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ANALYSIS
(April 27) -- An increasingly frustrated Republican Sen. Susan Collins wanted a yes-or-no answer.
Did Fabrice Tourre, the Goldman Sachs executive accused of securities fraud in a government lawsuit against the firm, think Goldman owed a good-faith effort to all the company's investors?
"I understand that you do not have a legal fiduciary obligation. But did the firm expect you to act in the best interests of your clients as opposed to acting in the best interests of the firm?" she asked during questioning about a series of deals that featured heavy investor losses on bonds backed by home mortgages amid hefty profits for Goldman on bets against the housing market.
"Could you give me a yes or no to whether or not you considered yourself to have a duty to act in the best interests of your clients?" she repeated.
"I believe we have a duty to serve our clients well," Tourre answered, providing neither a yes nor a no -- nor the clear answer Collins eventually decided she wasn't going to get.
Tourre, who "categorically" denied the civil charges against him filed by the Securities and Exchange Commission, was categorical about little else.
The image of Goldman Sachs emerging from the first of today's hearings at the Senate Permanent Subcommittee on Investigations -- and a stack of documentary evidence nearly a foot thick -- was of a company that foresaw the looming meltdown for subprime mortgages and was willing to sell doomed-to-fail financial products in order to come out ahead.
The hearing, aimed at supporting a federal overhaul of financial regulation, featured testimony from clean-cut, apparently bright young men who used complex financial jargon beyond the understanding of most Americans but who repeatedly said they couldn't understand the senators' questions.
And it focused on internal Goldman e-mails discussing the reassurance of customers buying securities that would crumble, using expletives to describe risky investments the firm was trying to sell, and touting the profits Goldman was making by shorting -- or betting against -- the housing market starting in early 2007.
The outrage expressed by senators of both parties toward the relatively junior Goldman executives during five hours of testimony targeted a scandal very different in nature from the round of financial transgressions that dominated headlines after the last recession. There was no clear criminal taint like that of the massive fabrications WorldCom made to investors, alleged insider trading of Martha Stewart or wholesale swindling by Enron. It was nothing like the more recently uncovered grand-scale larceny in the Ponzi schemes of Bernard Madoff.
Rather, Goldman stands accused of perverting American capitalism through an excess of greed by using accepted, if exotic, Wall Street practices to make money when most people were losing it.
"Surely there is no law, ethical guideline or moral injunction against profit, but Goldman Sachs didn't just make money," committee Chairman Carl Levin said. "It profited by taking advantage of its clients' reasonable expectation that it would not sell products that it didn't want to succeed, and that there was no conflict of economic interest between the firm and the customers it had pledged to serve. Goldman's actions demonstrate that it often saw its clients not as valuable customers, but as objects for its own profit."
For Goldman, that's a hazardous picture both for its political prospects at a time when Washington is looking to shake up the financial playing field, and for the legal environment surrounding the SEC's civil charges against the firm. Even more dangerous for Goldman is the message that today's hearing may send to investment clients who could reason their money is safer elsewhere.
But to the inquiring senators, the strategies exposed at Goldman are just an example of practices they see across the industry.
"Its conduct brings into question the whole function of Wall Street," Levin said. Isn't there a "fundamental" conflict of interest in Goldman's sale of securities to clients at the same time it is betting against them, he asked Goldman Chief Executive Lloyd Blankfein.
"They're buying something from you, and you are betting against it. And you want people to trust you," Levin said. "I wouldn't trust you."
Blankfein repeatedly said he sees no conflict.
At times, senators and the current or former Goldman executives before them seemed to be speaking two different languages, a disparity that had nothing to do with the clipped French accent of Tourre, who helped oversee the creation and sale of financial derivatives tied to mortgages and other assets.
Late in the hearing, Levin pressed Tourre about a document stating that Goldman and a firm called ACA Management chose the mortgage-backed securities that went into a $2 billion package but omitted the fact that hedge fund Paulson & Co. -- which was betting against the securities -- played a large role in choosing what went into the package. The SEC says Goldman also kept that fact hidden from ACA, which thought Paulson was going "long" on the securities, or betting on their success.
