Goldman Sachs executives grilled on Capitol Hill

WASHINGTON (AP) - Top Goldman Sachs officials defended their
conduct in the financial crisis on Tuesday, flatly disputing the
government's fraud allegations against the giant financial house.
"I did not mislead" investors, insisted a trading executive at
the heart of the government's case.
But they ran into a wall of bipartisan wrath before a Senate
panel investigating Goldman's role in the financial crisis and the
Securities and Exchange Commission fraud suit against it and one of
its traders. Democratic Sen. Carl Levin of Michigan accused Goldman
of making risky financial bets that "became the chips in a giant
casino."
Fabrice Tourre, a 31-year-old trader at Goldman and the only
company official directly accused in the SEC suit - testified that
he does not recall telling investors that a Goldman hedge fund
client had bought into an investment that soured. Instead, the
hedge fund, Paulson & Co., bet against the security - and profited
handsomely.
"I deny - categorically - the SEC's allegation," Tourre said.
"And I will defend myself in court against this false claim."
Federal regulators said Tourre marketed an investment designed
to lose value. 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."
About a half dozen protesters were in the committee room,
dressed in prison stripes with names on signs around their necks of
Tourre and Goldman CEO Lloyd Blankfein, who was also scheduled to
testify.
"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.
Ten days after the SEC action, the panel is looking into
allegations that Goldman used a strategy that allowed it to profit
from the housing meltdown and reap billions at the expense of
clients.
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," Levin 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 risky investments it was selling them.
Sparks said that the clients "should look at the assets
themselves" that made up the mortgage-based securities they were
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 comes as the Senate grapples 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.
Levin accused Wall Street firms of selling securities to clients
that 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
overhaul bill would "put a cop back on the Wall Street beat."
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."
And Sen. Claire McCaskill, D-Mo., accused Goldman of "pure and
simple raw gambling."
Goldman is accused of reaping billions at the expense of
clients.
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 from the
documents 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."
But Levin asserted: "I think they're misleading the country."
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.
The Senate panel provided excerpts of e-mails showing a
progression from late 2006 through the full-blown mortgage crisis a
year later. Levin said they show Goldman shifted in early 2007 from
neutral to a short position, betting that the mortgage market was
likely to collapse.
"That directional change is mighty clear," Levin said. "They
decided to go gangbusters selling those securities" while knowing
they were sour.
"We have a big short on," Tourre wrote in a December 2006
e-mail.
Daniel Sparks, a former head of Goldman's mortgages department,
wrote to other executives in March 2007, "We are trying to close
everything down, but stay on the short side."

(Copyright 2010 by The Associated Press. All Rights Reserved.)


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