"Why did blue-chip Goldman take a walk on subprime's wild side?" reveals how GS listed the bad paper at AAA in the Cayman islands even as the value tumbled in the USA.
McClatchy investigative reporter, Greg Gordan, stated the following:
"Well, I think what we really wanted to know is how did Goldman Sachs get out when nobody else did? And so, we looked and tried to reconstruct what happened in 2006 and 2007, looking at the SEC filings that Goldman made, which is a trick in itself, because when these Wall Street firms bought mortgages from subprime lenders, they put them into trust accounts, but you can't really find the trust accounts in the SEC files unless you know what the name of the trust accounts are, or you get very lucky kind of rummaging through the files. So, at any rate, we tried to reconstruct what happened."
"And what we discovered is that Goldman sold $39 billion in securitized subprime mortgages and other risky mortgages that it had purchased itself, and it turned into bonds--and it turned them into bonds and sold them off to pension funds and insurance companies and foreign banks. And the question was, OK, so if Goldman--how did Goldman get out so safely?"
"And, of course, we all know that when the government bailed out the American International Group, the giant insurer, last fall, a year ago last--a year ago in September and then in the ensuing months, that there was a sort of a payoff to all of the firms that had pending insurance-like contracts known as credit default swaps. And these are sophisticated and complex bets that Wall Street firms and others have secretly made in a dark market for at least well over a decade, I believe, but certainly in escalating fashion in recent years."
"So Goldman, in 2005 and 2006, began to place these swap bets that would, you know, make money for Goldman or hedge its risks if the housing market turned down. At the same time, Goldman was selling off these bonds to pension funds and others, and it did not disclose that it was betting the other way, not on the very same securities, but on very similar securities. Certainly, if its bets, secret bets, paid off, that meant that the value of these bonds was going to go down."
Here are some other links from McClatchy
How Goldman secretly bet on the U.S. housing crash
Goldman left foreign investors holding the subprime bag
Mortgage crisis shows why financial regulation is needed