Goldman is a main buyer of Washington Mutual's Option Adjustable Rate Mortgage for repackaging into securities. Most Option ARM has a growing loan balance and borrowers usually default when home prices drop. Goldman must have known the risk of this product as evidenced from their buying protection from AIG. But they continue to buy these mortgages in bulk, repackaging and selling them to other long term investors such as pension funds and insurance companies. They probably also used their reputation and sophisticated model to influence the rating agencies on the securities they repackaged to get a good price. Their attitude toward these securitization is that as long as someone else is buying we don't care about the long term sustainability of the product. The same logic obviously doesn't apply if you are buying a car or an airplane. I see what Goldman did as a textbook case of moral hazard. Why would the expert of risk assessment not caring about the risk involved? Because that expert (read Goldman) intended to transfer it to others to make a handsome risk free fee income.
Option ARM:
http://www.mtgprofessor.com/tutorials2/option_arm_tutorial.htm
FDIC sue WaMu executives:
http://www.bizjournals.com/seattle/blog/2011/03/fdic-files-lawsuit-agains-wamu-execs.html
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