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By Alan Rappeport
3:13pm – The committee has excused the witnesses after an exhaustive array of questioning. The Goldman witnesses appeared to hold their own, often frustrating the Senators who probed aggressively. There will be a 10 minute recess before David Viniar, CFO, and Craig Broderick, chief risk officer, take the stage. We’ll return for the third panel featuring Lloyd Blankfein.
3:03pm – Mr Levin is returning to the bigger question of conflicts of interest. “For heavens sake, clients should know that when you are selling securities, that you are betting against those securities. I think it is intolerable and it needs to be addressed,” he said.
2:55pm -The back and forth is reaching a more rapid fire pace, with Mr Coburn growing frustrated as an argument with Mr Birnbaum over shorting Bear Stearns goes in circles. Mr Birnbaum said he was just trying to be a good risk manager.
2:51pm – Mr Tourre said that he had dashed off the email in question, and that the portfolio was really selected by Goldman and ACA with suggestions from Paulson and IKB. Mr Tourre agreed that he knew Paulson was short on the transaction, had helped to pick the securities and that he had mentioned it to ACA. He also acknowledged that Paulson was not disclosed in the transaction and that Goldman itself tried to hedge its risk and not have a long stake in the deal.
“I’m sure it was for all the right reasons,” Mr Levin said with sarcasm.
2:47pm – Not finished with Mr Tourre, Mr Levin demands details about who else was involved in structuring the Abacus CDO. The witness says Paulson, ACA, Goldman and IKB were involved. Unsatisfied, he says that Mr Tourre has not answered the question as well as he could have.
2:45pm – Nearly five hours in, the witnesses are sipping water and looking fatigued.
2:39pm – Mr Tourre is now facing a question about an email from a Goldman saleswoman that showed ACA thinking Paulson had an equity position. Mr Tourre says he has no idea where they got that impression.
2:34pm – Mr Levin wants to know what percentage of ACA securities suggestions were selected and Mr Tourre said he did not remember, but they were more than a few.
2:30pm – ACA removed more than half of the suggestions that Goldman and Paulson put forward, Mr Tourre said. None of them ultimately were not selected by ACA.
2:25pm – Mr Tourre tells the committee that he never told ACA that Paulson would be an equity investor. He said he did mention to ACA that Paulson’s expectation was that they were buying credit protection on certain tranches of that portfolio. “To me, buying protection on risks would mean being short,” Mr Tourre said.
2:21 – “We’re not that stupid,” Mr Coburn said when the witnesses appeared to waffle about the nature and frequency of their changing positions from long to short on transactions.
2:16pm – On email protocol, Mr Sparks said there is not Goldman policy that says you cannot raise ethical questions about the bank on email. Mr Birnbaum cannot recall the policies and Mssrs Swenson and Tourre say there are no email rules.
2:10pm – Mr Levin digs up a document sent to the SEC in 2007 from Goldman saying it had a net short subprime position in the housing market and profited from the downturn. “No quibbling,” he warned the witnesses. Mr Sparks said he didn’t write the statement. Mr Birnbaum said they aren’t his words and that the document is long. Mr Swenson gives a “yes, but” explaining that the nature of the risk changed.
2:05pm – Making lemonade. Mr Levin berates Mr Sparks for praising an employee for travelling the world, selling CDOs, structuring “mad” and “making some lemonade from some big old lemons”. “You don’t have regrets?” Mr Levin asks Mr Sparks. “You should have regrets.”
1:57pm – Going back to the emails, Mr Levin is using the witnesses words against them on the Hudson mezzanine deal, which was referred to as “junk”. He and Mr Sparks are sparring about how the bank shifts risk.
1:54pm – “I think we’ve got a problem,” Mr Tester said. “We can’t let this happen again.”
1:48pm – Who do you work for? Mr Tester wants to know if Goldman is working for its clients or itself, and Mr Sparks responds that if they don’t manage their risk properly, they won’t be around for their clients. Clients are very important, he says.
1:45pm – “At the time we did those deals, we expected them to perform,” Mr Sparks said of the synthetic CDO deals. “We did not expect them to get downgraded to junk”.
1:39pm – Did Goldman do anything wrong in the process of synthetic CDO’s, Sen Jon Tester asks.
Mr Sparks said the bank didn’t do anything wrong but that it did make some mistakes and deals that didn’t work out. Now Mr Tester wants to know about the history of synthetic CDOs and how they actually work. Mr Sparks struggles to answer succinctly and Mr Tester calls the whole practice gambling.
1:28pm – Mr Sparks and Mr Tourre both say that Goldman did not improperly influence the ratings agencies. Mr Ensign wonders why the “incredible” bonuses were still paid out even after investors lost everything and wants to know if the incentives at firms like Goldman are skewed.
