Goldman Saches wring money on mortgage market meltdown

--Goldman's bet that securities backed by risky home loans would fall in value generated nearly $4 billion of profits during the year ended Nov. 30 --Goldman's trading home run was blasted from an obscure corner of the firm's mortgage department -- the structured-products trading group, which now numbers about 16 traders. Two of them pushed the company to wager that the subprime market was heading for falls. --Goldman's success at wringing profits out of the subprime fiasco, however, raises questions about how the firm balances its responsibilities to its shareholders and to its clients. --Financial firms have good reason to keep a tight leash on proprietary traders. --Last December, David Viniar, Goldman's chief financial officer, gave the group a big push, suggesting that it adopt a more-bearish posture on the subprime market, according to people familiar with his instructions. Mr. Swenson and his traders began shorting certain slices of the ABX, or betting against them, by buying credit-default swaps. At that time, new subprime mortgages still were being pumped out at a rapid clip, and gloom hadn't yet descended on the market. As a result, the swaps were relatively cheap. --Thanks to the wager that the ABX index would fall, Goldman's mortgage department earned several hundred million dollars during the first quarter, say people familiar with the matter. But the traders had unwound that bet in the weeks that followed. That left Goldman unhedged against further carnage, a worrisome situation for the second quarter. --Although it had become more expensive to wager against the ABX index, Messrs. Swenson and Birnbaum got a green light to once again ratchet up the firm's bet that securities backed by subprime mortgages would fall further. In July, the riskiest portion of the index plunged