The role of Goldman Sachs and other financial institutions in the housing industry bubble and subsequent financial crisis

1. Introduction

Goldman Sachs was not the only financial institution that played a role in the housing industry bubble and subsequent financial crisis. There were other institutions that were involved in the creation and sale of synthetic collateralized debt obligations (CDOs), and some of those institutions have been subject to investigation by the Securities and Exchange Commission (SEC). In addition, there were other financial institutions that were involved in the lending to and securitization of subprime mortgages.

2. The role of Goldman Sachs in the housing industry

Goldman Sachs was a major player in the housing industry, both in terms of lending to subprime borrowers and in terms of creating and selling CDOs.

In terms of lending, Goldman Sachs was one of the largest subprime lenders through its wholly owned subsidiary, Litton Loan Servicing. Litton made subprime loans to borrowers with poor credit histories and then sold those loans to investors. Goldman Sachs also participated in the securitization of subprime mortgages, which involves pooling together mortgages and then selling bonds backed by those mortgages to investors.

In terms of creating and selling CDOs, Goldman Sachs was one of the largest players in that market as well. Goldman Sachswas involved in the creation of CDOs through its Abacus program. The Abacus program was a way for Goldman Sachs to create CDOs without having to put any money up front. Instead, Goldman Sachs would find an investment bank that was willing to invest in a CDO and then Goldman Sachs would provide insurance contracts (called credit default swaps) to that investment bank that would pay off if the CDO went bad. This allowed Goldman Sachs to take on very little risk while still profiting from the sale of the CDO.

Goldman Sachs also sold CDOs to other investors, including hedge funds, pension funds, and insurance companies. In some cases, Goldman Sachswould sell CDOs to investors without disclosing that it had created those CDOs or that it had insured them against loss. This led to complaints from some investors who felt that they had been misled by Goldman Sachs.

3. The role of other financial institutions in the housing industry

In addition to Goldman Sachs, there were other financial institutions that played a role in the housing industry bubble and subsequent financial crisis. These include:

Abn Amro: Abn Amro was a Dutch bank that was one of the largest issuers of subprime mortgage-backed securities (MBSs) in 2006 and 2007. In 2007, Abn Amro was acquired by Royal Bank of Scotland (RBS). RBS subsequently ran into difficulty and had to be bailed out by the UK government during the financial crisis. IKB: IKB is a German bank that specialized in lending to small- and medium-sized businesses. IKB was also heavily involved in the issuance of MBSs and CDOs. In 2007, IKB ran into difficulty and had to be bailed out by Deutsche Bank and KfW (the German state-owned development bank). ABN AMRO: ABN AMRO was another Dutch bank that was involved in lending to subprime borrowers and securitizing their loans. In 2007, ABN AMRO was acquired by a consortium of banks led by Royal Bank of Scotland (RBS). Magnetar Capital: Magnetar Capital is a Chicago-based hedge fund that was one of the largest buyers of CDOs in 2006 and 2007. Magnetar Capital would often buy CDOs that it knew were likely to default, betting that the insurance contracts that it had purchased would pay off. This strategy contributed to the default of many CDOs and the subsequent financial crisis.

4. Conclusion

Goldman Sachs was not the only financial institution that played a role in the housing industry bubble and subsequent financial crisis. There were other institutions that were involved in the creation and sale of synthetic collateralized debt obligations (CDOs), and some of those institutions have been subject to investigation by the Securities and Exchange Commission (SEC). In addition, there were other financial institutions that were involved in the lending to and securitization of subprime mortgages.

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