Going down the line: Mr Sparks hedges and says he does not work at Goldman any more, but in the past had every reason to be ethical. Mr Birnbaum says that pay is a function of performance and that a huge part of performance is qualitative and has to do with the culture of the firm and with ethics. Mr Swenson says “yes”. And Mr Tourre explains that compensation is based on firm and personal performance and the incentives are aligned correctly.
1:23pm – Ratings agencies are back in focus and Mr Ensign is asking about how Goldman paid the ratings agencies to help structure deals and products that they rate and wanted to know if this creates a conflict of interest. Mr Sparks acknowledges that there is an appearance of a conflict of interest there.
1:18pm – Sen John Ensign, of Nevada (the US gambling centre) said that the gambling industry was more fair than Wall Street and said that the witnesses were “market manipulators” working under the guise of market makers.
1:12pm – Mr Sparks acknowledges that clients lost money and that losing money is not a good thing, but avoids saying that Goldman helped cause the crisis. “Regret to me means when you feel you have something that you did wrong. I don’t have that. We made mistakes and we made some poor business decisions in hindsight,” Mr Sparks said. Mr Pryor presses on about Goldman’s responsibility in the crisis and Mr Sparks said that he wants to think about it more. Then he explains that credit standards in the industry got loose and that they participated in the industry.
Same question to all now.
Mr Birnbaum says Goldman and other investment banks may have provided to much credit and that he is sympathetic to those that lost money because of that. “It’s possible”, he said that giving out too much credit created a bubble and led to the crash.
Mr Swenson says “We did not cause the mortgage crisis. I do not think we did anything wrong.”
Mr Tourre says, “I am sad and humbled by what happened in the market in 2007 and 2007 and the overall financial crisis. But I believe my conduct was proper. To the extent that excess credit contributed to the asset price bubble which ultimately magnified the crisis. Goldman Sachs was involved in some of these products that allowed the excessive credit. I ultimately believe my conduct was correct. ”
1:03pm – Sen Mark Pryor is hammering Mr Sparks about his multiple roles as a market maker and a placement agent and why the different jobs have different disclosure rules. “Lawyers have to follow certain ethical standards, doctors have to follow certain ethical standards….different professions have a certain code they have to follow. Is that not the same in your industry?” In response, Mr Sparks said that ethics was a very important part of the firm’s culture and that at Goldman they often had off-site meetings with employees to discuss ethical standards. “I found them to be typically very well thought out and probably more robust than what a number of people in the industry had,” he said.
12:55pm – Returning to disclosure duties, Mr Sparks explains that Goldman, as a market maker, is not obligated to tell counterparties about their positions in transactions. “Functionally it would be very difficult and there are things about it that could cause problems,” Mr Sparks said, noting the constant changing of positions.
12:50pm – Ms McCaskill wants to know how typical it is for an investor to get to pick the assets they are betting against when they make a “bet”. “You understand that this doesn’t make common sense,” Ms McCaskill said to Mr Tourre. ACA approved everything in the deal, Mr Tourre said.
12:47pm – The language is heating up, with Ms McCaskill quoting liberally from the witnesses emails that describe their products as “crap” and “shitty”.
12:43pm – “We’re trying to hone in on why there are so many unemployed people in my state,” Ms McCaskill, of Missouri, says, getting to the bottom line.
12:38pm – Moving on to the selection agents, Ms McCaskill wants to know who decides the decider of what goes into a product portfolio. Mr Tourre said that in the Abacus transaction, it was Goldman and Paulson that selected ACA as the selection agent. Digging into the Paulson issue, she asks Mr Tourre about his “parsed words” and why he didn’t tell ACA that Paulson wanted to go short.
Mr Tourre says he did not know what tranches Paulson wanted to short and that Goldman was not obligated to make those disclosures. IKB was not in the room during the selection process, Mr Tourre said, because they were not in on the investment yet. “I didnt’ tell IKB about the existence of Paulson,” Mr Tourre said. Ms McCaskill calls the whole situation “bizarre” and demands to know if anyone else was in the room with ACA other than Paulson, calling ACA a “fig leaf” to give the deal credibility.
12:34pm – Back to her favourite analogy, Ms McCaskill is calling Goldman bankers bookies and said that they were moving the line on the bets to get the “vig”, or betting edge. “It’s just a bet, that’s all it is,” Ms McCaskill says, when Mr Sparks tries to put the gambling analogy aside.
