Goldman Execs Teed Up; Will Senate Swing Hard?
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.
The Goldman executives, in their prepared testimony, took the opportunity to insist that the bank's behavior in the run-up to the financial crisis was simply business as usual, an effort to manage the firm's risk.
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" vigorously denies in his prepared testimony that he misled investors. Tourre insists that his clients, all "sophisticated" financial institutions, had the expertise, experience and opportunity to analyze deals for themselves.
Watch Blankfein's and Tourre's Senate testimony on CBSNews.com starting at 10 a.m. EDT Tuesday
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. In his testimony, Tourre says he never told ACA Management LLC, who had the final say in selecting the mortgage assets for the security and was one of the security's chief investors, that Paulson was an equity investor in the deal, meaning it was betting the investment's value would go up.
CBSNews.com Special Section: Wall Street Under Fire
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."
Blankfein: Goldman Didn't Bet Against Clients
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."
Probe: Goldman Eyed Profits from Housing Bust
Republican Sen. John McCain, disagreed, saying Goldman was hedging its bets.
I don't think they were betting against themselves," McCain told CBS' "The Early Show" Tuesday. The Arizona senator added though that Goldman's actions, "had the effect of worsening and deepening the housing crisis."
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."
CBS/ AP 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.
The Goldman executives, in their prepared testimony, took the opportunity to insist that the bank's behavior in the run-up to the financial crisis was simply business as usual, an effort to manage the firm's risk.
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" vigorously denies in his prepared testimony that he misled investors. Tourre insists that his clients, all "sophisticated" financial institutions, had the expertise, experience and opportunity to analyze deals for themselves.
Watch Blankfein's and Tourre's Senate testimony on CBSNews.com starting at 10 a.m. EDT Tuesday
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. In his testimony, Tourre says he never told ACA Management LLC, who had the final say in selecting the mortgage assets for the security and was one of the security's chief investors, that Paulson was an equity investor in the deal, meaning it was betting the investment's value would go up.
CBSNews.com Special Section: Wall Street Under Fire
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."
Blankfein: Goldman Didn't Bet Against Clients
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."
Probe: Goldman Eyed Profits from Housing Bust
Republican Sen. John McCain, disagreed, saying Goldman was hedging its bets.
I don't think they were betting against themselves," McCain told CBS' "The Early Show" Tuesday. The Arizona senator added though that Goldman's actions, "had the effect of worsening and deepening the housing crisis."
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."
Popular on MoneyWatch
- TGI Fridays nailed for doctoring booze
- Reverse cell phone lookup service is free and simple
- Snapple co-founder Leonard Marsh dies at 80
- Amy's Baking Company could face legal 'nightmare'
- How Bernanke's testimony affects investors
- When it comes to vacations, the U.S. stinks
- Help! My boss is promoting the wrong person
- My company is ending OT pay, but not OT work
Go and tell that midnight rider
Tell the rambler, the gambler, the back biter
Tell 'em that God's gonna cut 'em down
----The Gospel according to Johnny Cash-----
We still have massive amounts of people (including almost all Republicans) apologizing for the big corporations and their crooked runaway capitalism.
How did so many people get brainwashed by the twisted, corrupt ideas of Reagan? It is because the same criminals who are robbing us blind also own the media and the military.
Why won't Republicans allow a debate on reforming Wall Street?
The party of NO says what?
With plenty of press so you can see it you know open door policy. The people demand to see Justice
This country needs another revolution. Laws mean nothing if they are never enforced.
THAT IT CAN BRING A NATION'S ENTIRE ECONOMY TO ITS KNEES,
AND BRING RUIN TO SO MANY MILLIONS OF LIVES,
such should qualify for consideration under treasonous 'nation-wrecking' laws, making those who calculated and plotted such massive swindles against an entire nation, eligible for capital punishment.
These greedy, unconscionable parasitic investment banker/'financiers' continue to take so much from us and contribute nothing but pain, and destroyed lives that they directly should be held responsible for.
Absence of justice with regard to these 'financiers' crimes will likely breed more corruption and further disrespect and disregard for our laws and for people's lives.
The people and the victims call for lengthy prison terms with hard labor for these criminals at the very least, and call for capital punishment for those who were the masterminds and who deliberately planned this financial destruction on such massive scale - AGAINST ALL OF US !
Is it a deal. No the socialist/communist gov. people want to completely destroy the big companies in the USA. These big companies are our real strength in this world. If we lose free enterprise and humongous comapnaies we will be no stronger than the UK or Russia.
Then tell those companies to stop begging at the Washington trough for welfare handouts.
Big corporations, by and large, cannot exist except by the "grace" of government intervention. True free markets would see these bloated bums get eviscerated by hungry, nimble mid-size firms. With notable exceptions in oil and gas (e.g. Exxon), most big corps cannot survive without constant government enforced monopolies and government dole.
Big corp does not equal free enterprise bonehead.