Senators Express Disgust, Anger as Goldman Execs Squirm
In subcommittee hearing on financial crisis, legislators raise issues of lack of transparency and conflict of interest
Sue Reisinger, Corporate Counsel, April 28, 2010
The Senate Permanent Subcommittee on Investigations, which is probing the causes of the market meltdown, summoned the seven finance executives to Washington to answer questions about Goldman's role in the crisis. But what senators heard was a group of people claiming they may have made some bad judgments, but had done nothing illegal or unethical.
Sen. John McCain, R-Ariz., countered, "I don't know if they've done anything illegal ... but there's no doubt that their behavior was unethical."
The Securities and Exchange Commission, for one, thinks the executives' actions were illegal. On April 16 the SEC sued the company (pdf) and one trader, Fabrice Tourre, who was among those grilled Tuesday, for fraud.
The SEC alleges the giant Wall Street bank profited by selling subprime mortgage investments that were secretly designed to fail.
At the heart of the issue is Goldman's making money off certain deals by taking a "short" position -- in effect, betting that the deal would lose value. At the same time, Goldman was selling the deals to its investors, many of whom expected the deals to increase in value, without disclosing its own position.
At the hearing, the tension reached its highest point when Chairman Carl Levin, D-Mich. -- who repeatedly quoted obscenities from subpoenaed Goldman Sachs e-mails -- furiously questioned Goldman CEO Lloyd Blankfein.
Levin: "How do you expect to deserve the trust of your clients?"
Blankfein: "Our clients trust is not only important to us. It's essential to us. It's why we're successful."
Levin: "Do they know you think they're buying a piece of crap?
Blankfein: "We are principals. The act of selling something is that we are the other side of what our clients want to do."
Levin: "Not just that you sold something. We're talking about betting against the very thing that you're selling. Without disclosing."
Sitting in the first row of onlookers at the hearing was Gregory Palm, Goldman's co-general counsel who has publicly defended the company's actions.
The hearing opened with Levin comparing the causes of the 2008 crisis with the Great Depression of the 1930s. "The results of the unregulated activities of the investment bankers [in the 1930s] were disastrous," a report at the time concluded.
"The parallels today are unmistakable," Levin said. He accused Goldman of "repeatedly putting its own interests and profits ahead of the interests of its client and our communities."
Levin pressed panel members as to why they didn't disclose certain facts to investors. The answer came down to this: They didn't have to.
Fabrice Tourre, a self-described "market maker" for Goldman in London, explained that his duty was to tell investors about the assets in the deal and how the deal would work, and nothing more. Tourre is the trader being sued by the SEC.
As each panelist insisted he had done nothing wrong and had no regrets, Levin fired back, "You ought to have plenty of regrets, even though you won't acknowledge them."
During the session, senators complained repeatedly that the employees were dodging their questions. At one point, an exasperated Levin gave up, saying, "OK, you've not answered the question as best you can, so let's move on."
Among the most critical voices was Claire McCaskill, D-Mo., who accused the traders of gambling. "You had less oversight than a pit boss in Las Vegas," she said. "What you worried about most was a bad article in The Wall Street Journal, not a regulator."
Senator after senator pointed to specific deals and raised issues of lack of transparency and conflict of interest. They asked how Goldman could repackage a group of triple-B rated securities, convince credit rating agencies to rescore the portfolio as triple A, and then sell the portfolio to investors without disclosing the change.
On learning that Goldman often paid the rating agencies for their rescoring, Sen. John Ensign, R-Nev., asked, "Isn't there the appearance of at least a potential conflict of interest?"
One panelist conceded, "There's that concern."
Ensign said Wall Street differs from Las Vegas in a key way. "In Las Vegas they set the odds in advance. On Wall Street they manipulate the odds while you're playing the game. Wall Street definitely had a role in the crisis."
Ensign also challenged Tourre's explanation that he was simply a neutral market maker arranging deals for willing buyers and sellers.
"You say you are market makers, but we want to know if you are also market manipulators," Ensign said.
Finally Sen. Susan Collins, R-Maine, asked about possible finance reform. "Do you think that Congress should impose a clear fiduciary obligation on broker-dealers to act in the best interest of their clients, similar to legal requirements now imposed on investment advisers?" she asked.
Joshua Birnbaum, a former Goldman employee who left in 2008 to start his own advisory firm, gave the idea a lukewarm reception. "Conceptually, it seems like an interesting idea," he offered.