I used to have a joke I told all the time, back when the mortgage business was booming, about the “loan officer’s tool kit.” If I saw someone standing in front of the copier, frowning at the papers they were rifling through, most likely because the borrower had disclosed an annual income for the 1003 Uniform Residential Loan application that was higher than the actual income reflected on the copy of the W2 the loan officer was frowning at, I might say, “looks like you need to pull out your ‘loan officer’s tool kit.’"
Bewildered, because there really was no such kit, they would invariably ask “what’s that?” Whereupon I would give them a cheesy smile and say, with as straight a face as I could muster, “a bottle of White-Out and a pair of scissors.”
I thought about that joke the other day when I saw a line in a story in Mother Jones that identified a mortgage security from Long Beach Mortgage that Goldman’s traders had shorted for big profits.
A May 2007 exchange inside Goldman includes information on the "wipeout" of a mortgage security from Long Beach Mortgage Company, a former subsidiary of the failed bank Washington Mutual. The security also happened to be underwritten and sold by Goldman. One Goldman staffer says this is bad news, because it'll cost the firm $2.5 million; however, the same staffer adds that because Goldman had bet against that very same security, it netted $5 million, easily covering its losses.
Inside Goldman Sachs' “Big Short" Mother Jones
The state of Georgia is one of the mortgage fraud capitals in the country, which has generated more than its fair share of cut-and-paste W2's and bank statements. Needless to say, my managers never really saw the humor in my joke, especially if a pair of scissors were prominently displayed in the office caddy on their desk. But the reality was, you didn’t really need a ‘loan officer’s tool kit’ when you had lenders like Long Beach. It was known in the business as a lender of last resort, a “C” and “D” and “F” lender, although its “C” paper rates were so high it was effectively a “D” and “F” loan shop. There was no real way to know what they wouldn’t do – the only way to find out was to call the rep and tell him the story. New Century Mortgage, whose infamous collapse in the spring of 2007 was the precipitating event in the subprime mortgage crash, was practically a Fannie Mae level lender compared to Long Beach.
You had a borrower with a tax lien they didn’t want to pay? Run it by Long Beach. You had a borrower with a credit score under 500? Run it by Long Beach.
The real question isn’t why Goldman’s traders heavily shorted this security, but why the firm underwrote this "dog with fleas" in the first place. Behind the glass and marble facade of its New York offices, the famed securities dealer seems to suffer from some sort of schizophrenia, acting at some points like elder statesmen of the market, and at others like rapacious penny stockbrokers who run "pump and dump" scams with dubious initial public offerings.
I have no idea what Lloyd Blankfein, chairman of Goldman Sachs, is going to say to Congress today. Denying everything is fine, so long as he doesn’t try to advance any ridiculous “rogue trader” narratives, the kind of bald faced lie that conveniently ignores the fact that bankers always know where their money is, no matter how "unsupervised" their 31 year old employees may claim to be. What else would you expect from someone in Blankfein’s position?
Maybe the big boys at Goldman Sachs need to get some “investment banker toolkits” made up that they can make their traders and investment bankers wear on lanyards around their necks. I guess they would look something like a jump drive that an employee could plug into their machine to destroy personal emails. Or at least the ones that have the words “monstrosity”, “made more than we lost”, or “serious money” in them.