Goldman Sachs Executives Grilled in Senate Hearing

Annemarie McAvoy in BusinessWeek, April 27, 2010

Media Source

By Jody Shenn and Michael J. Moore

April 27 (Bloomberg) -- Goldman Sachs Group Inc. executives were grilled by U.S. lawmakers who compared the bank’s mortgage bankers to bookies as Senator Carl Levin asked why they sold securities the company itself called “shitty.”

“How about the fact that you sold hundreds of millions of that deal after your people knew it was a shitty deal?” the Michigan Democrat asked Daniel Sparks, who ran the bank’s mortgage unit at the time. “Does that bother you at all?”

Members of Levin’s Permanent Subcommittee on Investigations, winding up a probe of Goldman Sachs that has lasted more than a year, used today’s hearing to pepper current and former executives with questions about their duty to clients and the ethics of betting against the housing market as the bank also sold mortgage-linked securities to customers.

Seven current and former Goldman Sachs employees including Chief Executive Officer Lloyd Blankfein are testifying about the mortgage-securities business in the years leading to the biggest financial crisis since the Great Depression.

“You are the bookie, you are the house,” said Senator Claire McCaskill, a Missouri Democrat. “You had less oversight than a pit boss in Las Vegas.”

Senator John Ensign, a Republican, said residents in Las Vegas in his home state of Nevada would take offense at being compared with Wall Street.

“In Las Vegas most people know that the odds are stacked against them,” Ensign said. “On Wall Street they manipulate the odds while you’re playing the game.”

2007 E-Mail

David Viniar, Goldman Sachs’s chief financial officer, told the panel that “we share responsibility” for the financial crisis. He also said “we care very much about ethics at Goldman Sachs.”

In his comments to Sparks, Levin was referring to a June 2007 e-mail to Sparks from Thomas Montag, the former head of sales and trading in the Americas at Goldman Sachs. 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 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.

Shares Rise

As the executives testified, Goldman Sachs was the only stock among 79 financial companies that gained in the Standard & Poor’s 500 Index. The stock rose $1.01 to $153.04 as of 5:04 p.m. in New York Stock Exchange composite trading.

Goldman Sachs, the most profitable securities firm in Wall Street history, was sued for fraud earlier this month by the Securities and Exchange Commission on a similar deal. The company contests the claim.

Fabrice Tourre, the only Goldman Sachs employee named by the SEC, said he “categorically” denied the SEC’s allegations. “I will defend myself in court against this false claim,” Tourre, 31, told the standing-room-only hearing.

The transaction referred to by Levin was Timberwolf Ltd., a $1 billion collateralized debt obligation holding pieces of other CDOs as well as bets that CDOs would continue to perform well.

Timberwolf’s Liquidation

“Boy that timberwo[l]f was one shitty deal,” Montag, who is now Bank of America Corp.’s president of global banking and markets, said in a June 22, 2007, e-mail. Within five months of Timberwolf’s debut, the CDO had lost 80 percent of its value, and it was liquidated in 2008.

“The message that I took from the e-mail from Mr. Montag was that my performance on that deal wasn’t good and I think the fact that we had lost money related to that wasn’t good,” Sparks said. “I didn’t use that term in respect to this deal.”

Montag, now 53, isn’t scheduled to appear and didn’t respond to a request for comment. Bank of America spokeswoman Jessica Oppenheim declined to comment.

CDOs repackage pools of assets such as mortgage bonds, bank capital notes and buyout loans into new securities with varying risks.

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 CDO manager select securities to include in the portfolio involved in the SEC suit. Goldman Sachs has called the lawsuit “completely unfounded.” Paulson wasn’t accused of wrongdoing.

‘Fall Guy’

Annemarie McAvoy, a former inside counsel at Citigroup Inc. and Morgan Stanley, said the Senate inquiry was being used to assign blame for problems such as unemployment that weren’t the fault of Goldman Sachs.

“Goldman is being used as the fall guy here, being vilified and accused of things that they were not even involved with, such as causing the fall of the housing market and giving unreasonable loans to investors,” said McAvoy, who is now a professor at Fordham University School of Law.

Susan Collins, a Republican Senator from Maine, said even legal practices raise ethical concerns.

“There is something unseemly about Goldman betting against the housing market at the same time as it is selling to its clients mortgage-backed securities containing toxic loans,” she said.