the housing market. Two men, Francis Tourre and Jonathan Egol, said the housing market was not safe. These two men were responsible for the creation of an Abacus investment, which they devised with the intent of it falling apart. Goldman Sachs executives sided with Tourre and Egol and, in 2007, ordered the selling of its positive bets on the housing market and to place the short (or negative) bets into a central trading account. As a result, when the housing market crashed, Goldman Sachs pocketed $4 billion in profits.

The NYT further reported that, on Friday, the Securities and Exchange Commission filed a civil fraud suit against Goldman Sachs, stating that the financial giant set up an elaborate scheme to defraud investors and profit from the coming housing market collapse. Yesterday, two members of Congress called for an investigation into Goldman Sachs’ role in the mortgage market. But it doesn’t stop here in the U.S. Britain’s prime minister, Gordon Brown, also wants an investigation. Meanwhile, the German government is considering legal action against the banking giant.

But it’s not just Goldman Sachs that is being scrutinized. The Associated Press reported yesterday that federal authorities are looking to launch as soon as possible a criminal investigation into Countrywide Financial’s role in the housing market meltdowns in 2007 and 2008. Three Countrywide executives face a civil lawsuit filed by the SEC, but, so far, no criminal charges have been filed.

There is a connection between Countrywide and Goldman Sachs: The NYT reported that Countrywide worked with traders at Goldman Sachs to buy and package mortgage loans. These traders clashed with Tourre and Egol over the state of the housing market. Needless to say, they were wrong.

As we learn more from these investigations into Goldman Sachs and Countrywide, these revelations will definitely ripple throughout the banking industry. In this housing market collapse, maybe some truth will rise from it.