- The Washington Times - Tuesday, April 27, 2010

Goldman Sachs executives on Tuesday resisted attempts by a Senate investigative subcommittee to use the storied Wall Street firm as “Exhibit A” in the Democrats’ drive to enact a sweeping reform of Wall Street practices.

Members of the Senate’s Permanent Investigations Subcommittee repeatedly accused the firm of working against its own clients as well as creating the housing and credit disaster that brought down the global economy in the fall of 2008. The legislators waved sometimes damning internal e-mails and other documents the panel obtained from Goldman suggesting it greatly profited from a massive bet that the housing market would collapse — a charge the firm stoutly denies.

“We did not cause the financial crisis,” said Michael J. Swenson, a Goldman executive whose job was to try to counterbalance the firm’s growing exposure to risky subprime mortgage securities it was holding in 2006 and 2007 by placing bets against the subprime and housing market in derivatives markets.

Echoing the view of a team of Goldman executives at the hearing, he said: “I do not think we did anything wrong. There were things we could have done better in hindsight.”

Joshua S. Birnbaum, a former Goldman trader who now runs the Tilden Park hedge fund, said Goldman was one of many participants in a global industry that offered subprime loans to people who sometimes lied about their ability to repay, and then engineered and securitized those loans into complex products that were bought by investors around the world.

“We participated in an industry that got loose,” he said.

“We may have contributed to a bubble,” he said. “We’re all sympathetic to the negative impact of that bubble,” including people losing their homes and jobs in the deep housing bust and recession that followed the collapse of the bubble.

But in the face of stinging criticism from legislators from both parties, the Goldman executives said they for the most part performed their jobs legally and ethically by assisting clients who wanted to profit from both the upside and downside of the market bubble.

Legislators persistently grilled the firm over individual deals that went sour.

“You knew it was a s–ty deal,” said Sen. Carl Levin, Michigan Democrat and the panel’s chairman, referring to an internal e-mail that described one of Goldman’s subprime offerings that way. “How much of that s–ty deal did you sell to your clients?”

But the Goldman executives said that many sophisticated investors were eager to buy the risky securities during the height of the bubble in late 2006 and early 2007, and only a few such as the Paulson hedge fund were betting against the market. Goldman itself started betting more consistently against the subprime market in 2007 largely to offset its exposure to risks in subprime securities it held, and it lost money on a lot of the transactions, they contended.

Goldman’s handling of one deal dubbed “Abacus,” the target of a Securities and Exchange Commission civil fraud case, was discussed at the hearing. The Goldman executives said it was an example of the company acting as a neutral “market maker” for clients, some of whom wanted to buy into the market and others who wanted to bet against it.

The Paulson hedge fund helped structure the Abacus deal and then took the side of betting against the market, while Germany’s IKB bank purchased the highly complex mortgage securities and lost much money as a result. At issue in the case is whether Goldman should have disclosed Paulson’s role in the deal to IKB.

“Knowledge of the counterparty is not something that has to be disclosed” under current law, said Fabrice Tourre, the only Goldman trader who was charged in connection with the SEC case. Current law requires investment banks to make extensive disclosures only to less sophisticated clients than the ones involved in the Abacus deal.

Whether Goldman acted properly in brokering subprime deals that went sour is a question not only in the SEC case but in legislation that Democrats are trying to push through the Senate in the face of so-far unanimous resistance from the Senate’s 41 Republicans.

The legislation would crack down broadly on practices that were widespread on Wall Street in a pre-crisis era where derivatives transactions were not regulated at all as a result of explicit exemptions from securities laws approved by Congress and signed by President Bill Clinton in the late 1990s. Many of the senators at the hearing voted for those exemptions.

Political leaders and regulators such as former Federal Reserve Chairman Alan Greenspan decided against regulating the market in the late 1990s, in large part because they believed it would be self-regulating because of the opportunities the market presented for businesses to hedge their exposure to risks like the collapse of the housing market or a change in the direction of interest rates.

Mr. Greenspan frequently testified that he expected firms to hedge themselves against risky holdings such as the subprime securities, and only badly run firms would get caught with excessive exposure to bad investments that weren’t properly hedged. After leaving the Fed, Mr. Greenspan disclosed that the Fed’s only oversight of the market was to try to determine whether the firms were managing risks properly.

The Goldman executives said their bets against the mortgage and housing market — though portrayed darkly as “unethical” if not illegal by even Republican committee members — were simply part of the Wall Street culture, encouraged by regulators, of covering themselves.

Because of Goldman’s adroit maneuvering, the firm lost only $1.7 billion in the subprime market in 2007, though it suffered much greater losses in 2008.

Even so, the firm insisted that it did not need the $10 billion in bailout funds that former Treasury Secretary Henry M. Paulson — himself a former Goldman executive — insisted that the firm take to cover its losses in October 2008, at the height of the crisis. Goldman repaid the money a year ago.

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