IRVINE, Calif. — Goldman Sachs was one of the last Wall Street giants to enter the subprime lending world, but when it did, it quickly climbed into bed with profligate, highflying firms — companies such as New Century Financial Corp.
In at least nine deals from 2002 to 2007, Goldman sold bonds backed by more than $5 billion of New Century’s mortgages, one even after the California lender’s underwriting criteria all but disintegrated and a cash squeeze paralyzed its operation. Goldman also marketed at least three secret offshore deals bearing New Century’s name.
Goldman has yet to explain why it risked its blue-chip reputation and financial health to buy and repackage at least $135 billion in loans mostly originated by companies that have since gone bust.
Goldman spokesman Michael DuVally stressed, however, that the firm “was not the largest purchaser of loans from any of these mortgage originators, and in some cases was actually quite a small purchaser.”
A glimpse inside New Century’s operations sheds light on how one of Wall Street’s proudest and most prestigious firms helped create a market for junk mortgages, contributing to the economic morass that’s cost millions of Americans their jobs and their homes.
Perhaps no mortgage lender was more emblematic of the go-go atmosphere in the sprouting industry that was seizing an outsize share of the home loan market.
Traversing the country in private jets and zipping around Southern California in Mercedes Benzes, Porsches and even a Lamborghini, New Century executives reveled as the firm’s annual residential mortgage sales rocketed from $357 million in 1996 to nearly $60 billion a decade later. To be a subprime lender at the industry’s height was to join in a dash for cash, and New Century was an Olympic-caliber sprinter.
Inside the mortgage company, the former employees said, pressure was intense to increase the firm’s share of an exploding market for mortgages that depended almost entirely on Wall Street’s seemingly unlimited hunger for bigger, faster returns.
Michael Missal, a federal bankruptcy examiner who investigated New Century’s operations after it sought Chapter 11 protection on April 2, 2007, reported last year that the firm’s lax lending and accounting standards “created a ticking time bomb” as it pushed for ever-higher loan production.
The incentives for high-risk behavior reached all the way to Manhattan.
Goldman and other investment banks could put $20 million in the till by taking a 1 percent fee for assembling, securitizing and selling a $2 billion pool of mostly triple-A rated bonds backed by subprime loans — and that was just stage one.
Goldman entities earned millions of dollars more by servicing many of the loans and arranging sophisticated interest-rate swaps to guard against inflation.
As profits poured in, Wall Street firms extended lines of credit to New Century — known as “warehouse loans” — totaling billions of dollars to finance the issuance of more home loans to other marginal borrowers. Goldman Sachs’ mortgage subsidiary gave the firm a $450 million credit line.
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