The head of Goldman Sachs testily defended his company's ethics and business practices during the nation's financial crisis on Tuesday, saying customers who bought securities from the Wall Street giant came looking for risk "and that's what
they got."
"Unfortunately, the housing market went south very quickly," Lloyd Blankfein told skeptical senators on the the Senate Permanent Subcommittee on Investigations. "So people lost money in it."
Blankfein was the final witness in a daylong hearing on Goldman Sachs' behavior, which resulted in a government civil fraud charge earlier this month. Five present and two former Goldman officials held their ground in hours of contentious testimony, unflinchingly defending their conduct and denying that the Wall Street investment bank helped cause the near-meltdown of the nation's financial system.
The Senate panel has been probing the role of Goldman Sachs and other investment banks in the financial crisis for nearly 18 months. Tuesday, lawmakers released documents and e-mails showing that Goldman Sachs made and held bets against the general mortgage market -– called short positions -– often betting against securities that Goldman had assembled and marketed to clients.
The Securities and Exchange Commission leveled civil fraud charges against the company and trading executive Fabrice Tourre earlier this month. The suit maintains Goldman Sachs and Tourre bundled toxic mortgages into a complex financial product -- known as Abacus -- that was sold to investors, while Goldman secretly took short positions against Abacus' success.
"Goldman and other investment banks played a crucial role in building and running the conveyor belt that fed toxic mortgage-backed securities into the financial system," the panel said in a summary of its findings.
"It was hedging its risk and moving toward a balanced position, but within months that neutral position shifted into a large bet against the mortgage market."
Tourre told lawmakers Tuesday that he did not design Abacus to fail.
"I deny categorically the SEC's allegations," the 31-year-old trading executive told lawmakers. "I will defend myself in court against this false claim.”
In the civil suit, the SEC claimed Tourre and Goldman Sachs didn't tell investors that hedge fund Paulson & Co. helped choose the underlying securities and was betting against the product. Paulson & Co. has denied any wrongdoing.
But Tourre said there were only two investors -- bond insurer ACA and the German bank IKB -- and that both were "sophisticated institutional investors."
"I did not mislead" them, Tourre insisted.
Panel members on Tuesday accused Goldman of manufacturing multiple deals designed to profit from the collapsing U.S. mortgage market -– taking allegations beyond the single deal outlined in civil fraud charges by the SEC.
Sen. Carl Levin (D-MI) said documents show Goldman Sachs put its own interests ahead of its clients. He said the company repeatedly bundled toxic mortgages into financial products that were sold to clients, while Goldman bet against the success of the products.
"As we speak, lobbyists fill the halls of Congress, hoping to weaken or kill legislation aimed at reforming these abuses," Levin told the Goldman Sachs executives. "Wall Street is on the wrong side of this fight."
Levin made much of an internal, expletive-laden Goldman e-mail: "'Boy, that Timberwolf was one s----y deal,"' Levin read into the microphone. Goldman Sachs nonetheless continued selling that investment.
"You knew it was a s----y deal," Levin scolded, using the expletive a dozen times during the daylong hearing. "Should
Goldman Sachs be trying to sell a s----y deal?"
The executives, in turn, blamed investors, saying that in many of the cases at issue, Goldman Sachs was acting as "market-makers," not investment advisers.
"Goldman used financial engineering, selling [financial products laden with toxic mortgages] to pension funds spreading the poison throughout the system," Levin said.
In his prepared testimony, the Goldman CEO strongly denied the company did anything wrong. But he also took a conciliatory tone, saying he knows the complex deals look bad to the public.
Goldman Sachs has faced mounting legal problems since the SEC filed civil fraud charges. On Monday, shareholders filed suit in Manhattan federal court alleging the company and Blankfein hid information about a risky transaction that led to the SEC action. It was the third shareholder lawsuit filed since Friday.
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.
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.
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.
Material from The Associated Press was used in this report.
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