Jan. 14 (Bloomberg) -- Goldman Sachs Group Inc., the world's largest securities firm, said it bet on declines in the subprime mortgage market for most of last year, as many of its competitors suffered record losses from the business.

``During most of 2007 we maintained a net short subprime position with the use of derivatives and therefore stood to benefit from declining prices in the mortgage market,'' Chief Accounting Officer Sarah Smith wrote in an Oct. 30 letter to the Securities and Exchange Commission made public today. The New York-based firm has previously only disclosed that it was short the mortgage market in the third quarter.

Goldman declined to comment on the matter when it released fourth-quarter earnings last month, after telling investors and analysts in the prior quarter that it profited by betting the market would decline. Goldman earned a record $11.6 billion in fiscal 2007 while competitors including Morgan Stanley and Bear Stearns Cos. posted quarterly losses and annual profit declines.

The SEC's Division of Corporation Finance wrote to Goldman on Sept. 20, the same day that Goldman reported higher-than- expected third-quarter earnings, requesting ``supplemental information about your involvement in subprime loans.''

The firm responded that mortgage-related activities represented less than 3 percent of total net revenue in fiscal 2005, 2006 and the first three quarters of 2007, of which roughly half was subprime-related. It added that balance sheet exposure to all subprime mortgage products represented less than 2 percent of total assets in those same periods.

`Potentially Misleading'

Disclosing balance-sheet exposure to subprime mortgages is ``potentially misleading'' because even though the firm's balance sheet showed it held some subprime loans and securities, that may not capture any offsetting trading positions.

The firm's traders ``may choose to take a directional view of the market and will express that view through the use of mortgage loans, securities and derivatives,'' Goldman told the SEC. ``Our net risk position was either short or long depending on our then-existing view of the market,'' Smith said in the Oct. 30 letter.

Smith's letters to the SEC also disclose that the firm used the ABX Index and credit default swaps on single securities to hedge its holdings in the subprime market, establishing its short position.

The firm also told the SEC it bought Senderra Funding, a South Carolina-based subprime mortgage originator, for $14 million in March 2007.

Disclosure Question

The SEC Division of Corporation Finance scrutinizes financial statements to make sure companies make sufficient disclosures to investors. Last year, the division initiated a broad review of banks and securities firms to make sure they were adequately informing shareholders about their risks from subprime mortgages.

The SEC Enforcement Division, which investigates companies for violations of securities laws, has separately opened more than three dozen probes into Wall Street's handling of subprime loans, according to Walter Ricciardi, the division's deputy director. The examinations are looking at underwriters and others firms involved in securitizing mortgages.

Michael DuVally, a spokesman for Goldman in New York, declined to comment on the SEC correspondence or the firm's position in subprime mortgages. John Nester, a spokesman for the SEC, also declined to comment on the agency's letters to Goldman.

To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net.

Last Updated: January 14, 2008 17:34 EST