Goldman Sachs executives face senators investigating role in financial crisis

By Zachary A. Goldfarb
Washington Post Staff Writer
Wednesday, April 28, 2010; A01

It was a day of public flogging for Goldman Sachs.

Summoned to a Senate panel examining the firm's role in the financial crisis, Goldman executives endured a 11-hour excoriation that crystallized the wide gulf between Washington's view of the storied investment bank and Goldman's view of itself.

The seven men, including chief executive Lloyd C. Blankfein and Executive Director Fabrice Tourre, subject of a fraud lawsuit by the Securities and Exchange Commission, at times struck a humble tone with the committee but gave no ground on the concerns raised by senators, offering technical responses and eating up time looking for documents in a 900-plus-page binder.

But for the lawmakers, who seldom engaged the finer points the executives made about the markets, the question of Goldman's conduct on the eve of the financial crisis was not primarily one of law or finance.

"The SEC and the courts will resolve the legal question of whether Goldman's actions broke the law. The question for us is one of ethics and policy," said Sen. Carl M. Levin (D-Mich.), chairman of the Senate Permanent Subcommittee on Investigations. "Were Goldman's actions in 2007 appropriate? And if not, should we act to bar similar actions in the future?"

But for Goldman's executives, it was a narrower question of what the firm was legally required to do to serve its clients and protect itself as the financial markets declined.

Blankfein, the public face of Goldman, began his testimony more than seven hours into the hearing, receiving a more gentle line of questioning than several of his lieutenants. First to testify were four current and former mortgage executives -- Tourre, Daniel Sparks, Michael Swenson and Joshua Birnbaum -- who all wore dark jackets and white shirts and had worked extensively to prepare for questions the committee might ask.

Goldman hired lawyers who formerly worked on the committee to prepare the executives; one of those lawyers once told a trade journal that the best strategy is "long, thoughtful pauses followed by rambling non-responsive answers." The executives practiced the technique.

At one point, Sen. Susan Collins (R-Maine) asked Tourre about an e-mail he wrote that suggested he was looking to sell mortgage-backed investments only to unsophisticated investors. But, taking his time, he asked her three times to identify which e-mail she meant and to repeat her question.

"I cannot help but get the feeling that a strategy of the witnesses is to try to burn through the time of each questioner," Collins responded in an exasperated tone.

The Senate panel released a report this week, based on millions of pages of internal Goldman documents, that accuses the firm of assembling risky mortgage-backed investments, making huge and profitable bets against the housing market and acting against the interest of its clients.

It was this last charge that provoked the strongest protests from Blankfein as Levin pressed it. Referring to evidence collected by his committee, Levin asked the chief executive how Goldman could sell securities to clients without telling them that it was betting against those very investments on the side.

Blankfein was speechless.

"You just don't think it's relevant and needs to be disclosed. Is that the bottom line?" Levin asked.

"Yes," Blankfein responded.

Blankfein attempted to explain to the senator that it is his bank's job to act as a middleman, buying from clients when they want to sell a security and selling them a security when they want to buy.

"You're out there looking around for buyers of stuff, whether it's junk or not junk, where you are betting against what you're selling," Levin said. "You're not troubled by that?"

"I'm not troubled by the fact that we market-make as principal . . . and that when somebody sells, they sell to us, or when they buy, they buy from us," Blankfein responded.

Goldman also faces a suit by the Securities and Exchange Commission that claims the firm and Tourre broke the law and committed fraud when they sold clients a complex investment linked to the value of home loans that was secretly designed to fail. Another firm, Paulson & Co., a hedge fund, helped Goldman create the investment and planned to bet against it. But the SEC claims that relationship was not disclosed to Goldman's clients, ACA Financial Guaranty and the German bank IKB.

At the hearing, Goldman executives, including Tourre, continued to deny wrongdoing. But while Tourre said he told ACA that Paulson would bet against the investment, he acknowledged that IKB was not informed.

Goldman executives said disclosure was not necessary, because ACA and IKB were sophisticated investors that knew what they were betting on.

Throughout the hearing, Levin cited e-mails from Goldman employees disparaging investments they were selling to clients.

One e-mail Levin repeatedly referred to described investments Goldman was selling as "shitty."

"Do you think Goldman ought to be selling it?" the senator asked David Viniar, Goldman's chief financial officer.

Viniar responded: "I think that's a very unfortunate thing to have on an e-mail," drawing a burst of laughter from the hearing room.

But, he said, it was fine to sell an investment that was not backed by good loans if a client wanted to bear the risk of buying it for cents on the dollar. "We know it's not a great piece of paper, but it means they think it's worth more than 20 cents," Viniar said.

Although they all had harsh words for the Goldman executives, the senators themselves did not agree on everything. One topic of debate: whether the executives were the equivalent of, or worse than, Las Vegas bookies.

Sen. Claire McCaskill (D-Mo.) told the executives: "You are the bookie. You are the house. You had less oversight than a pit boss in Las Vegas."

The senator from Nevada disagreed. "Most people in Las Vegas would take offense at having Wall Street compared to Las Vegas," said Sen. John Ensign (R). "Because in Las Vegas, actually, people know that the odds are against them. It's almost like somebody was playing a slot machine [as] the guys on Wall Street were in there kind of tweaking the odds."

Staff writer Frank Ahrens contributed to this report.

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