"It could have been more accurate," Tourre acknowledged. But he repeatedly tried to avoid directly answering Levin's query about what was inaccurate. "If ACA was confused about Paulson's role in the transaction, it had every opportunity to clarify the issue," he said earlier.
Asked by Levin if Goldman was morally obliged to tell clients it was making bets against the investments it sold, Daniel Sparks, former head of Goldman's mortgages unit, also declined to answer directly, stating instead that investors "should look at the assets themselves."
Exasperated senators weren't buying.
They pointed to an e-mail from Tourre suggesting Goldman would profit more from selling such products less often to "sophisticated hedge funds with which we should not expect to make too much money since (a) most of the time they will be on the same side of the trade as we will, and (b) they know exactly how things work." Instead, Tourre suggested Goldman find investors who follow the credit ratings of agencies like Moody's and Standard & Poor's.
They asked about Goldman strategies aimed at getting strong credit ratings for investment bundles rife with ill-fated securities, whether it was wrong for Goldman to make investors more "comfortable" with investments that its executives were internally describing as "sh***y," and why the witnesses repeatedly emphasized Goldman's losses on mortgage-backed securities but were vague about the firm's much bigger profits in that area.
"It is unsettling to read e-mails of Goldman executives celebrating the collapse of the housing market when the reality for millions of Americans is lost homes and disappearing jobs," Collins said.
To Goldman's Blankfein, the disconnect between the two sides suggests the senators, the SEC and the public just don't understand how Wall Street works.
"While we strongly disagree with the SEC's complaint, I also recognize how such a complicated transaction may look to many people," Blankfein said. "To them, it is confirmation of how out of control they believe Wall Street has become, no matter how sophisticated the parties or what disclosures were made. We have to do a better job of striking the balance between what an informed client believes is important to his or her investing goals and what the public believes is overly complex and risky."
To Levin, that's an example of Wall Street's "self-serving" attitude. And "the ultimate harm here is not just to clients poorly served by their investment bank. It's to all of us," he said.
The problem, for a Congress trying to enact new rules for Wall Street, is that you can't legislate attitude.
(April 27) -- An increasingly frustrated Republican Sen. Susan Collins wanted a yes-or-no answer.
Did Fabrice Tourre, the Goldman Sachs executive accused of securities fraud in a government lawsuit against the firm, think Goldman owed a good-faith effort to all the company's investors?
"I understand that you do not have a legal fiduciary obligation. But did the firm expect you to act in the best interests of your clients as opposed to acting in the best interests of the firm?" she asked during questioning about a series of deals that featured heavy investor losses on bonds backed by home mortgages amid hefty profits for Goldman on bets against the housing market.
Charles Dharapak, AP
Sen. Susan Collins, R-Maine, questions Goldman Sachs executives on Capitol Hill in Washington on Tuesday.
"Could you give me a yes or no to whether or not you considered yourself to have a duty to act in the best interests of your clients?" she repeated.
"I believe we have a duty to serve our clients well," Tourre answered, providing neither a yes nor a no -- nor the clear answer Collins eventually decided she wasn't going to get.
Tourre, who "categorically" denied the civil charges against him filed by the Securities and Exchange Commission, was categorical about little else.
The image of Goldman Sachs emerging from the first of today's hearings at the Senate Permanent Subcommittee on Investigations -- and a stack of documentary evidence nearly a foot thick -- was of a company that foresaw the looming meltdown for subprime mortgages and was willing to sell doomed-to-fail financial products in order to come out ahead.
The hearing, aimed at supporting a federal overhaul of financial regulation, featured testimony from clean-cut, apparently bright young men who used complex financial jargon beyond the understanding of most Americans but who repeatedly said they couldn't understand the senators' questions.
And it focused on internal Goldman e-mails discussing the reassurance of customers buying securities that would crumble, using expletives to describe risky investments the firm was trying to sell, and touting the profits Goldman was making by shorting -- or betting against -- the housing market starting in early 2007.
The outrage expressed by senators of both parties toward the relatively junior Goldman executives during five hours of testimony targeted a scandal very different in nature from the round of financial transgressions that dominated headlines after the last recession. There was no clear criminal taint like that of the massive fabrications WorldCom made to investors, alleged insider trading of Martha Stewart or wholesale swindling by Enron. It was nothing like the more recently uncovered grand-scale larceny in the Ponzi schemes of Bernard Madoff.
