JEFFREY BROWN: Leaders of Goldman Sachs were called to account by irate senators today, but the executives defended their conduct in the financial meltdown.
The tone was pointed, the exchanges heated at times.
SEN. CLAIRE MCCASKILL, D-Mo.: You think you are so smart? Any street gambler would never place a bet with a bookie or a house with the record that is revealed in the documents that this committee has gathered.
JEFFREY BROWN: A Senate panel charged today that Goldman Sachs plotted multiple strategies to profit from the impending housing meltdown, without disclosing its moves to investors, ultimately reaping billions of dollars itself.
At the outset, senator after senator, on both sides of the aisle, voiced outrage.
Republican John McCain:
SEN. JOHN MCCAIN, R-Ariz.: Mr. Chairman, I don’t know if the — if Goldman Sachs has done anything illegal on those charges have been brought and it’s going to be a subject of a lot of our discussion today.
But, from the reading of these e-mails and the information that this committee has uncovered, there’s no doubt their behavior was unethical and the American people will render a judgment, as well as the courts.
JEFFREY BROWN: Committee Chairman Carl Levin, a Democrat, said the company’s behavior called into question the conduct of all of Wall Street.
SEN. CARL LEVIN, D-Mich.: Wall Street is on the wrong side of this fight. It insists that reining in that — those excesses would unduly restrict the free market that is the engine of American progress.
But this — this market of ours isn’t free of self-dealing or conflict of interest. It isn’t free of gambling debts that taxpayers end up paying.
JEFFREY BROWN: With that, the first panel of current and former Goldman Sachs executives got their say.
DANIEL SPARKS, former partner, Head of Mortgages Department, Goldman Sachs: The culture at Goldman Sachs was one in which excellence and integrity are expected.
JOSHUA BIRNBAUM, former managing director, Structured Products Group Trading, Goldman Sachs: We provided significant liquidity to our customers in a difficult and challenging market while also managing to post a profit during this period.
JEFFREY BROWN: Fabrice Tourre was the only Goldman employee directly accused in a Securities and Exchange Commission civil suit alleging fraud. The SEC claimed he marketed investments designed to lose value.
But Tourre insisted today that wasn’t the case.
FABRICE TOURRE, executive director, Structured Products Group Trading, Goldman Sachs: I deny categorically the SEC’s allegations, and I will defend myself in court against this false claim.
I appreciate the opportunity to appear before the subcommittee to answer these false charges. I wish to repeat, I did not mislead IKB or ACA, two of the most sophisticated institutional investors in these products anywhere in the world.
JEFFREY BROWN: Tourre did say he regretted internal e-mails in which he called himself — quote — “The Fabulous Fab” and boasted of his financial exploits.
Later, in a tense exchange, Chairman Levin asked Dan Sparks, the former head of Goldman’s mortgage department, whether he should have told clients when he was betting against their trades.
Levin quoted a Goldman e-mail that used an obscenity.
SEN. CARL LEVIN: June 22 is the date of this e-mail. “Boy, that Timberwolf was one [EXPLETIVE DELETED] deal.”
How much of that “[EXPLETIVE DELETED] deal” did you sell to your clients after June 22, 2007?
DANIEL SPARKS: Mr. Chairman, I don’t know the answer to that. But the price would have reflected levels that they wanted to invest…
SEN. CARL LEVIN: Oh, of course.
DANIEL SPARKS: … at that time.
SEN. CARL LEVIN: But they don’t know it’s a — you didn’t tell them you thought it was a [EXPLETIVE DELETED] deal.
DANIEL SPARKS: Well, I didn’t say that.
SEN. CARL LEVIN: No. Who did? Your people, internally. You knew it was a [EXPLETIVE DELETED] deal, and that’s what your…
DANIEL SPARKS: And again, I…
SEN. CARL LEVIN: … e-mail showed.
DANIEL SPARKS: I think the context, the message that I took from the e-mail from Mr. Montag, was that my performance on that deal wasn’t good.
