- The Washington Times - Wednesday, April 28, 2010

Goldman Sachs executives on Tuesday strongly 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 Homeland Security and Governmental Affairs permanent subcommittee on investigations 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 thumbed through a thick volume of documents that the panel obtained from Goldman in charging that the leading investment house greatly profited from a strategy of betting that the housing market would collapse — an accusation the firm stoutly denied.

“We did not cause the financial crisis. I do not think we did anything wrong,” said Michael 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.

“Unfortunately, the housing market went south very quickly. So people lost money in it,” Goldman Chief Executive Officer Lloyd Blankfein said later in the afternoon, stressing that each transaction that the firm brokered had a buyer and a seller, a winner and a loser — a feature of every market. “We do hundreds of thousands, if not millions, of transactions a day.”

Josh 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.

The sometimes rowdy crowd at the hearing mostly sided with Goldman’s critics. At one point, a few members from Code Pink, dressed in mock jail suits, yelled, “We want these guys in jail” and “We want our jobs back.”

Intimidated by the approach of a Capitol Police officer, the women sat down, to the applause of other spectators. They sometimes hissed as the Goldman executives defended themselves.

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

In a grueling, daylong barrage of questioning, legislators persistently grilled the firm over individual deals that went sour, sometimes exhibiting fluency on the highly complex subject of derivatives transactions but other times fumbling over the many technicalities.

At one point, Sen. Carl Levin, Michigan Democrat and the subcommittee chairman, held up a chart that supposedly showed that Goldman held overwhelming “short” positions betting on the demise of the housing market in 2007. A Goldman executive said the figures represented only one part of the firm’s mortgage portfolio and did not include the firm’s many “long” holdings of subprime holdings that lost money.

Mr. Levin, sometimes reverting to coarse language, aggressively demanded details on intricate transactions that were completed years ago, pressing repeatedly for admissions of wrongdoing.

“You knew it was a s——y deal,” he said, referring to an internal e-mail that described one of Goldman’s subprime offerings that way. “How much of that s——y 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, like the Paulson hedge fund, were betting against the market.

Little known at the time, Paulson later gained fame as the biggest moneymaker on Wall Street in 2008, when it reaped billions of dollars from “shorts” it had placed on the imploding mortgage market.

Goldman 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, the executives said.

Goldman’s handling of a 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 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 resistance from the Senate’s 41 Republicans.

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

Political leaders and regulators, including Federal Reserve Chairman Alan Greenspan, decided against regulating the market in the late 1990s, in large part because they thought it would be self-regulating. They thought the opportunities the market presented for businesses hedged 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 like 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 properly managing risks.

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.

“We didn’t have a massive short against the housing market, and we certainly did not bet against our clients,” Mr. Blankfein said in his prepared testimony. “Rather, we believe that we managed our risk as our shareholders and regulators would expect.”

Because of Goldman’s adroit maneuvering, the firm lost only $1.2 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 Jr. — 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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