Rather, Goldman stands accused of perverting American capitalism through an excess of greed by using accepted, if exotic, Wall Street practices to make money when most people were losing it.
"Surely there is no law, ethical guideline or moral injunction against profit, but Goldman Sachs didn't just make money," committee Chairman Carl Levin said. "It profited by taking advantage of its clients' reasonable expectation that it would not sell products that it didn't want to succeed, and that there was no conflict of economic interest between the firm and the customers it had pledged to serve. Goldman's actions demonstrate that it often saw its clients not as valuable customers, but as objects for its own profit."
For Goldman, that's a hazardous picture both for its political prospects at a time when Washington is looking to shake up the financial playing field, and for the legal environment surrounding the SEC's civil charges against the firm. Even more dangerous for Goldman is the message that today's hearing may send to investment clients who could reason their money is safer elsewhere.
But to the inquiring senators, the strategies exposed at Goldman are just an example of practices they see across the industry.
"Its conduct brings into question the whole function of Wall Street," Levin said. Isn't there a "fundamental" conflict of interest in Goldman's sale of securities to clients at the same time it is betting against them, he asked Goldman Chief Executive Lloyd Blankfein.
"They're buying something from you, and you are betting against it. And you want people to trust you," Levin said. "I wouldn't trust you."
Blankfein repeatedly said he sees no conflict.
At times, senators and the current or former Goldman executives before them seemed to be speaking two different languages, a disparity that had nothing to do with the clipped French accent of Tourre, who helped oversee the creation and sale of financial derivatives tied to mortgages and other assets.
Late in the hearing, Levin pressed Tourre about a document stating that Goldman and a firm called ACA Management chose the mortgage-backed securities that went into a $2 billion package but omitted the fact that hedge fund Paulson & Co. -- which was betting against the securities -- played a large role in choosing what went into the package. The SEC says Goldman also kept that fact hidden from ACA, which thought Paulson was going "long" on the securities, or betting on their success.
"It could have been more accurate," Tourre acknowledged. But he repeatedly tried to avoid directly answering Levin's query about what was inaccurate. "If ACA was confused about Paulson's role in the transaction, it had every opportunity to clarify the issue," he said earlier.
Asked by Levin if Goldman was morally obliged to tell clients it was making bets against the investments it sold, Daniel Sparks, former head of Goldman's mortgages unit, also declined to answer directly, stating instead that investors "should look at the assets themselves."
Exasperated senators weren't buying.
They pointed to an e-mail from Tourre suggesting Goldman would profit more from selling such products less often to "sophisticated hedge funds with which we should not expect to make too much money since (a) most of the time they will be on the same side of the trade as we will, and (b) they know exactly how things work." Instead, Tourre suggested Goldman find investors who follow the credit ratings of agencies like Moody's and Standard & Poor's.
They asked about Goldman strategies aimed at getting strong credit ratings for investment bundles rife with ill-fated securities, whether it was wrong for Goldman to make investors more "comfortable" with investments that its executives were internally describing as "sh***y," and why the witnesses repeatedly emphasized Goldman's losses on mortgage-backed securities but were vague about the firm's much bigger profits in that area.
"It is unsettling to read e-mails of Goldman executives celebrating the collapse of the housing market when the reality for millions of Americans is lost homes and disappearing jobs," Collins said.
To Goldman's Blankfein, the disconnect between the two sides suggests the senators, the SEC and the public just don't understand how Wall Street works.
"While we strongly disagree with the SEC's complaint, I also recognize how such a complicated transaction may look to many people," Blankfein said. "To them, it is confirmation of how out of control they believe Wall Street has become, no matter how sophisticated the parties or what disclosures were made. We have to do a better job of striking the balance between what an informed client believes is important to his or her investing goals and what the public believes is overly complex and risky."
To Levin, that's an example of Wall Street's "self-serving" attitude. And "the ultimate harm here is not just to clients poorly served by their investment bank. It's to all of us," he said.
The problem, for a Congress trying to enact new rules for Wall Street, is that you can't legislate attitude.
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