WASHINGTON – In its aggressive pursuit of profits, Goldman, Sachs & Co. became a key enabler of the mortgage meltdown that triggered the global financial crisis, Senate investigators said Monday as they released new documents detailing the bank’s controversial actions.
The excerpts of internal Goldman documents were made public on the eve of today’s hearing before the Senate Permanent Subcommittee on Investigations, at which senators plan to question Goldman brass, including chief executive Lloyd Blankfein, and Fabrice Tourre, the trader who is the focus of a fraud suit by the Securities and Exchange Commission.
Senate investigators said the documents show how Goldman used its gold-plated reputation on Wall Street to sell toxic mortgage-related securities to investors, then reversed course and bet against the overheated market it helped create.
“The evidence shows that Goldman Sachs helped build and operate that conveyor belt that fed toxic mortgages and mortgage securities into the financial system, and then made large bets against the market it helped create … reaping the profits from it,” said Sen. Carl Levin, D-Mich., the subcommittee’s chairman. “The ultimate harm here is not just to the clients who were not well-served by their investment bank. The harm here is to all of us.”
In prepared testimony released Monday, Blankfein will reiterate that his firm was simply trying to balance its mortgage investments and did not bet heavily against the housing market or against the interests of its clients.
“We didn’t have a massive short against the housing market, and we certainly did not bet against our clients,” Blankfein said, adding that Goldman lost a total of $1.2 billion on housing investments in 2007 and 2008. “Rather, we believe that we managed our risk as our shareholders and our regulators would expect.”
According to the subcommittee’s bipartisan findings, Goldman earned lucrative fees helping subprime lenders turn high-risk, poor-quality loans into securities, get favorable credit ratings for them and then sell them to investors.
Goldman then “magnified the impact” of those toxic mortgages, the subcommittee said, by creating other complex financial instruments known as collateralized debt obligations based on those securities, spreading the risk deeper into the financial system.
When the housing market started turning sour, Goldman made a strategic decision to dramatically reverse course. The company bet aggressively against the investments it sold and made billions of dollars in so-called proprietary trades for the benefit of the firm without disclosing those moves to its clients, the subcommittee alleged.
A provision of the financial regulatory overhaul being pushed by Senate Democrats and the White House would require regulators to prohibit such trading by banks. It’s one way the subcommittee’s investigation will fuel the debate over the legislation as Democrats and Republicans battle over the details this week.
The documents released Monday follow the committee’s disclosure Saturday of four internal e-mail exchanges showing Goldman executives bragging about making “some serious money” from engaging in “the big short” – betting aggressively against the mortgage market.
Goldman on Saturday accused the subcommittee of cherry-picking e-mails to try to make its case.
But Levin denied that Monday, holding up a 6-inch binder with hundreds of internal Goldman documents to be fully released today. They included excerpts from internal performance reviews in which two executives boasted of their success in betting against the housing market.
“Clearly we believe the documents we present fairly and accurately describe what happened,” Levin told reporters. “They misled the country, I believe, and were not fair to their customers.”
According to his prepared remarks, Blankfein will tell lawmakers and the public that he recognizes that “many Americans are skeptical about the contribution of investment banking to our economy and understandably angry about how Wall Street contributed to the financial crisis.”
He will seek to dispel that viewpoint by arguing that the company’s culture depends on honesty.
“We have been a client-centered firm for 140 years, and if our clients believe that we don’t deserve their trust, we cannot survive,” according to the copy of Blankfein’s testimony.
Still, Levin described the company’s actions as improper, though the subcommittee did not make any conclusions about the SEC case or whether the company acted illegally.