Sen. Levin Calls Goldman Sachs Allegations 'Deeply Troubling'

April 27, 2010 — -- In a testy exchange at today's Senate grilling of Goldman Sachs executives, Sen. Carl Levin, D-Mich., confronted a former Goldman trader with an e-mail in which another former Goldman executive described a mortgage-backed deal as "sh**ty."

The transaction in question was Timberwolf Ltd., a $1 billion collateralized debt obligation holding pieces of other CDOs. In an e-mail to Daniel Sparks, then head of Goldman's mortgage desk, Thomas Montag, Goldman's former head of sales and trading, called a set of mortgage-linked investments sold by the firm as "one shi**y deal," according to an e-mail that Sen. Levin quoted. Within five months, Timberwolf lost 80 percent of its value.

"Do you think it was a sh**ty deal?" Levin asked Sparks, one of seven Goldman executives appearing today. Sparks said he did not recall the e-mail, and did not directly answer the question.

"If you can't give a clear answer to that one Mr. Sparks then we're not going to get any clear answers from you today," Levin said.

In his opening remarks, Levin called the allegations against the Wall Street firm "deeply troubling."

"The evidence shows that Goldman repeatedly put its own interests and profits ahead of the interests of its clients and our communities," Levin said. "Its misuse of exotic and complex financial structures helped spread toxic mortgages throughout the financial system. And when the system finally collapsed under the weight of those toxic mortgages, Goldman profited from the collapse."

Speaking publicly for the first time since the Securities and Exchange Commission brought fraud charges against him and his employer, Goldman Sachs, the trader at the center of the case, Fabrice Tourre, strongly asserted his innocence, insisting repeatedly to a Senate panel that he didn't mislead clients in a controversial mortgage derivative product the SEC claims was designed to fail.

"I deny -- categorically -- the SEC's allegation," Tourre said. "And I will defend myself in court against this false claim."

Tourre was among the first of a number of Goldman executives to testify before the Senate panel today amid accusations that the firm helped create the housing bubble that preceded the worst financial crisis since the Great Depression of the 1930s.

Goldman CEO Lloyd Blankfein and six others, including now-infamous Goldman trader Fabrice "Fabulous Fab" Tourre, are being grilled by the Senate Permanent Subcommittee on Investigations.

The subcommittee said Monday that its 18-month investigation found that Goldman helped create the housing bubble by selling securities backed by risky subprime mortgage loans and then profited off that bubble's bursting by secretly betting against the market.

"Goldman continues to deny that it shorted the mortgage market for profit, despite the evidence," Sen. Levin, the chairman of the panel, said, kicking off the session. "Why the denial? My best estimate is that it's because the firm cannot successfully continue to portray itself as working on behalf of its clients if it was selling mortgage-related products to those clients while it was betting its own money against those same products or the mortgage market as a whole," said Sen. Levin.

"It's gambling, pure and simple, raw gambling," said Sen. Claire McCaskill, D-Mo. "They're called synthetic because there's nothing there ... you think you're so smart? Any street gambler would never place a bet with a bookie or a house that has the record that this committee has uncovered."

Goldman, Levin said, made billions by betting against the market and didn't disclose the bets to their customers who were buying their securities.

"I think people who buy bonds and securities have a right to expect that the people who are selling those bonds want them to succeed," Levin said, and by betting against the market it helped create, Goldman "dumped a lot of toxic mortgaged-backed securities and mortgage-related securities into that market. It helped to create a huge housing bubble with the synthetic instruments, these exotic instruments that they created. And so, there's some real responsibility here, it seems to me."

Goldman's profits rose considerably after the financial collapse in 2007, just as other investment banks saw a drop.

In prepared testimony released Monday, Blankfein defended the firm and said the allegations are false.

"We didn't have a massive short against the housing market and we certainly did not bet against our clients. Rather, we believe that we managed our risk as our shareholders and our regulators would expect," he said.

Blankfein said while Goldman did find the last two years of the financial crisis to be profitable, it lost about $1.2 billion "from activities in the residential housing market."

Blankfein will be walking a fine line: defending his firm's actions while acknowledging public anger over its actions.

In his prepared remarks the 31-year old trader Tourre explains what happened with the ABACUS 2007-AC1 transaction that is the basis for the SEC's fraud charges.

Tourre states that the transaction "was not designed to fail," and that Goldman lost $100 million on it. He also claims that ACA – one of the investors in the deal – "had sole authority" for picking the securities that went into the portfolio, and that ACA was informed that the hedge fund Paulson & Co. was expected to make a negative bet on it.

"They're in crisis mode," William Cohan of Fortune Magazine and author of "House of Cards," told "Good Morning America's" George Stephanopoulos today. "He's trying to be conciliatory. He's trying to finally tell the American people that he's grateful for what they did but, they're in a very difficult position."

Levin's committee has forced Goldman to turn over 2 million pages of documents that Levin said proves his case and shows that Goldman overall made $3.7 billion from the financial crisis.

"We're going to ask them some very tough questions and hope that they give us candid answers," he said.

Goldman Sachs isn't exactly used to the hot seat. It may be the most successful investment bank in history, and the most politically connected. Goldman executives have served on Capitol Hill and in the White House, and as treasury secretaries for Democrats and Republicans. They've also given massive amounts of political donations, much of it to Democrats.

"Goldman Sachs is a powerhouse on a level all together different from a vast majority of political players and they've given $31 million over the last 20 years," said Sheila Krumholz, executive director at the Center for Responsive Politics.

Goldman, Krumholz said, was the second largest contributor to the Obama campaign last year, giving nearly $1 million.

"They're trying to make sure they have a foot in the door for the time when they need it, such as now," she added. "They're not going to waste this moment and pull back on their efforts in Washington. I expect that we'll see growth, if not a surge, in both contributions and lobbying once these numbers are available."