Goldman Sachs Emerges From Senate Showdown Ahead $549 Million

By Christine Harper and Michael J. Moore
April 28 (Bloomberg) -- Goldman Sachs Group Inc. executives endured more than 10 hours of congressional grilling in one of the most public, and most hostile, political lashings in the firm’s 141-year history. By day’s end, the investment bank’s market value had risen by $549 million.
Senator Carl Levin and members of his Permanent Subcommittee on Investigations said evidence they presented made the case for Congress to pass legislation tightening financial regulation. Goldman Sachs, the world’s most profitable securities firm, was alone among 79 stocks of the Standard & Poor’s 500 Financial Index in posting a gain yesterday.
"Both sides got what they wanted," said Robert Hillman, a securities law professor at the University of California, Davis.
"The Senate probably did what it felt it had to do, which was bring Goldman people up and embarrass them. For Goldman, the goal was to demonstrate that they had not engaged in fraud or illegal conduct. They probably succeeded in that."
The senators, capping a probe of Goldman Sachs that has lasted more than a year, peppered Chief Executive Officer Lloyd Blankfein and six current and former executives with questions about their duty to clients and the ethics of betting against the housing market as the bank sold mortgage-linked securities to customers. The hearing came 12 days after the Securities and Exchange Commission sued the New York-based firm for fraud, saying the bank misled investors in a mortgage-linked investment, claims the company denies.

‘Jarring’ Realities

"The cultural realities of what you all do is jarring to most Americans," Sen. Claire McCaskill, a Democrat from Missouri and former prosecutor, told Blankfein during the hearing. "This notion of selling a product that you’re betting against is hard for people to understand."
Blankfein, who repeatedly insisted the company had done nothing wrong, said after the hearing that he had "no illusions" about how hard Wall Street must work to win back the trust of the American people.
"Wall Street has a lot of work to do to regain the confidence of Main Street," Blankfein told Bloomberg Television. "We have a lot to improve in our communication with Main Street and we’re committed to do it."
Some senators used the hearing to advertise their position on a financial regulatory bill that’s been blocked by Republicans so far this week. Levin concluded the hearing by calling for tougher regulation than the bill contains, while Republicans including Tom Coburn said they felt the measure fails to address issues such as how to handle companies that are "too big to fail."

Russian, Japanese TV

As the day began, a line to enter the hearing stretched down the corridor on the first floor of the Dirksen Senate office building, the equivalent of half a city block. At the head of the queue were four protesters dressed in black-and- white convict stripes and holding "wanted" posters for Blankfein and Fabrice Tourre, the 31-year-old Frenchman who was the only Goldman Sachs employee named in the SEC suit.
Television crews from Russia and Japan were among journalists who filled the packed room.
Disagreements between the senators and the executives started with how much money the bank earned. Levin said Goldman Sachs made $3.7 billion in 2007 by placing "huge shorts"
against mortgage-linked securities. Taking into account losses on securities it held, the firm’s residential mortgage securities had net revenue of less than $500 million, Chief Financial Officer David Viniar said.
"How about the fact that you sold hundreds of millions of that deal after your people knew it was a shitty deal?" Levin asked Daniel Sparks, who ran the bank’s mortgage unit at the time. "Does that bother you at all?"

‘One Shitty Deal’

Levin was referring to a June 2007 e-mail from Thomas Montag, the former head of sales and trading in the Americas at Goldman Sachs, to Sparks. The message described a set of mortgage-linked investments that his bank had been trying to sell as part of "one shitty deal."
"I don’t recall selling hundreds of millions of that deal after that," Sparks replied, adding that he believed the e-mail referred to his performance, not the security itself.
"If you can’t give a clear answer to that one, Mr. Sparks, I don’t think we’re going to get too many clear answers from you," Levin said.