SEN. CARL LEVIN: How about the fact that you sold hundreds of millions of that deal after your people knew it was a [EXPLETIVE DELETED] deal? Does that bother you at all; you sold the customers something?
DANIEL SPARKS: I don’t recall selling hundreds of millions of that deal after that.
JEFFREY BROWN: Michael Swenson, currently a managing director at Goldman, was asked by Arkansas Senator Mark Pryor if Goldman contributed to the larger collapse.
MICHAEL SWENSON, managing director, Structured Products Group Trading, Goldman Sachs: I do not think that we did anything wrong. There’s things that we wish we could have done better in hindsight, but at the times that we made the decisions, I didn’t think we did anything wrong.
SEN. MARK PRYOR, D-Ark.: My sense is that people feel like you’re betting with other people’s money and other people’s future, because, for example, in the real estate area, someone gets a mortgage, and that gets sold, and then it gets chopped up, and bounced around. And, you know, instead of Wall Street, it looks more like Las Vegas.
JEFFREY BROWN: When it was his turn, Republican John Ensign of Nevada took issue with Pryor’s comparison.
SEN. JOHN ENSIGN, D-Nev.: Senator Pryor, I — I think most people in Las Vegas would take offense at having Wall Street compared to Las Vegas, because, in Las Vegas, actually, people know that the odds are against them. They play anyway. On Wall Street, they manipulate the odds while you’re playing the game.
JEFFREY BROWN: After five hours with that group, a second panel took its turn at the witness table, this one featuring Goldman’s chief financial officer, David Viniar, and Craig Broderick, the firm’s risk officer.
Senator Levin bore in again on Viniar, saying Goldman bet against the housing market, known as shorting its position, while telling the public something else.
SEN. CARL LEVIN: Didn’t you make a decision in December of 2006 to basically head in a different direction, you were much too long and you wanted to go short? Is that not true?
DAVID VINIAR, executive vice president and chief financial officer, Goldman Sachs: No. In — in December 2006, we made a decision to reduce risk.
LEVIN: All right.
DAVID VINIAR: That decision was not directional. It did not say that we should go long or go short.
LEVIN: All right.
DAVID VINIAR: It didn’t say we shouldn’t, and it didn’t say we should take no risk, but it said that we should reduce risk.
JEFFREY BROWN: Viniar argued Goldman actually took heavy losses from the housing market, so its profits were held down.
DAVID VINIAR: Overall, across the year, our portfolio was short.
LEVIN: Did you…
DAVID VINIAR: That’s why we were profitable, but it was just was not very large.
LEVIN: Well, large is in the eyes of the beholder.
DAVID VINIAR: Correct.
LEVIN: Billions seem large to a lot of folks who have lost their homes.
JEFFREY BROWN: For his part, Broderick, Goldman’s risk manager, said the firm had attempted to flatten risk, to, in effect, even out its exposure in the mortgage market.
CRAIG BRODERICK, chief risk officer, Goldman Sachs: Particularly in light of events in the last two years, it’s clear that no approach to risk management was fool-proof, and we’ve all learned valuable lessons from — from the recent experiences. However, we do believe that the core elements that make up our risk management framework were broadly effective, despite the unprecedented turmoil in the markets.
JEFFREY BROWN: Lloyd Blankfein, the CEO and public face of Goldman, was last on the scheduled list of witnesses.
SEN. CARL LEVIN: My question, is there not a conflict when you sell something to somebody, and then are determined to bet against that same security, and you don’t disclose that to the person you’re selling it to?
SEN. CARL LEVIN: Do you see a problem?
LLOYD BLANKFEIN, CEO, Goldman Sachs: In the context of market-making, that is not a conflict. What — where — what clients are buying or customers are buying is, they’re buying an exposure.
The thing that we are selling to them is supposed to give them the risk they want. They are not coming to us to represent what our views are. They probably — the institution clients we have wouldn’t care what our views are. They shouldn’t care.
JEFFREY BROWN: That claim will be central to the bank’s defense in the SEC fraud investigation.