April 27, 2010 — -- Goldman Sachs CEO Lloyd Blankfein defended his firm against unyielding criticism that it exploited the U.S. housing bubble during a hearing before a Senate panel today.
Blankfein stressed that he did not feel the firm had a responsibility to tell clients when it took "short positions" on -- what some refer to as betting against -- the products it was selling them, at least one of which was described as "sh**ty" in an internal company e-mail.
"What do you think about selling securities that your own people think are crap?" asked panel chairman Sen. Carl Levin, D-Mich.
"I think there are a lot of opinions about how a security will perform against the market it is in," Blankfein answered.
Blankfein, responding to a series of questions by a clearly furstrated Levin, said that while maintaining clients' trust was "essential" to the firm, he also argued that clients came to Goldman to buy certain products. It would be unusual, he said, to tell them exactly who was shorting that product, including Goldman itself.
"I don't believe there's a disclosure obligation," Blankfein said, "but as a market maker, I'm not sure how a market would work if it was premised on the assumption that the other side of the market cared about what your opinion was about the position you were taking."
Blankfein's responses failed to satisfy the panel chairman.
"You are taking a position against the very security you are selling and you're not troubled?" Levin later said. "And you want people to trust you? ... I wouldn't trust you."
Levin, who couched his concerns on "moral" grounds, eventually stopped that line of questioning, concluding that "we're going round and round on this."
Blankfein was the last of seven witnesses, all current or former Goldman executives, to testify today at a more than 10-hour-long Senate hearing marked by testy exchanges as well as a few notable declarations.
Under questioning from the panel, both Blankfein and Goldman Chief Financial Officer David Vinair accepted some responsibility on behalf of the firm for the financial crisis.
"I believe that we share responsibility because we were a major player in those markets," Vinair said.
Blankfein also voiced some support for more regulation of financial products. He said that "synthetic" financial products -- products that allow investors to make bets on the performance of certain securities without actually owning them -- "may be something that should not be permitted."
A synthetic product is at the heart of a recent Securities and Exchange Commission lawsuit against Goldman Sachs alleging investor fraud.
"Clearly, the world needs more regulation," Blankfein said.
The hearing was held by the Senate Permanent Subcommittee on Investigations, which announced Monday that it had conducted an 18-month investigation that found Wall Street powerhouse Goldman Sachs 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.
Blankfein countered that the firm did not significantly "short the market" and that it lost some $1.2 billion from "activities in the residential housing market."
In his prepared remarks, with protesters holding up signs behind him, Blankfein thanked American taxpayers for the bank's $10 billion bailout from the federal Troubled Asset Relief Program that began at the height of the financial crisis in 2008. Blankfein acknowledged that many people are "understandably angry about how Wall Street contributed to the financial crisis."
Later, under questioning from Sen. John Tester, D-Mont., Blankfein conceded that Goldman was "embarrassed" by the bailout.
"We got funds from the government and it's an embarrassing situation then and it's embarrassing now," he said.
Blankfein also specifically addressed the SEC's lawsuit, reiterating his firm's rebuttal of the complaint.
He called the day the SEC announced the charges "one of the worst days" of his professional life and said the bank has 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."
Internal Goldman E-mails Figure Prominently in Senate Investigation
Committee aides said the panel obtained about 2 million documents during its investigation, including internal Goldman e-mails. E-mails from June 2007 showed that bank officials believed that a transaction known as Timberwolf was "one sh**ty deal."
Earlier during today's hearing, Levin asked other Goldman witnesses about that and other e-mails.
"When you heard that your employees in these e-mails are looking at these deals said, 'God, what a sh**ty deal. God, what a piece of crap, when you hear your own employees and read about those e-mails, do you feel anything?" he asked Goldman chief financial officer David Vinair this afternoon.
"I think that's very unfortunate to have on e-mail," Vinair said, prompting laughter from the audience attending the hearing. Vinair quickly corrected himself, adding, "I think it's very unfortunate for anyone to have said that in any form."
"How about to believe that and sell it?" Levin pressed.
"I think that's unfortunate as well," Vinair replied.
Vinair's testimony was markedly different from that of Daniel Sparks, a former partner and head of the mortgages department at Goldman Sachs, who joined three other current and former Goldman employees in the first part of the subcommittee's hearings this morning.
"Your top priority is to sell that sh**ty deal!" Levin said, holding up the series of e-mails. "Come on, Mr. Sparks! Would Goldman Sachs be trying to sell -- and by the way, it sold it, a lot of it, after that date -- should Goldman Sachs be trying to sell the sh**ty deal? Well, can you answer that one yes or no?"
"There are prices in the market that people want to invest in things," Sparks answered. "I didn't use that term with respect to that deal."
Senators from both sides of the aisle expressed frustration today with what they said were evasive answers by Sparks and others who argued that the bets they made against the housing market were part of the firm's efforts to manage investment risks.
"I cannot help but get the feeling that a strategy of the witnesses is to try to burn through the time of each questioner," said Sen. Susan Collins, R-Maine.
Daniel Sparks: 'No Regrets'
While some of the Goldman witnesses who testified this morning conceded that they made mistakes, they denied wrongdoing.
"We did not cause the financial crisis," said Michael Swenson, a managing director at the firm.
"There's things we wish we could have done better in hindsight, but at the times we made the decisions, I don't think we did anything wrong," he said.
Sparks said though he felt sympathy for Goldman clients who lost money, he said had no regrets.
