A Senate showdown has put Goldman Sachs' defense of its conduct in the run-up to the financial crisis on display before indignant lawmakers and a national audience. Democrats hope it also builds momentum for legislation, now before the Senate, to tighten regulation of the nation's financial system.
Goldman Sachs CEO Lloyd Blankfein testily told skeptical senators at a hearing Tuesday that clients who bought subprime mortgage securities from the Wall Street powerhouse in 2006 and 2007 came looking for risk "and that's what they got."
The Senate investigative panel alleges the firm bet against its clients — and the housing market — by taking short positions on mortgage securities, and failed to tell them that the securities it was selling were very high risk.
Blankfein was the final witness in a daylong hearing on Goldman's conduct before the financial near-meltdown that turned into the worst recession since the Great Depression. The Securities and Exchange Commission filed a civil fraud suit earlier this month against the firm and one of its traders.
Goldman's CEO and other executives were lambasted by senators for "unbridled greed" in an often-electric showdown between Wall Street and Congress — with expletives frequently undeleted. Unrepentant, five present and two former Goldman executives unflinchingly stood by their conduct before the Senate Permanent Subcommittee on Investigations, which had probed Goldman's activities for 18 months.
"Unfortunately, the housing market went south very quickly," Blankfein told the panel. "So people lost money in it."
Nearby at the Capitol, Republicans succeeded for a second day in blocking efforts to move toward Senate debate and a vote on the sweeping financial overhaul legislation. At the same time, they floated a partial alternative that they said could lead to an election-year compromise on an issue that commands strong public support. Additional votes are expected later in the week.
Among an array of changes, the legislation would crack down on the kind of lightly regulated housing market investments that helped set off the crisis in 2007.
Both sides are trying to harness voter anger toward Wall Street. Unlike with the health care debate, both Democrats and Republicans say they want tighter regulations passed — but they disagree on timing and significant details.
Whether Tuesday's hearing would help Democrats win Republican converts on the legislation remained an open question. "It's too soon to tell," Sen. Carl Levin, D-Mich., the panel's chairman, said in a brief interview outside the hearing room. "We'll have to wait until the dust settles."
At the hearing, there was hour upon hour — nearly 11 hours in all, winding up just before 9 p.m. EDT — of combative exchanges, occasional humor and long stretches of senators and Wall Street insiders speaking past each other. There was talk of ethical obligations versus financial transactions so complex they all but defy explanation. And there were a half-dozen protesters dressed head to toe in prison stripes with Goldman executives' names around their necks.
Senators from both parties verbally pounded the Goldman executives, accusing them of a financial version of rigged casino gambling that they said endangered the entire U.S. economy.
That drew a protest from Sen. John Ensign, a Nevada Republican. In Las Vegas, he said, "people know the odds are against them. They play anyway. On Wall Street, they manipulate the odds while you're playing the game."
Away from the hearing room, analysts and investors suggested the firm was surviving the hearing with its reputation intact, something its stock performance for the day may have underscored. Goldman's stock rose $1.01 to $153.04 on Tuesday, a day in which the Dow Jones industrials had their worst drop in nearly three months, down 213 points.
Levin cited a "fundamental conflict" in Goldman's selling to clients home-loan securities that company e-mails showed its own employees had derided as "junk" and "crap" — 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 in a feisty exchange. "We do hundreds of thousands, if not millions of transactions a day, as a market maker," he said, noting that behind every transaction there was a buyer and a seller, creating both winners and losers.
Levin vigorously pressed about an e-mail between Goldman executives describing one product called Timberwolf as "one s——y deal."
"Your top priority is to sell that s——y deal," Levin said. "Should Goldman Sachs be trying to sell a s——y deal?"
"I didn't use that term with respect to this deal," the executive responded.
Other senators repeated the language in their questioning.
Blankfein said the company didn't bet against its clients — and can't survive without their trust. He 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 slide.
He and other executives described their use of complex trading tools as a way to reduce risks for the company and its clients.
Earlier, Levin said that financial industry lobbyists "fill the halls of Congress, hoping to weaken or kill legislation" to increase regulation. He 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.
The Goldman witnesses strongly denied that the firm intentionally cashed in on the housing crash by crafting a strategy to bet against home loan securities while misleading its own clients.
"I will defend myself in court against this false claim," said Fabrice Tourre, a French-born 31-year-old Goldman trader who was the only individual named in the SEC suit. "I deny — categorically — the SEC's allegation."
The SEC says Tourre marketed securities without telling buyers they had been 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 said he didn't recall telling investors that.
Tourre said: "I am saddened and humbled by what happened in the market in 2007 and 2008. ... But I believe my conduct was proper."
Was Goldman harmed by the hearing?
"Despite the interrogation, the Goldman team hasn't really provided any new information," market analyst Edward Yardeni said. "And the (senators) aren't creating a more damaging view than already existed."
"Right now, it looks like the PR battle has been fought to a draw," Yardeni added.
Associated Press writers Stevenson Jacobs in New York and Jim Kuhnhenn and Michael Sandler in Washington contributed to this report.
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