Goldman Sachs executives run the gauntlet of Senate investigation

THEY WERE masters of the universe, what Senator Susan Collins called “the top tier of the system – a major investment bank . . . one of the few Wall Street firms to actually profit from the financial crisis”.

Betrayed by the firm’s internal e-mails, executives from Goldman Sachs were yesterday grilled by the US Senate Permanent Subcommittee on Investigation for their role in selling mortgage-backed assets with names like Abacus, Timberwolf, New Century and Fremont on unsuspecting clients, then betting on the failure of those assets to reap profits for the bank.

Senator Carl Levin, the chairman of the subcommittee, has spent a year and a half investigating how overheated property markets in a few US states sparked the near meltdown of the global financial system. Levin says Goldman earned $3.7 billion through a clear strategy of “shorting” the mortgage market – gambling that it would collapse.

The hearing took place against the backdrop of the Obama administration’s struggle to enact financial regulations to prevent future failures. Late on Monday, Senate Republicans appeared to side with Wall Street by blocking a draft financial regulation Bill.

A Washington Post-ABC News poll published yesterday shows 65 per cent of Americans want stricter regulation.

In a prepared statement released before he was to testify late yesterday, Goldman chief executive Lloyd Blankfein said the filing on April 16th of a civil suit by the Securities and Exchange Commission (SEC) against Goldman Sachs for fraud “was one of the worst days in my professional life”.

Blankfein denied his firm “bet against our clients” and said it “managed our risk as our shareholders and our regulators would expect”. The SEC suit targets the Abacus 2007-AC1 instrument devised by the French-born, London-based trader Fabrice Tourre.

Last weekend, Goldman released personal e-mails sent by Tourre to girlfriends, prompting speculation that the firm hopes the 31-year old will take the fall for its dealings.

“The whole building is about to collapse any time now,” Tourre wrote in one e-mail. “Only potential survivor, the fabulous Fab . . . standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!”

In another message, Tourre boasted of having sold “a few abacus bonds to widows and orphans that I ran into at the airport”. Mr Tourre said he regretted the e-mails and denied having designed the Abacus transaction to fail.

A few minutes before the hearing started, demonstrators dressed in black and white striped prison garb, and wearing the names “Blankfein” and “Tourre” around their necks, chanted in the back of the room: “These are criminals! The American people want justice! Too big to fail but not to big to go to jail! No one should be above the law!” The audience applauded.

Senator Levin explained how the crisis occurred. Mortgage lenders “dumped their bad loans into the river of commerce and regulators failed to stop their behaviour. The credit rating agencies assured everyone that the poisoned water was safe to drink, slapping AAA ratings on bottles of high-risk financial products”.

Despite Goldman’s claims to the contrary, Levin continued: “Evidence shows that Goldman repeatedly put its own interests and profits ahead of the interests of its clients and our communities. Its misuse of exotic and complex financial structures helped spread toxic mortgages throughout the financial system. And when the system finally collapsed under the weight of those toxic mortgages, Goldman profited from the collapse.”

Goldman “profited by taking advantage of its clients’ reasonable expectation that it would not sell products that it didn’t want to succeed”, Levin continued. “It often saw its clients not as valuable customers, but as objects for its own profit . . . instead of doing well when its clients did well, Goldman Sachs did well when its clients lost money.”

The transactions in question involve “synthetic” financial instruments – collateralised debt obligations (CDOs) and credit default swaps (CDSs).

The question and answer session was revealing. Levin asked Daniel Sparks, the former head of the mortgages department, why he continued to push the sale of Timberwolf securities – to the tune of $600 million – after a Goldman employee sent him a misspelled e-mail noting, “boy that timebewof was one shitty deal”.

Senator Susan Collins pressed Tourre on an e-mail he sent proposing that Goldman focus less on “sophisticated hedge funds with which we should not expect to make too much money since (a) most of the time they will be on the same side of the trade as we will, and (b) they know exactly how things work and will not let us work for too much $$$”. Instead, Tourre suggested, traders should target more naive “rating-based buyers” who believed ill-founded AAA ratings.

The Goldman executives stonewalled, claiming, for example, that they had not understood questions.

“There may be a strategy not to give answers,” Senator Levin noted. “It’s not going to work. We are going to stay here as long as it takes.”