12:30pm – Mr Coburn brings up the personal emails that Goldman released about Mr Tourre over the weekend and asked how it made him feel, when they were released, publicly. “I regret these emails, they reflect very badly on the firm and myself. I wish I hadn’t sent those,” Mr Tourre said. He went on to say that he had spoken to several lawyers who are paid for by Goldman Sachs prior to the hearing.
12:24pm – In his career review, Mr Swenson said that the housing investments were going to have a very “unhappy ending”. Mr Coburn wants to know if Goldman would make a market for a product that “stinks”. Mr Swenson said that his job is just to find the price at which the risk is worth taking.
12:19pm – Mr Coburn is digging out the witnesses career reviews and trying to figure out who led the structured products team. Mr Swenson, like the other witnesses, appears frustrated by the thousands of pages of exhibits they are fielding questions about and said meekly that he is just trying to be helpful.
12:16pm – In a rare conciliatory note, Mr Coburn acknowledges that there is a role for a market maker that plays both sides of the market. But he says that the cost of doing business is too hight without truth and transparency.
12:14pm – Sen Tom Coburn said that the questions being asked of Goldman today should be asked of other leading investment banks, signalling a widening probe.
12:10pm – Mr Tourre said that here “merely applied” rating models when working with the rating agencies, but did not try to “game” the system.
12:05pm – Witnesses are now being quizzed on thin files and barbelling and the intricacies of Fico scores. Mr Sparks, still on the hot seat, is scolded for blaming hindsight by Mr Kaufman, who claims to hate Monday morning quarterbacking.
11:59am – Sen Ted Kaufman wants to know if there was a CDO explosion and wants to know why Mr Sparks was not more worried about the high proportion of stated income loans, that eventually failed. Mr Sparks said that at the time things happened in the market and were accepted in the market that at the time looked very different. Mr Kaufman said that none of the witnesses were taking any responsibility and that everyone thinks that the housing market collapse was a natural disaster, like a hurricane. “I don’t mean to imply that we didn’t know anything,” Mr Sparks said.
11:52am – Mr Levin grabs the microphone and tells the witnesses that their filibustering will not work and that the hearing will go on as long as it takes to get the information that they want.
11:46 – Moving on the the “big short”, Ms Collins asks Mr Birnbaum if Goldman was just trying to be as neutral as possible, why there were so many references to the big short. He said he had a singular voice that was not necessarily the view of his department or firm and said that he can’t interpret what the “big short” means because he didn’t get that email. Ms Collins said she is “baffled” that the witnesses maintain they did not have an overall short position on the housing market. Mr Birnbaum calls Ms Collins’ chart to show Goldman’s short position misleading. He said the chart would be the equivalent to showing someone who is long on Google and short on Johnson and Johnson.
11:42am – Mr Tourre said he was expressing that hedge funds tend to argue about prices and that his role as a market maker was based on buying and selling and that ratings based clients tended to argue less than hedge fund clients, making them more attractive. He goes on to say that clients like ACA and IKB were “highly sophistiscated”. In response, Ms Collins said, “Well Mr Tourre, that’s not how it reads to me”, and said the whole system seems to be rife with conflicts of interest.
11:40am – Ms Collins presents Mr Tourre with an email that he received that implies Goldman was looking for less sophisticated investors that they could prey upon. Ms Collins accuses the witnesses of trying to “burn through the time” of the questioners by asking the questions to be repeated.
11:37am – Mr Birnbaum is back in focus because he was the only one to clearly say he had a duty to act in the best interests of clients. He defended his former colleagues, saying that he worked with them for years and that they shared his sentiments, even if that was not what Sen. Collins was getting out of the questioning right now.
11:30am – Ms Collins asks the witnesses if they feel they have a duty to act in the best interests of their clients rather than the best interests of the firm. Mr Sparks said that he had a duty to be straightforward and open. “I believe we have a duty to serve our clients well,” Mr Sparks said. Ms Collins said she is feeling the frustration that Mr Levin felt. Mr Birnmaum feels he has a duty to act in the best interest of the clients and that they did. Mr Swenson is obfuscating in his answer. Mr Tourre, said “we have a duty to serve our clients” by showing prices and to offering liquidity, but as a market maker, they do not give investment advice.
11:25am – Next exhibit is about a product called Timberwolf and Mr Levin confronts Mr Sparks with an email from a colleague who said, “Boy, that Timberwolf was one shitty deal”. Meanwhile, Mr Levin lambasts Mr Sparks for making that deal a priority and wants to know why the bank would be pushing a “shitty” deal. Mr Sparks says he never characterised the deal that way and said that some context would be helpful.