Goldman as ‘Own Client’

Blankfein, responding to questions from Levin, said the nature of the principal business often puts the firm on the opposite side of customers and market-makers have no obligation to tell clients about their own position in a security.
"What clients or customers are buying is they are buying an exposure," Blankfein said. "The thing we are selling to them is supposed to give them the risk they want. They are not coming to us to represent what our views are. They probably, the institutional clients we have, wouldn’t care what our views are.
They shouldn’t care."
Levin, a Michigan Democrat, told Blankfein he’s "troubled" by his view that the company doesn’t seem to understand conflicts of interest.
"You can make sure that someone you sell an investment to knows that you believe it’s a bad investment," Levin said.
"You obviously don’t see that. It troubles me that you don’t see that."
Levin added, "It troubles me that you don’t see that your client is yourself. Goldman Sachs has turned itself into its own client."
The U.S. claims Goldman Sachs misled investors by failing to disclose that hedge fund Paulson & Co., which was betting against the U.S. mortgage market, helped the Abacus CDO manager select securities to include in the portfolio. Goldman Sachs has called the SEC’s lawsuit "completely unfounded." Paulson wasn’t accused of any wrongdoing.

Tourre Speaks

Tourre, wearing a charcoal-gray suit, white shirt and red- and-navy striped tie, testified that he "categorically" denied the allegations. "I will defend myself in court against this false claim," Tourre told the standing-room-only hearing.
"The securities weren’t meant to fail; they succeeded by conveying the risks that people wanted," Blankfein told Senator Jon Tester about the Abacus deal.
"I’m sorry, it’s like we’re speaking a different language here," replied Tester, a Democrat from Montana who was a farmer before he entered politics. Tester said "it seemed to me more than just a little bit odd" that Paulson helped pick securities even as he was betting against a CDO that later collapsed in value.
The politicians expressed frustration over a lack of direct answers during the first panel, which lasted more than five hours and featured testimony from Tourre; Sparks; Michael Swenson, a managing director in the structured-products group; and Joshua Birnbaum, a former managing director in the group.

Don’t Sell ‘Crap’

Levin and Viniar, the chief financial officer, agreed on at least one thing during his testimony: Investment bankers shouldn’t call the securities they sell "crap."
"I think that’s very unfortunate to have on e-mail,"
Viniar said, drawing laughter from the audience and the press, after Levin asked how he felt when he read e-mails in which Goldman Sachs employees described mortgage-linked securities as "crap" or "shitty."
"Please don’t take that the wrong way," Viniar said when pressed by Levin. "I think that’s very unfortunate for anyone to have said that in any form."
Levin then asked, "How about to believe that and sell it?" and Viniar agreed that was also unfortunate.
"Well, that’s what you should have started with," Levin said.

Goldman's Tourre: Hedge Funds Not Wanted in CDO Deal

The knives were out and sharpened when Goldman Sachs appeared at a Senate subcommittee looking into the role of investment banks in the financial crisis.

The focus of the first round of inquisitions by the Subcommittee on Investigations was on Goldman's sale of collateralized debt obligations (CDOs), in which the investment bank allegedly had short positions.

The investment bank is the subject of a Securities and Exchange Commission civil lawsuit that claimed Goldman put together a CDO deal with the help of hedge fund firm Paulson & Co., which was publicly known to be short the subprime mortgage market. The SEC claimed that Goldman didn't tell its clients about Paulson's involvement.

Goldman responded that the responsibility for choosing the ABACUS portfolio was the responsibility of its third-party manager, ACA, and the nature of synthetic CDOs was such that a long position always implied a short position.

Fabrice Tourre, the Goldman executive who was in charge of the CDO deal that was the subject of the SEC lawsuit, appeared at the morning part of the hearing.

Sen. Claire McCaskill (R.-Maine) pointed out an e-mail that Tourre wrote in Dec. 28, 2006, which she said inferred that Goldman Sachs should not go after so many hedge funds as clients for their structured products as they were too sophisticated.

"We should not expect to make too much money as they will be on the same side of the trade as we will and they know exactly how things work and will not let us work for too much money, as opposed to buy and hold ratings-based buyers," McCaskill said, reading from Tourre's e-mail.

Tourre said he wasn't claiming that ratings-based clients were less sophisticated, but that hedge fund firms tended to "argue about prices."

"With respect to our role as a market maker, money made is on bid-offer spreads," Tourre said.

"All the clients we did business with on the CDO desk, including ACA and IKB," Tourre said, "were highly sophisticated institutions which fall into the ratings-based investor category."

The SEC lawsuit focuses on one CDO deal that was part of a structured product named ABACUS. The agency names two investors -- ACA and German bank IKB -- as Goldman clients who lost money in the deal