The CEO 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 an investigatory panel. "So people lost money in it."
He 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.
Goldman executives argued they did not place a massive bet against the housing market but conceded in 2007 they made a half a billion dollar profit on their mortgage investments, CBS News Correspondent Anthony Mason reports (video).
While the famous firm fought for its reputation, senators said the company's actions leading up to the financial crisis clearly demonstrated a need for stronger regulation, and Democrats hoped the hearing would build support for legislation now before the Senate.
Republicans have so far succeeded in blocking debate, and. But more test votes are expected, and GOP lawmakers floated a partial alternative they said could lead to election-year compromise on an issue that commands strong public support.
If the two parties were far apart on terms of a regulation bill, they united in criticizing Goldman in the highly charged committee room in a direct confrontation between Wall Street and Congress.
Sen. Carl Levin, D-Mich., the panel's chairman cited a "fundamental conflict" in Goldman's selling securities and then betting against the same securities - and not telling the buyers.
"They're buying something from you, and you are betting against it. And you want people to trust you. I wouldn't trust you," Levin told Blankfein.
Blankfein denied such a conflict. "We do hundreds of thousands, if not millions of transactions a day, as a market maker," Blankfein said, noting that behind every transaction there was a buyer and a seller, creating both winners and losers.
Blankfein called the announcement of the Securities and Exchange Commission's fraud allegations against Goldman last week "one of the worst days of my professional life."
In his prepared testimony, Blankfein said Goldmanand can't survive without their trust.
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.
Goldman disputes the charges and says it will contest them in court.
Blankfein repeated in his prepared testimony 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 argued 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 said. "Rather, we believe that we managed our risk as our shareholders and our regulators would expect."
During Tuesday's hearing, David A. Viniar, Goldman's executive vice president and chief financial officer, and Chief Risk Officer Craig W. Broderick testified before the committee Tuesday afternoon.
Broderick is known partly forthat Goldman bet against the mortgage market, saying, "Early in '07 our mortgage trading desk started putting on big short positions ... and made money ... as the subprime market weakened."
Goldman officials strongly disputed barbed accusations from the Senate panel investigating Goldman's role in the national financial crisis. Senators accused the firm of cashing in on the housing meltdown by crafting a strategy to bet against home loan securities while misleading its own investors.
The investment bank officials ran into a wall of bipartisan wrath. Levin accused Wall Street firms of selling securities they wouldn't invest in themselves. That's "unbridled greed in the absence of the cop on the beat to control it," he said.
Democrats hope rising public anger with Wall Street will help them push new financial regulations past Republican objections - a pending overhaul bill that Levin said would "put a cop back on the Wall Street beat."
"As we speak, lobbyists fill the halls of Congress, hoping to weaken or kill legislation aimed at reforming these abuses," said Levin. "Wall Street is on the wrong side of this fight."
But senators from both parties verbally pounded the Goldman executives, accusing them of financial gambling that helped nearly derail the entire U.S. economy.
At least in Las Vegas, said Sen. John Ensign, R-Nev., "people know the odds are against them. They play anyway. On Wall Street, they manipulate the odds while you're playing the game."
Through hours of testimony to a Senate investigative subcommittee, present and former Goldman officials disputed, sometimes testily, the SEC's recent fraud allegations.
They stronglyby crafting a strategy to bet against home loan securities while misleading its own investors.
"I will defend myself in court against this false claim," said Fabrice Tourre, a French-born 31-year-old Goldman trader who, along with the firm, was charged with civil fraud by the SEC. "I deny - categorically - the SEC's allegation."
Investors seemed unimpressed by the tough talk at the Capitol: Goldman's stock rose $1.01 per share, to $153.04, on Tuesday, a day in which the Dow Jones industrials had their worst drop in nearly three months, down 213 points.
The SEC says Tourre marketed securities without telling buyers they were chosen with help from a Goldman hedge fund client that was betting the investments would fail. The commission alleged that Tourre told investors the hedge fund, Paulson & Co., actually bought into the investments.
The executives rejected the senators' accusations that Goldman helped fuel the financial crisis that plunged the country into recession.
"We did not cause the financial crisis. ... I do not think that we did anything wrong," said Michael Swenson, who runs Goldman's structured products group trading.
Swenson offered no regrets, Mason reports.
