TOPICS > Economy

Goldman Sachs Denies Misleading Investors in Senate Committee Hearing

April 27, 2010 at 12:00 AM EDT
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Goldman Sachs executives testified before a Senate committee about whether it used a large hedge fund to bet against the complex financial instruments it was marketing to investors. Jeffrey Brown gets two views on the hearings from financial writers Roger Lowenstein and Gregory Zuckerman.
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JEFFREY BROWN: And two writers with recent books on the financial crisis help us parse what happened at today’s hearing. Roger Lowenstein is author of “The End of Wall Street.” He’s a columnist for Bloomberg News. Gregory Zuckerman is a reporter for The Wall Street Journal and author of “The Greatest Trade Ever,” a book about hedge fund manager John Paulson and his bet against the housing boom.

Roger Lowenstein, that line from Senator Levin early on that we heard about the conduct of all Wall Street being in question, how much of this was about Goldman, how much about a larger picture? What did — what did you hear going on today?

ROGER LOWENSTEIN, author, “The End of Wall Street”: Jeff, I really think that Levin hit the nail on the head. It really is a question about all of Wall Street. It’s not whether Goldman defrauded its customers so much. The courts will decide that.

It’s not even Goldman’s reputation, which, presumably, in time, will recover. But Goldman, like other firms, structured billions — tens of billions of securities that added absolutely nothing to the economy. They contributed nothing to real estate. They didn’t put a single American in their homes — in new homes. They just allowed people to take bets.

And, when the mortgage bubble collapsed, they greatly aggravated the losses and the damage done. These firms are running what were in fact casinos. They were off-track betting parlors for the American mortgage industry.

And the question for Congress is, which they have been posed for now 12 years and have been ignored, are they finally going to get these derivative instruments under regulation?

JEFFREY BROWN: Greg Zuckerman, there were many variations on a constant theme here, questions like, who exactly is Goldman serving? What are these — who and what are these trades for? What is your responsibility to your client? On and on and on.

What were they really trying to get at here?

GREGORY ZUCKERMAN, author, “The Greatest Trade Ever”: Well, Goldman, like many other firms, has transformed from an investment banking firm with some trading, to a real trading house with some banking on the side.

And America gets to see the real Goldman Sachs today, which is an investment — a firm that will sell many things to clients, even things, even securities that it itself doesn’t believe in. And the argument is, well, it’s like someone comes in for an ugly suit. If they want to buy then it, we will sell it to them. The store owner doesn’t look so great, and Goldman Sachs doesn’t come off looking so good today either.

JEFFREY BROWN: Well, Greg, just to stay with you on that, because they — they weren’t — they weren’t giving much way in their responses in trying to explain what it is they do. What did you make of the responses from the Goldman officials?

GREGORY ZUCKERMAN: Well, they were playing rope-a-dope a little bit. They were taking some punches and trying to avoid the big knockout blow. And I think they did, actually. I don’t think that they landed — the congressmen landed any kind of knockout blow.

I mean, Goldman doesn’t come off looking great here. They come off as a firm that will serve clients, but not always equally, a firm that sometimes will take a negative bet on the very securities that it is selling to its clients. Legally, they’re in the clear on a lot of this stuff.

I think what it shows is a lot of the practice on Wall Street over the past few years has been legal, but maybe improper, or at least can be seen, especially with the benefit of hindsight of what happened in this country, to be improper.

JEFFREY BROWN: Well, that, Roger Lowenstein, that, we heard from Senator McCain, that — and a lot of people, actually — that line of legality, morality, ethics, responsibility.

What did you make of the responses from the Goldman officials, pretty much holding the line and not giving too much on — too much away on what they were being asked about?

ROGER LOWENSTEIN: Well, as Greg said, they did play rope-a-dope. And I think they had to play rope-a-dope, because they really had two battles to fight. One was the reputational battle.

And, for reputational purposes, I think they would have liked to have said and it would have behooved them to have said, we should have told you more, our customers. We should have told you that we in some cases were short, that we were working very closely with a powerful short-seller, John Paulson.

But they couldn’t make that point because they are also, of course, fighting a legal battle. And to have given way reputationally and fessed up a little bit wouldn’t have looked so good in court.

JEFFREY BROWN: Roger, I think it was you who — you just said earlier about Congress is another, of course, big player here. They have been responsible for the regulatory system in which these guys operate in the past. And now here they are debating some kind of new system now.

So, to what degree are they part of the — the theater and the reality that we were watching today?

ROGER LOWENSTEIN: Well, they’re all shocked, shocked today, right, like Louis in “Casablanca,” but particularly I thought of that when I heard Senator McCain, because, of course, his party is filibustering the financial reform bill.

And the — the really main element of that bill, the strongest element, the newest element would be to take derivatives and regulate them. We have had a very good system in this country for regulating securities on balance sheet assets with the Securities and Exchange Commission.

But derivatives of the type that drove AIG down and that were involved in this trade are very loosely regulated. They’re very loosely disclosed. There are virtually no capital limits on them. So, instead of standing there saying they’re shocked, the senators ought to go along and they ought to vote this bill through, if they mean it.

JEFFREY BROWN: Greg Zuckerman, what did you take from Congress today?

GREGORY ZUCKERMAN: Well, to extend Roger’s points, clearly, people on Wall Street and the larger banking industry made mistake after mistake, fell in love with securities that they shouldn’t have. And we all kind of suffered, because we had to step in for — to help them out.

But Congress has as much guilt as anybody on Wall Street. I mean, to take a step back, the years in which we encouraged — Congress encouraged Fannie Mae and Freddie Mac to buy up subprime loans, to the extent that both sides of the — the Republicans and Democrats have a lot of guilt.

The Republicans encouraged deregulation and let subprime lenders do all kinds of loans they shouldn’t have. So, it’s a little bit ironic for Congress to be pointing a finger at Wall Street, when just as a finger can be pointed at Congress as well.

JEFFREY BROWN: So, Greg, there is a legal case to come with the SEC, but do you expect this — this sort of public debate through Congress in this case to continue, I mean, at this kind of level of, what is it exactly that Wall Street is about?

GREGORY ZUCKERMAN: I do think so, because it reflects the discourse I hear among citizens around the country. And I, frankly, think that it will leave a little bit of an impression on Wall Street going forward for at least the — the short term anyway. I don’t know about the long term.

But, in the short term, I think people will think twice about doing a deal that maybe is technically legal, but could look in some lights as improper. So, if it sends a message along that regard, maybe that’s a good thing from the hearings.

JEFFREY BROWN: All right, Greg Zuckerman and Roger Lowenstein, thank you both very much.

ROGER LOWENSTEIN: Thank you.