Senate report to reveal mortgage crisis details: WSJ

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WASHINGTON: The Senate will soon issue findings of a probe of the US mortgage meltdown that fueled the global financial crisis, with Goldman Sachs likely to face fresh embarrassment over its role, the Wall Street Journal reported Sunday.

The Senate Permanent Subcommittee on Investigations, whose high-profile inquiry commission subpoenaed Goldman's and other executives last year, is due to release its report on the subprime implosion of 2007 and 2008.

The paper, citing people familiar with the matter, said the report was expected to release emails from securities firms that developed or sold subprime mortgages and financial vehicles including collaterized debt obligations (CDO).

CDOs were used to help Wall Street firms bet against the housing market. When the housing bubble burst, several of the top CDOs were downgraded to "junk" status, and their values plunged.

Goldman, the Journal reported, created CDOs in 2006 and 2007 to shield its exposure to the US housing market, and has been accused of making large bets against the market while selling bullish positions to group that were not expecting the market to fall.

People familiar with the matter said Goldman and Deutsche Bank -- both of which have been criticized for misleading investors in the housing market -- were expected to draw particular scrutiny in the report, the Journal said.

In January, Goldman said it was renewing its commitment to the "primacy" of client interests, and laid out 39 recommendations stressing greater transparency in how the company does business, especially with regard to its own private trading and potential conflicts of interest.

The Journal said the Senate investigation's findings would likely expose bad blood between Goldman and Morgan Stanley, another Wall Street giant, over their roles in a deal involving a CDO called Hudson Mezzanine Funding 2006-1.

According to the Journal, Goldman had sold insurance on the CDO, allowing the company to make money if and when the loans backing the deal began to default.

The Senate report was expected to disclose that Morgan Stanley was a key counterparty in the Hudson deal, said the paper.

It said Morgan Stanley's involvement in the deal was one of the company's bad mortgage bets that contributed to its $9.0-billion trading loss in 2007, while Goldman's mortgage division lost some $1.2 billion in 2007 and 2008, the worst years of the crisis. (AFP)