Tuesday, April 27, 2010
The CEO of Goldman Sachs and other executives from the Wall Street powerhouse are coming before Congress 10 days after the government accused the firm of fraud. The Senate panel hearing their testimony Tuesday alleges that Goldman used a strategy that allowed it to profit from the housing meltdown and reap billions at the expense of clients.
Goldman executives misled investors in complex mortgage securities that turned toxic, investigators for the Senate subcommittee say. They point to a trove of some 2 million e-mails and other Goldman documents obtained in an 18-month investigation. Excerpts from the documents were released Monday, a day before the hearing bringing CEO Lloyd Blankfein and the others before the Senate Permanent Subcommittee on Investigations.
Blankfein says in his prepared testimony that Goldman didn't bet against its clients and can't survive without their trust.
Also appearing Tuesday: Fabrice Tourre, a Goldman trading executive who, federal regulators say, marketed an investment designed to lose value. Tourre who famously called himself in a January 2007 e-mail "The fabulous Fab ... standing in the middle of all these complex, ... exotic trades he created."
The Securities and Exchange Commission this month filed a civil fraud case against Goldman, saying it misled investors about securities tied to home loans. The SEC says Goldman concocted mortgage investments without telling buyers they had been put together with help from a hedge fund client, Paulson & Co., that was betting on the investments to fail. The agency also charged Tourre.
Goldman disputes the charges and says it will contest them in court.
At the hearing, Blankfein will repeat the company's assertion that it lost $1.2 billion in the residential mortgage meltdown in 2007 and 2008 that touched off the financial crisis and a severe recession.
He also will argue that Goldman wasn't making an aggressive negative bet -- or short -- on the mortgage market's meltdown.
"We didn't have a massive short against the housing market, and we certainly did not bet against our clients," Blankfein says in the prepared remarks released by Goldman. "Rather, we believe that we managed our risk as our shareholders and our regulators would expect."
But Sen. Carl Levin, D-Mich., the subcommittee chairman, said Monday: "I think they're misleading the country. ... There's no doubt they made huge money betting against the (mortgage) market."
Goldman "knew of Paulson's involvement in the selection" of securities, Levin told reporters. "They knew Paulson was going short."
Goldman has fought back against the fraud charges with a public relations blitz aimed at discrediting the SEC's case and repairing the bank's reputation. Some big clients are publicly backing the firm. But its stock has yet to recover from the fall that followed the SEC lawsuit on April 16.
The subcommittee, which is investigating Goldman's role in the financial crisis, provided excerpts of e-mails showing a progression from late 2006 through the full-blown mortgage crisis a year later. Levin said they show Goldman shifted in early 2007 from neutral to a short position, betting that the mortgage market was likely to collapse.
"That directional change is mighty clear," Levin said. "They decided to go gangbusters selling those securities" while knowing they were toxic.
"We have a big short on ...," Tourre wrote in a December 2006 e-mail.
Daniel Sparks, a former head of Goldman's mortgages department, wrote to other executives in March 2007, "We are trying to close everything down, but stay on the short side." Sparks also is scheduled to testify at Tuesday's hearing.
The issue of how much Goldman executives pushed such policies and were aware of the mortgage trading department's practices is a key one emerging before the Senate hearing.
The 140-year-old investment house's trading strategy in recent years enabled it to weather the financial crisis better than most other big banks. It earned a blowout $3.3 billion in the first quarter of this year.
Even before the SEC filed its fraud charges, Goldman denied that it bet against clients by selling them mortgage-backed securities while reducing its own exposure to them by taking short positions.
By the Senate subcommittee's reckoning, Goldman made about $3.7 billion from its short positions in several complex mortgage securities called collateralized debt obligations in 2006-2007. The short positions made up about 56 percent of its total risk during the period, the investigators found.
But the company says it lost $1.2 billion when it sold home mortgage securities in 2007 and 2008.
According to a November 2007 internal Goldman e-mail: "Of course we didn't dodge the mortgage mess. We lost money, then made more than we lost because of shorts."
In addition to the $2 billion collateralized debt obligation that's the focus of the SEC's charges against Goldman, the subcommittee analyzed five other such transactions, totaling around $4.5 billion. All told, they formed a "Goldman Sachs conveyor belt," the Senate panel said, that dumped toxic mortgage securities into the bloodstream of the financial system.
The firm's correspondence to the SEC dated Oct. 4, 2007, includes this: "During most of 2007, we maintained a net short subprime (mortgage) position and therefore stood to benefit from declining prices in the mortgage market."
In his prepared remarks, Blankfein acknowledges, "We have to do a better job of striking the balance between what an informed client believes is important to his or her investing goals and what the public believes is overly complex and risky."
He adds, "If our clients believe that we don't deserve their trust, we cannot survive."