Goldman Sachs officials strongly disputed barbed accusations Tuesday from U.S. senators that the firm cashed 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 before the Senate panel investigating Goldman's role in the national financial crisis. Democratic Sen. Carl Levin of Michigan 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."
Among the officials testifying Tuesday was Fabrice Tourre, a 31-year-old Goldman trader who, along with the firm, has been charged with civil fraud by the Securities and Exchange Commission.
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.
Tourre testified that he doesn't recall telling investors that.
"I deny — categorically — the SEC's allegation," Tourre said. "And I will defend myself in court against this false claim."
Through hours of questioning, the executives stood their ground. They 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.
Tourre said: "I am saddened and humbled by what happened in the market in 2007 and 2008. ... But I believe my conduct was proper."
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.
In a brash January 2007 e-mail, Tourre called himself "The fabulous Fab ... standing in the middle of all these complex ... exotic trades he created."
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 Goldman CEO Lloyd Blankfein, who was scheduled to testify later in the day.
"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.
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, the committee chairman, 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.
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 that the 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."
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 Monday blocked the Senate from taking up the measures, but Democrats are vowing to try again.
At Tuesday's hearing, criticism of Goldman's behavior came from both sides of the aisle.
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.
Sen. John McCain, R-Ariz., 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., accused Goldman of "pure and simple raw gambling."
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.
Blankfein said in his prepared testimony that Goldman didn't bet against its clients and 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. The agency also charged Tourre.
Goldman disputes the charges and says it will contest them in court.
Blankfein repeated 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."
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.
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