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Goldman Letter Smells Like Fear

Senior writer Dan Freed says, if you read between the lines of Goldman Sachs' annual letter, you'll discover evidence that even Wall Street titans get scared sometimes.
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Editor's note: TheStreet senior writer Dan Freed, in a story originally published on April 7, sensed something wasn't quite right about Goldman Sachs' emphasis in a shareholder letter that it did not trade against its clients. The bombshell charge Friday by the Securities and Exchange Commission -- accusing Goldman of fraud in the structure of a collaterized debt obligation linked to the performance of subprime residental mortgage-backed securities -- makes Freed's original hunch eerily prescient. Here is that column, republished below.



) --

Goldman Sachs

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gets scared too, it seems.

Goldman Sachs CEO Lloyd Blankfein

The mighty investment bank went over well-trodden ground in its

letter to shareholders

published Wednesday, addressing the controversy over its relationship with


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and its successful bet against the U.S. housing market that allowed it to avoid the multibillion dollar write-downs taken by competitors such as

Morgan Stanley

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in late 2007 and through 2008.

Why take on these topics for the umpteenth time? Shareholder letters are usually breezy affairs, full of optimistic platitudes (though this one had plenty of those, too.)

Goldman may be genuinely scared of a regulatory crackdown that would endanger key businesses, like proprietary trading or private equity.

That is interesting, since the markets have largely been assuming that Goldman and other big investment banking institutions will get by with just a slap on the wrist.

Goldman may also be afraid of competition. Lloyd Blankfein's troops blew everyone away a year ago by grabbing up all the trading business when other trading shops were too weak or too scared to put capital at risk.

But markets are healthier now. Longtime Goldman competitors like

JPMorgan Chase

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and Morgan Stanley are out there trying to steal Goldman's clients, as is

MF Global


, a derivatives dealer that just snapped up former Goldman chief and New Jersey Governor Jon Corzine.

You can bet that one of the pitches these newly bold competitors are making to potential new clients is that they won't trade against them as Goldman did.

If Goldman is so great, why didn't they warn you about subprime when they knew things were getting dicey,

those competitors will say.

Goldman dances around this issue in the letter, with Blankfein and President Gary Cohn stating that they didn't know which way the market was headed.

"Although Goldman Sachs held various positions in residential mortgage-related products in 2007, our short positions were not a 'bet against our clients.' Rather, they served to offset our long positions," the letter argues.

Still, most other banks were not offsetting long positions, and you can be sure a lot of "clients" would have liked to know Goldman was doing so.

Going forward, Goldman is in a tricky spot. Clients will want better information than they got the last time around, but regulators will presumably be more zealous than ever in making sure Goldman isn't crossing any legal boundaries.

In August, for example,

The Wall Street Journal


that Goldman analysts were meeting with some investors to share opinions at odds with their published research. The report got the attention of

securities regulators

, according to the newspaper.

I emailed a Goldman spokesman to ask if the inquiry was ongoing, but got no immediate response.


Written by Dan Freed in New York


Goldman Letter Has Whiff of Fear

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