Probe, suit force Goldman to defend actions in crisis
Tuesday, April 27, 2010
Most big Wall Street firms sold investments that contributed to the financial crisis. And most suffered in the markets, with some forced out of business.
But it's Goldman Sachs, the bank that not only survived but prospered from the crisis, whose executives are being called before a congressional firing line Tuesday over accusations that the firm bet against the American homeowner, betrayed its clients and helped fuel the financial meltdown.
Chief executive Lloyd C. Blankfein and several current and former deputies will answer questions from the Senate Permanent Subcommittee on Investigations, which has concluded an 18-month probe of Goldman's activities.
Like most other investment banks, the committee charges, Goldman turned high-risk loans into investments, then sold them to customers around the world.
Unlike most others, however, Goldman also profited by betting against the housing market as it began to falter and unloaded bad investments to other parties, according to the committee.
Goldman says its strategy was guided mainly by a desire to hedge risks and avoid the costly fallout that hit other banks.
The Senate panel's findings -- as well as a recent suit by the Securities and Exchange Commission against Goldman for allegedly defrauding clients -- raise the question of whether the bank's actions moderated or magnified the financial crisis.
While it is no doubt true that Goldman's actions protected the firm, the Senate's findings suggest they did so at the cost of others in the market. The panel is not charging that Goldman did anything illegal, but is looking to blame the firm for a role in the meltdown.
"Goldman Sachs was slicing, dicing and selling toxic mortgage-related securities on Wall Street . . . but its executives continue to downplay the firm's role in the financial engineering that blew up the financial markets," said Sen. Carl M. Levin (D-Mich.), chairman of the subcommittee. "Goldman Sachs made billions of dollars from betting against the housing market, and it placed those bets in some cases at the same time it was selling mortgage-related securities to its clients. They have a lot to answer for."
In prepared testimony, Blankfein says the company was trying reduce its overall risk in the mortgage market. He calls the filing of the SEC suit "one of the worst days in my professional life."
Blankfein says the firm never "consistently or significantly net 'short the market' in residential mortgage-related products."
Internal e-mails, however, suggest that the company's actions to short, or bet against, the housing market yielded considerable profit.