Top Goldman Sachs officials defended their conduct in the financial crisis 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.”
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.
“Its conduct brings into question the whole system of Wall Street,” Levin, the committee chairman, said of the investment banking firm.
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 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.
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.
Goldman executives misled investors in complex mortgage securities that turned bad, investigators for the panel said. They pointed to a trove of some two 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 Loyd Blankfein, CEO of Goldman Sachs, 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.
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.”
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.”
Sparks wrote to other executives in March 2007, “We are trying to close everything down, but stay on the short side.”