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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.
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 has 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.
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 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.
Goldman entities earned millions 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.
As the economy slowed, the mortgage industry couldn't keep up with Wall Street's loan demands, but that actually generated leverage.
Kevin Cloyd, the New Century executive vice president who dealt with Wall Street and in 2006 also oversaw loan production, told examiner Missal that a tacit understanding developed with Wall Street firms that were trying to edge out each other for loans, said a person familiar with Missal's inquiry.
Cloyd revealed that investment banks willing to reduce scrutiny of mortgage applications got to buy more loans, said this individual, who declined to be identified because the material is confidential.
Cloyd declined to comment.
Duvally denied that Goldman felt pressure from mortgage lenders to relax its standards to win bids on pools of mortgages. He said that Goldman's standards were at least as tough in 2006 as they were in 2002, but he declined to describe them.
Goldman Sachs Mortgage, however, published guidelines in early 2007 indicating that it would accept a "stated income, stated asset" loan for a person with a subpar credit score of 600 who was borrowing 90 percent of the home's value. The designation meant that although the borrower had poor credit, claimed income and financial background would go unchecked.
Deep in a Feb. 13, 2007, Goldman prospectus offering bonds backed by 9,800 New Century mortgages were these disclosures:
3,422 of the borrowers had credit scores below 600, levels experts say could include applicants with past bankruptcies.
3,688 of the borrowers were required only to state their incomes, not to document them - mortgages that became known as "liars' loans."
More than a quarter of the borrowers had combined first and second mortgage balances that equaled or exceeded 90 percent of their homes' values.
As was typical, 34 percent of the loans in the 2007 deal were in California, and 9 percent were in Florida, markets where home prices were rising so fast that all the players shrugged off the risk of default. If a loan soured, they thought, they could seize and easily resell the house without a loss.
With that philosophy, from 2004 to 2006 New Century executives relaxed their lending criteria to levels previously unimagined. The shift would have huge consequences: The looser the credit, the greater would be a torrent of loan foreclosures that would sink the housing market and force downgrades in supposedly safe subprime mortgage securities.
To make matters worse, the incentives inside New Century seemed to invite trouble.
For example, account executives, whose job was persuading mortgage brokers to steer clients to them, were paid largely in sales commissions. The more loans they secured, the more money they made.
To garner more loans, some female executives sauntered into mortgage brokers' offices wearing "short skirts, cleavage showing, looking like hotties," said Christine Fidler, a former company vice president.
New Century tossed out a requirement that every homebuyer make a down payment and began lending up to 80 percent of a property's value for a first mortgage and up to 20 percent for a second. It also lowered borrowers' minimum required credit scores into the 500s, although 700 or better is considered a good credit score. The nationwide average is 693, according to the consumer credit rating agency Experian.
Missal's examiner's report estimated that 40 percent of the company's mortgages were "liars' loans" because any income claim on an application was accepted as truthful. A SIVA meant "some income, verified assets," but it went downhill to the NINA - "no income, no assets."
Wall Street firms required lenders to buy back a loan if the borrower defaulted on his first payment or there was a major defect in the mortgage.
Missal's report said that New Century was faced with an "alarming" wave of payment defaults beginning in mid-2004 - a wave that later turned into a multibillion-dollar tsunami of loans being rejected by Wall Street. New Century desperately needed cash to buy back thousands of deficient loans it had made.
In late 2006, however, Goldman Sachs and other Wall Street firms cut off its credit lines. The cash squeeze, as well as admitted misstatements on its 2006 year-end financial statement that had turned a loss into a profit, halted New Century's operations and sent it into bankruptcy.
The lender's demise, however, didn't stop Goldman, which unloaded a $1.7 billion pool of bonds tied to New Century loans in February 2007. In May, weeks after New Century's bankruptcy filing, Goldman started selling securities backed by New Century mortgages in a secret deal based in the Cayman Islands, a tax haven for U.S. companies.