11:20am – Mr Sparks can’t say off-hand how much was made on the short positions but promises to find out. Mr Levin is now inquiring about RMBS that Goldman packaged and sold for Fremont, a subprime lender and asks if he knew about their bad reputation.
11:14am – Mr Levin goes after Mr Sparks first, presenting him with quotes from eight emails. He asks why Goldman clients were not informed that the bank was short on nearly 50 per cent of the “Anderson” CDO when selling those securities to clients. Mr Sparks seems confused by the nature of the question, but Mr Levin presses him on the issue of if clients should have been told about the shorts when asked how they got “comfortable” with the securities. “How do you view your ethical responsibility?” Mr Levin asks. “Don’t you have the duty to disclose an adverse interest to your client?” Mr Sparks continues avoiding a direct answer, saying that the information about the security was available and that the sales team could have handled any questions, and finally Mr Levin, in frustration, moves on.
11:04am – Discussing the AC-1 transaction in question, Mr Tourre said that it was not designed to fail and that he never indicated that Paulson was an equity investor in the product. He then told the committee that ACA and IKB, who have been painted as victims, are among the most sophisticated institutional investors in the world. Getting personal, Mr Tourre said that the last week has been challenging for him and his family, as he has faced “unfounded attacks” on his “character and motives”.
11:01am – Mr Tourre makes his debut, dressed in a black suit, white shirt and dark striped tie. He calmly but vigorously defends his actions. “I deny categorically these allegations,” Mr Tourre said of the SEC’s charges against him. “I will defend myself in court against this false claim.”
10:58am – Echoing Mr Birnbaum, Michael Swenson, managing director of the structured products group, said he too was told to bring the portfolio “closer to home”. He notes that the bank actually reduced its short positions at times and “left money on the table”.
10:51am – It appears Mr Tourre will go last. Mr Birnbaum, former managing director of the structured products trading group, is defending the Goldman bosses and said that he was the one on the desk that had argued that the subprime housing market was looking ugly and that he pushed to purchase CDS protection against the failure of securities tied to the market. He said that senior management never told him to make a directional bet against the market, but instructed him to reduce risk and get smaller.
10:46am – The first four Goldman witnesses have sworn to tell the truth and first up is Daniel Sparks, former partner and head of Goldman’s mortgages department. He’s defending the ethics of the bank and explaining that he was never instructed to short the housing market, but that the bank’s actions were focused on risk management.
10:43am – Sen. Claire McCaskill scolded the Goldman executives sitting before her, calling synthetic CDOs “raw gambling” and criticising Goldman for being both the “bookie” and the “house”. “You were chasing compensation, you were chasing your colleagues and other investment banks and you were trying to make a killing,” she said.
The witnesses are up next.
10:40am – John McCain, the Republican from Arizona and former presidential candidate, offered a brief statement on Goldman Sachs, saying that he did not know if its actions were illegal but said he had “no doubt” that they were unethical, and that the American people and the courts would render their judgment.
10:38am – Ms Collins notes that the conflicts of interest may not be illegal, but they appear to be ethically questionable.
10:34am – Next up is Susan Collins, the junior Senator from Maine. She is arguing in her statement that there is something “unseemly” about Goldman betting against the housing market and celebrating the collapse of that market while millions of Americans lose their jobs and homes. “The damage was widespread and nearly catastrophic,” she said.
10:32: Mr Levin closes by calling on Congress to “put a cop on the Wall Street beat”.
10:28am – Citing a thread of “unbridled greed” Mr Levin says that Wall Street is on the wrong side of this fight.
10:24am – Looking back to the Great Depression, Mr Levin quotes Senators who investigated the cause of that crisis and had argued that bankers selling bonds to investors should not be selling those bonds unless they thought them to be safe.
10:19am – Mr Levin is getting to the heart of the controversy, pointing to a 2007 email sent by Mr Blankfein where the Goldman CEO says the bank made more than it lost on a housing bet because of short positions. “The clients they sold the products to lost out big time, but Goldman Sachs made out big time because it bet against its own clients. The conflict of interest is striking,” Mr Levin said.
10:12am – The first panel today includes the much awaited testimony of Fabrice Tourre, head of Goldman’s structured trading group, as well as colleagues Daniel Sparks, Joshua Birnbaum, and Michael Swenson. Lloyd Blankfein faces questioning later today.
10:03am – Sen. Carl Levin kicks off the hearings saying that Goldman Sachs’ activities in 2007 “contributed to the economic collapse that came full blown the following year”. He said, “Goldman’s actions demonstrate that it often saw its clients not as valuable customers, but as objects for its own profit” and argued that its actions bring into question the whole function of Wall Street.
Related reading:
A guide to Goldman Sachs’ alleged offences John Gapper
