http://www.bloomberg.com/apps/news?pid=20601110&sid=aE6bwG.4PBVU
Goldman Sachs Emerges From Showdown Up $549 Million (Update2)[
By Christine Harper and Michael J. Moore
April 28 (Bloomberg) -- Goldman Sachs Group Inc. executives endured more than
10 hours of congressional grilling in one of the most public, and most hostile,
political lashings in the firm’s 141-year history. By day’s end, the investment
bank’s market value had risen by $549 million.
Senator Carl Levin and members of his Permanent Subcommittee on Investigations
said evidence they presented made the case for Congress to pass legislation
tightening financial regulation. Goldman Sachs, the world’s most profitable
securities firm, was alone among 79 stocks of the Standard & Poor’s 500
Financial Index in posting a gain yesterday. The shares added 1.9 percent in
New York trading today.
“Both sides got what they wanted,” said Robert Hillman, a securities law
professor at the University of California, Davis. “The Senate probably did what
it felt it had to do, which was bring Goldman people up and embarrass them. For
Goldman, the goal was to demonstrate that they had not engaged in fraud or
illegal conduct. They probably succeeded in that.”
The senators, capping a probe of Goldman Sachs that has lasted more than a
year, peppered Chief Executive Officer Lloyd Blankfein and six current and
former executives with questions about their duty to clients and the ethics of
betting against the housing market as the bank sold mortgage-linked securities
to customers. The hearing came 12 days after the Securities and Exchange
Commission sued the New York-based firm for fraud, saying the bank misled
investors in a mortgage-linked investment known as Abacus, claims the company
denies.
‘Jarring’ Realities
“The cultural realities of what you all do is jarring to most Americans,” Sen.
Claire McCaskill, a Democrat from Missouri and former prosecutor, told
Blankfein during the hearing. “This notion of selling a product that you’re
betting against is hard for people to understand.”
Blankfein, who repeatedly insisted the company had done nothing wrong, said
after the hearing that he had “no illusions” about how hard Wall Street must
work to win back the trust of the American people.
“Wall Street has a lot of work to do to regain the confidence of Main Street,”
Blankfein told Bloomberg Television. “We have a lot to improve in our
communication with Main Street and we’re committed to do it.”
In a voicemail to employees last night, Blankfein called the questioning
“rigorous,” and said he tried to convey the “seriousness with which we adhere
to the rules and regulations that govern our business.”
Shares of the company rose $2.85 to $155.89 in composite trading on the New
York Stock Exchange at 9:59 a.m.
‘Continued External Focus’
“Let me remind you that we should anticipate continued external focus on
Goldman Sachs for the foreseeable future,” Blankfein said in the message.
“Please do not let this distract you from your daily responsibilities.”
Some senators used the hearing to advertise their position on a financial
regulatory bill that’s been blocked by Republicans so far this week. Levin
concluded the hearing by calling for tougher regulation than the bill contains,
while Republicans including Tom Coburn said they felt the measure fails to
address issues such as how to handle companies that are “too big to fail.”
As the day began, a line to enter the hearing stretched down the corridor on
the first floor of the Dirksen Senate office building, the equivalent of half a
city block. At the head of the queue were four protesters dressed in black-and-
white convict stripes and holding “wanted” posters for Blankfein and Fabrice
Tourre, the 31-year-old Frenchman who was the only Goldman Sachs employee named
in the SEC suit. Television crews from Russia and Japan were among journalists
who filled the packed room.
‘Huge Shorts’
Disagreements between the senators and the executives started with how much
money the bank earned. Levin said Goldman Sachs made $3.7 billion in 2007 by
placing “huge shorts” against mortgage-linked securities. Taking into account
losses on securities it held, the firm’s residential mortgage securities had
net revenue of less than $500 million, Chief Financial Officer David Viniar
said.
“How about the fact that you sold hundreds of millions of that deal after your
people knew it was a shitty deal?” Levin asked Daniel Sparks, who ran the
bank’s mortgage unit at the time. “Does that bother you at all?”
Levin was referring to a June 2007 e-mail from Thomas Montag, the former head
of sales and trading in the Americas at Goldman Sachs, to Sparks. The message
described a set of mortgage-linked investments that his bank had been trying to
sell as part of “one shitty deal.”
‘I Don’t Recall’
“I don’t recall selling hundreds of millions of that deal after that,” Sparks
replied, adding that he believed the e-mail referred to his performance, not
the security itself.
“If you can’t give a clear answer to that one, Mr. Sparks, I don’t think we’re
going to get too many clear answers from you,” Levin said.
Blankfein, responding to questions from Levin, said the nature of the principal
business often puts the firm on the opposite side of customers and
market-makers have no obligation to tell clients about their own position in a
security.
“What clients or customers are buying is they are buying an exposure,”
Blankfein said. “The thing we are selling to them is supposed to give them the
risk they want. They are not coming to us to represent what our views are. They
probably, the institutional clients we have, wouldn’t care what our views are.
They shouldn’t care.”
Levin ‘Troubled’
Levin, a Michigan Democrat, told Blankfein he’s “troubled” by his view that the
company doesn’t seem to understand conflicts of interest.
“You can make sure that someone you sell an investment to knows that you
believe it’s a bad investment,” Levin said. “You obviously don’t see that. It
troubles me that you don’t see that.”
Levin added, “It troubles me that you don’t see that your client is yourself.
Goldman Sachs has turned itself into its own client.”
The U.S. claims Goldman Sachs misled investors by failing to disclose that
hedge fund Paulson & Co., which was betting against the U.S. mortgage market,
helped the Abacus CDO manager select securities to include in the portfolio.
Goldman Sachs has called the SEC’s lawsuit “completely unfounded.” Paulson
wasn’t accused of any wrongdoing.
Tourre, wearing a charcoal-gray suit, white shirt and red- and-navy striped
tie, testified that he “categorically” denied the allegations. “I will defend
myself in court against this false claim,” Tourre told the standing-room-only
hearing.
Conveying Risks
“The securities weren’t meant to fail; they succeeded by conveying the risks
that people wanted,” Blankfein told Senator Jon Tester about the Abacus deal.
“I’m sorry, it’s like we’re speaking a different language here,” replied
Tester, a Democrat from Montana who was a farmer before he entered politics.
Tester said “it seemed to me more than just a little bit odd” that Paulson
helped pick securities even as he was betting against a CDO that later
collapsed in value.
The politicians expressed frustration over a lack of direct answers during the
first panel, which lasted more than five hours and featured testimony from
Tourre; Sparks; Michael Swenson, a managing director in the structured-products
group; and Joshua Birnbaum, a former managing director in the group.
Levin and Viniar, the chief financial officer, agreed on at least one thing
during his testimony: Investment bankers shouldn’t call the securities they
sell “crap.”
‘Very Unfortunate’
“I think that’s very unfortunate to have on e-mail,” Viniar said, drawing
laughter from the audience and the press, after Levin asked how he felt when he
read e-mails in which Goldman Sachs employees described mortgage-linked
securities as “crap” or “shitty.”
“Please don’t take that the wrong way,” Viniar said when pressed by Levin. “I
think that’s very unfortunate for anyone to have said that in any form.”
Levin then asked, “How about to believe that and sell it?” and Viniar agreed
that was also unfortunate.
“Well, that’s what you should have started with,” Levin said.
To contact the reporters on this story: Christine Harper in New York at
char...@bloomberg.net; Michael J. Moore in New York at mmoor...@bloomberg.net
.
Last Updated: April 28, 2010 10:03 EDT
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