ANALYSIS:Goldman Sachs's role in the global financial crisis is being exposed in the US Senate, writes LARA MARLOWE
DID YOU think stockbrokers, like doctors or lawyers, were obliged to look out for their clients? Think again. In the most eye-opening minutes of the April 27th Senate hearing on the role of investment banks in the financial crisis, senator Susan Collins repeated the same question to four Goldman executives: “Did you have a duty to act in the best interest of your clients?” Three of the four hemmed and hawed but refused to give a Yes or No answer. “I do not believe we are acting as investment advisers for our clients,” said Fabrice Tourre, a French-born executive director who is the only Goldman employee named in a Securities and Exchange Commission (SEC) civil suit against Goldman.
“Your clients are not paying you big fees to conduct transactions,” Senator Collins chided Michael Swenson, a managing director. “They are paying you for judgment as well.” Only Joshua Birnbaum, a former managing director who has left Goldman, said that yes, Goldman had a duty to act in the best interest of its clients. But even he would not commit to Collins’ follow-up question: “Do you think Congress should impose a clear fiduciary duty on brokers to act in the best interest of clients?”
Republican senators were so humbled by the arrogance and evasiveness of seven Goldman executives, including the firm’s chief executive Lloyd Blankfein, that they flip-flopped and stopped filibustering a proposed Bill on financial regulation.
After the SEC filed its suit for fraud against Goldman, the Democrats cleverly stopped calling the legislation “financial regulatory reform” and instead labelled it “Wall Street reform”.
When he engineered last year’s bailout of Wall Street, the US treasury secretary Timothy Geithner, a Wall Street insider, argued that the government had to choose between punishing the banks or seeing the whole system collapse. America held its nose and drank the bitter potion, but it may never regain the naive faith in bullish markets of recent decades. The Goldman hearing confirmed what many long suspected: that the system was rigged in favour of the bankers.
Goldman executives showed themselves to be blind and deaf to the moral implications of their actions. It was easy to shrug off the $3.7 billion in profits they made by “shorting” mortgage-backed securities – anticipating the collapse of the property market and betting that the securities they sold would fail. The reality was that Goldman was the top end of the chain of unscrupulous mortgage lenders and ratings agencies whose machinations dispossessed millions of Americans of their jobs and homes and nearly brought down the world economic system.
Goldman also played a part in the European debt crisis, selling derivatives to Greece to help doctor that country’s books, then selling dodgy Greek bonds to its own clients.
Goldman Sachs was supposed to be the Rolls Royce of investment houses, the gold standard. “Not enough attention has been paid to the way Goldman got in bed with shysters running boiler rooms in California,” said a financial analyst who attended the hearing. “The Goldman guys all go to Harvard and Princeton. They wear $1,000 suits. All they had to do was fly out to California. They would have known in five minutes. They did it because that was where the money was.”
As Senator Claire McCaskill noted, “The cultural reality of what you all do is just jarring to many Americans ... it seems like hamsters in a cage trying to get compensation rather than producing any society value.”
In an interview with ABC News after the hearing, Blankfein, (who was paid $68 million by Goldman in 2007, the year the crisis started) said he has no intention of resigning and complained that Goldman was “getting disproportionate treatment”.
Blankfein may be the most hated man in America. Matt Taibbi of Rolling Stonenotoriously called him "a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money".
Yet Blankfein is as thick-skinned as he is rich. In an interview with the Sunday Timesof London last November, he boasted that he was "doing God's work", that his bank was involved in "a virtuous cycle" that had "a social purpose".
In the Abacus transaction, the specific case targeted by the SEC, Goldman is accused of allowing a favoured client, John Paulson, to choose a package of toxic mortgage-backed securities on whose failure Paulson then bet. Tourre, who devised the deal, did not tell investors of Paulson’s role.
In a similar example, seized upon by Senator Tom Coburn in the Senate hearing, Goldman sold $300 million of what an internal e-mail called “one shitty deal” to hedge funds controlled by Bear Stearns. Four months later, then trader Josh Birnbaum advised his firm to “short” or bet against Bear Stearns stock. Birnbaum said he was only being “a good risk manager”. One commentator suggested any future hearings should include a spin-to-English translator.
Tourre, 31, has become a hate figure almost on a par with Blankfein, for referring to himself as “fabulous Fab”, and boasting of fleecing widows and orphans in private e-mails that Goldman released to the press. Yet for all his Gallic swagger, “Fab” was the only Goldman executive to show awareness of a moral dimension. “Anyway, not feeling too guilty about this,” he wrote in one e-mail. He was helping the US consumer “to leverage and finance himself, so there is a humble, noble and ethical reason for my job”. Tourre then added: “Amazing how good I am in convincing myself.”
The US billionaire Warren Buffett called derivatives such as synthetic collateralised debt obligations (CDOs) and credit-default swaps (CDSs), which were largely responsible for the financial meltdown, “financial weapons of mass destruction”. Tourre understood this.
“What if we created a ‘thing’ which has no purpose, which is absolutely conceptual and highly theoretical and which nobody knows how to price?” he wrote.
Goldman is now lobbying to kill a provision in the Senate’s draft legislation that would force them and other investment banks to sell off the derivatives-trading business.
Observers expect Goldman to pay a fine in an out-of-court settlement with the SEC. “Most of these [fraud] cases are resolved before they go to trial,” observed a lawyer who attended the hearing. “No one goes to jail.”
Perhaps the only thing bankers learned from the Goldman scandal was to be more careful about what they write in e-mails which could find their way into a Senate hearing.
Senator Carl Levin was criticised by prudish commentators for repeatedly quoting Goldman executives calling the securities they sold “junk”, “crappy” and “shitty”.
Their mistake was getting caught, chief financial officer David Viniar implied, provoking the only laughter in the 11-hour session. “I think that’s very unfortunate to have on e-mail,” Viniar said.