"Regret to me means something that you feel like you did wrong, and I don't have that," Swenson said.
Tourre said: "I am saddened and humbled by what happened in the market in 2007 and 2008. ... But I believe my conduct was proper."
E-mails released over the weekend by Goldman Sachs showed Tourre'sabout his job.
In a brash January 2007 e-mail, Tourre had called himself "The fabulous Fab ... standing in the middle of all these complex ... exotic trades" that he had created "without necessarily understanding all of the implications of those monstrosities!!!"
Tourre told the panel: "I regret the e-mails. They reflect very bad on the firm and myself. I wish I hadn't sent them."
At one point, about a half dozen protesters entered the committee room, dressed in prison stripes with names on signs around their necks of Tourre and Blankfein.
"Fabulous Fab is not so fab when he takes from the poor," the protesters spoke as a chorus before the hearing started. "We want to see these guys behind bars." They hissed at times during the testimony.
When the first panel of Goldman officials got up to leave, one of the protesters ran toward them and shouted questions. "You have no ethics, Fab," the protester said. They later were taken out of the room by a Capitol Police officer.
In the wake of the SEC's civil complaint earlier this month, the panel is looking into allegations that a Goldman strategy to profit from the housing meltdown contributed to the financial crisis.
Levin said actions by Goldman Sachs wreaked havoc on the economy. "Its conduct brings into question the whole system of Wall Street," he said of the investment banking firm, one of the few to emerge from the financial crisis larger and stronger than before.
At times, the senators and the witnesses, who have long marketed complex mortgage investments like collateralized debt obligations, seemed to struggle to explain themselves to the other side. The senators cast Goldman's efforts to bet against securities as a contributor to the crisis. By contrast, the Goldman officials described their use of such trading tools as a way to reduce risks for the company and its clients.
Levin pressed Daniel Sparks, the former head of Goldman's mortgages department, on whether the company felt it had a moral obligation to disclose to clients that it was making side bets against the same investments it was selling them.
Sparks said clients "should look at the assets themselves" that make up the mortgage-based securities they are buying. "Clients who did not want to participate in that deal did not," he said of one particular transaction.
Levin shot back: "I don't think you want to answer. You're not going to answer the question, it's obvious."
Levin also asked Sparks about a $1 billion product called Timberwolf that Goldman sold to investors while betting against it. Levin cited an e-mail sent to Sparks from another Goldman executive using an expletive to describe Timberwolf as "one s--y deal."
"Your top priority is to sell that s--y deal," Levin said. "Come on, Mr. Sparks, should Goldman Sachs be trying to sell a s--y deal?"
(Watch the exchange below)
"I didn't use that term," the Goldman executive responded.
The hearing came as the Senate grappled with Democratic-sponsored legislation to overhaul the nation's financial regulation system and prevent another meltdown. The legislation would crack down on the kind of lightly regulated housing market investments that helped set off the crisis.
Republicans on Mondayfrom taking up the measures, but Democrats .
Despite this legislative tug-of-war, Goldman Sachs drew bipartisan ire.
Sen. Susan Collins of Maine, the top Republican on the panel, said Goldman officials were "celebrating the collapse of the housing market when the reality for millions of Americans is loss of homes and disappearing jobs."
"There is something unseemly about Goldman betting against the housing market at the same time it is selling to its clients mortgage-backed securities of toxic loans," she said.
And Sen. John McCain, an Arizona Republican, said that while there may not be proof that Goldman did anything illegal, a reading of e-mails from Goldman officials bragging about profiting from bets against the housing market showed "there's no doubt their behavior was unethical and the people will render a judgment as well as courts."
Sen. Claire McCaskill, D-Mo., harshly compared Goldman's behavior to "raw gambling."
"You are the bookie, you are the house. … you have less oversight than a pit boss in Las Vegas," she said.
Later, in questioning Tourre, McCaskill said Goldman was "not only making the market, you're playing in the market and mucking it up," referencing Paulson's input into CDO at the center of the SEC case.
Goldman executives misled investors in complex mortgage securities that turned bad, investigators for the panel say. They pointed to a trove of some 2 million e-mails and other Goldman documents obtained in an 18-month investigation. Excerpts were released Monday, a day before the hearing bringing Blankfein and others before the panel.
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.