"Regret to me means something that you feel you did wrong and I don't have that. What I do have though is -- we made mistakes in our business which I think any business does and we made some poor business decisions in hindsight," he said.
Levin later shot back: "You got no regrets? You ought to have plenty of regrets. I don't think you're willing to acknowledge them but you oughta have them. I don't think you will acknowledge them, that's why we have to do some regulation."
Today's hearing included testimony from Fabrice Tourre, the trader at the center of a civil fraud lawsuit filed by the Securities and Exchange Commission against Goldman Sachs earlier this month. Tourre, who described himself as "fabulous Fab" in a Goldman e-mail released by the SEC, was the only individual named as a defendant in the lawsuit.
Speaking publicly for the first time since the SEC charges were announced, Tourre 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. The SEC alleges that Goldman and Tourre failed to disclose to investors that hedge fund Paulson & Co. bet against the product after helping choose the mortgages that it was tied to.
"I deny -- categorically -- the SEC's allegation," Tourre said. "And I will defend myself in court against this false claim."
"The last week has been challenging for me and my family," he said, "as I have been the target of unfounded attacks on my character and motives. I appreciate the opportunity to appear before the Subcommittee to answer these false charges. I wish to repeat -- I did not mislead IKB or ACA, two of the most sophisticated institutional investors in these products anywhere in the world."
A number of e-mails from Tourre have been made public by Goldman Sachs itself and the Senate panel in recent days.
Asked about internal Goldman e-mails that reveal Tourre joking about selling bonds to "widows and orphans that I ran into at the airport" in Belgium, Tourre said, "I regret these e-mails. They reflect very bad on the firm and on myself and I think, you know, I wish I hadn't sent those."
Lawmakers said in their opening statements at today's hearing that while Goldman may not have committed a crime in betting against the same securities they were selling to investors, the bank's actions still seemed simply wrong.
"While such conflicts of interest may not be illegal," Collins said, "they certainly seem ethically questionable."
Sen. John McCain, R-Ariz., went a step further, saying, "There's no doubt their behavior was unethical and the American people will render a judgment as well as the courts."
A fiery Sen. Claire McCaskill said the Wall Street firm was simply gambling with the securities known as synthetic collateralized-debt obligations.
"It's gambling pure and simple," she said. "Raw gambling. They're called synthetic because there's nothing there."
"You think it's so complicated and you think you're so smart – any street gambler would never place a bet with a bookie or a house with the record that is revealed in the documents this committee has gathered," she said.
However, critics say the blame may not only lie with Wall Street, but with Congress and the government itself -- it was Washington that scaled back its oversight of Wall Street for decades and decades.
As McCaskill said to the Goldman executives, "You had less oversight than a pit boss in Las Vegas."
A handful of Code Pink protesters were on hand at the hearing this morning, with one holding up a sign that said "SHAME" as Josh Birnbaum, a former managing director in the mortgage department of Goldman Sachs, delivered his opening statement.
Goldman in 'Crisis Mode'
Experts said Blankfein will be walking a fine line: defending his firm's actions while acknowledging public anger over its actions.
"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.
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."
Today's hearing comes a little more than a week after the Securities and Exchange Commission filed itslawsuit against Tourre and Goldman, alleging that they defrauded investors.
The SEC's claim states that Goldman Sachs structured a collateralized debt obligation (CDO) -- an instrument tied to the performance of certain securities -- that was secretly designed to fail and that the firm failed to disclose that to its investors. Paulson & Co., the hedge fund that helped pick the investment's portfolio, later made $1 billion by betting against the deal.
With civil charges pending against him, it might be smart for Tourre to have kept his mouth shut or to plead the Fifth but legal experts believe they know why he didn't.
"It would be a public relations nightmare for Goldman for him to take the Fifth," said John Coffee, a professor at Columbia Law School who frequently testifies before Congress on securities law. "Their style is to come out fighting and say they did nothing wrong, and taking the Fifth is seen as admission of guilt by the public."
Coffee and others said that Tourre is likely under pressure to speak up and defend himself and Goldman because the investment giant is covering his legal bills and because, with so much negative publicity surrounding him, the 31-year-old trader would be hard-pressed to find employment elsewhere.
"He's not very bankable right now," said white collar criminal defense lawyer Charles Miller. "I doubt if anybody would hire him, no matter what happens" at the hearing.
Tourre made headlines earlier this month after the SEC's lawsuit revealed an e-mail from him that seemed to indicate he didn't fully understand the complex deals he was making.
"More and more leverage in the system, The whole building is about to collapse anytime now...Only potential survivor, the fabulous Fab(rice Tourre) ... standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities (sic)!!!" Tourre wrote to a friend in January 2007, according to the SEC's complaint.
The Senate subcommittee has released additional e-mails related to the deal Tourre worked on in recent days.
In an e-mail exchange between Tourre and Sparks in early 2007, the two employees wrote, "Gerstie and I are finishing up engagement letters with ACA and Paulson for the large RMBS COO ABACUS trade that will help Paulson short senior tranches." "Still reputational risk."
Levin said the documents show that Goldman knew that Paulson had designed the portfolio and bet against it.
Blankfein addressed the SEC lawsuit in his prepared testimony.
"While we strongly disagree with the SEC's complaint, I also recognize how such a complicated transaction may look to many people," he 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."
ABC News' Rich Blake and Huma Khan contributed to this report.