WASHINGTON — The conduct of Goldman Sachs during last year’s financial meltdown turned into a vulgar fight this morning after a Senate panel assailed the Wall Street powerhouse of inflating the housing bubble and then profiting from its collapse.
The profane exchange during the televised hearing occurred when Sen. Carl Levin (D-Michigan) confronted Daniel Sparks, who headed Goldman’s mortgage department, with an e-mail about “Timberwolf,” one of their deals using mortgage-backed securities.
In an e-mail, Tom Montag, head of the division at the time who joined Merrill Lynch in 2008, told Sparks, that “Timberwolf was one sh—y deal.”
Goldman later sold hundreds of millions of dollars of the deal to investors after that e-mail.
Levin asked again and again about the “sh—y deal,” while Sparks tried to dodge the questions.
“I remember in the longs we took we lost hundreds of millions of dollars,” said Sparks.
“I’m talking about the shorts,” snorted Levin.
After reading the e-mail, Levin said, “You knew it was a sh—y deal and you didn’t tell your clients. Does that bother you at all?”
Sparks defended himself by saying, “I don’t recall.”
Levin used the word sh–ty 11 times during the heated exchange. And he used it again when CEO Lloyd Blankfein sat down at the witness table.
But Blankfein said customers who bought securities from the Wall Street giant came looking for risk “and that’s what they got.”
“Unfortunately, the housing market went south very quickly,” he told skeptical senators. “So people lost money in it.”
The firm appeared to suffer relatively minor harm in its legal fight against regulators’ charges that it defrauded investors in one big subprime-mortgage deal. Goldman’s stock was slightly up on a day when the downgrading of Greece’s debt hit other financial shares.
But the political and public-relations damage for Goldman — and Wall Street more broadly — might have been more extensive. Lawmakers repeatedly ripped the firm and its executives for allegedly stacking the deck against clients during the market’s slide in 2007.
Senators said those methods included setting up the firm’s own securities to fail and betting secretly against those securities, or helping clients do so.
“I don’t know if Goldman Sachs has done anything illegal, [but] from the reading of these emails … there’s no doubt their behavior was unethical, and the American people will render a judgment as well as the courts,” said Sen. John McCain (R-Ariz.).
Goldman Sachs execs — facing accusations that they had hurt clients, lenders and the overall economy — sought to defend themselves in the firm’s biggest showdown with lawmakers since it became a public company a decade ago.
Earlier in the hearing, embattled Goldman Sachs Executive Director Fabrice Tourre who was sued by the SEC for fraud told the Senate subcommittee today that he will defend himself in court against the suit.
“I deny — categorically — the SEC’s allegation,” Tourre said at a hearing of the Permanent Subcommittee on Investigations. “I will defend myself in court against this false claim,” he said, adding that a deal at the center of the suit “was not designed to fail.”
Tourre, 31, and six other current and former Goldman Sachs employees will testify before lawmakers about the firm’s mortgage-securities business in the years leading up to the economic collapse of 2009.
In a series of e-mails released by the SEC, Tourre referred to himself as the “Fabulous Fab” — even saying that in the end he’d be “standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!”
Over the weekend, the Senate Subcommittee on Permanent Investigations released selected e-mails showing Goldman execs celebrating their making money by shorting the collapsing mortgage market.
In one e-mail, Goldman CEO Lloyd Blankfein said, “Of course we didn’t dodge the mortgage mess. We lost money, then made more than we lost because of the shorts.”
In another series of company e-mails, Tourre revealed himself to be something of a romantic. Not only did he write about the impending collapse of the subprime mortgage market, but Tourre also used his Goldman Sachs e-mail account to chat with his girlfriend about how they wanted to curl up in each other’s arms and how they looked forward to tender moments together.
In the e-mail exchanges between Tourre and his girlfriend, Marine Serres, Tourre comes off as a young, hotshot trader who appears ethically conflicted about what he was doing.
“Anyway, not feeling too guilty about this, the real purpose of my job is to make capital markets more efficient and ultimately provide the US consumer with more efficient ways to leverage and finance himself, so there is a humble, noble and ethical reason for my job ;) amazing how good I am in convincing myself !!!” Tourre said in an e-mail to Serres in January 2007.
That portion of the e-mail reflecting Tourre’s conflicted views on his role in the subprime meltdown immediately followed another part of the e-mail that the SEC released in its complaint earlier this month.
Tourre — who refers to Serres at one point as a “super-smart French girl in London” — also tells her about selling to unwitting investors the type of synthetic collateralized debt obligation, or CDO, at the center of the SEC case.
The SEC charges that Tourre and Goldman fraudulently marketed an “Abacus” CDO by hiding vital information from investors, including the role that hedge fund Paulson & Co played in picking mortgage products tied to the CDO. Paulson & Co betted against the CDO.
“Just made it to the country of your favorite clients!!! I’m managed (sic) to sell a few abacus bonds to widow and orphans that I ran into at the airport, apparently these Belgians adore synthetic abs cdo2,” Tourre wrote in June 2007.
Tourre, who was 28 when he wrote the e-mails, also reflected on the strangeness of being so young, yet being in such a critical role with pressures from those above him at the firm to make money.
“I am now considered a “dinosaur” in this business (at my firm the average longevity of an employee is about 2-3 years!!!) people ask me about career advice. I feel like I’m losing my mind and I’m only 28!!! OK, I’ve decided two more years of work and I’m retiring.”
With AP, Reuters and Bloomberg News
Check out Tourre’s testimony below:
Chairman Levin, Dr. Coburn and Members of the Subcommittee. My name is Fabrice Tourre, and I work at Goldman Sachs International in London. Thank you for the opportunity to appear before the Subcommittee. I have worked at Goldman Sachs since 2001. Between 2004 and 2007, my job was primarily to make markets for clients. I made markets by connecting clients who wished to take a long exposure to an asset — meaning they anticipated the value of the asset would rise — with clients who wished to take a short exposure to an asset — meaning they anticipated the value of the asset would fall. I was an intermediary between highly sophisticated professional investors — all of which were institutions. None of my clients were individual, retail investors.
The structured products on which I worked fill an important need for these sophisticated financial institutions. To the average person, the utility of these products may not be obvious. But they permit sophisticated institutions to customize the exposures they wish to take in order to better manage the credit and market risks of their investment holdings.
Mr. Chairman, as you know, the Securities and Exchange Commission (“SEC”) recently filed a civil suit alleging that I failed to disclose to investors certain material information regarding a transaction that I helped to structure called “ABACUS 07 AC-1.” I deny — categorically — the SEC’s allegation. And I will defend myself in court against this false claim.
Since the suit was filed, there have been many questions raised about the 07 AC-1 transaction and my role in it. I appreciate the opportunity to answer those questions, and I want to make a few points absolutely clear.
First, the only two investors in this transaction, ACA and IKB, were institutions with significant resources and extensive experience in the CDO market. ACA was a specialty financial services company that, at year-end 2006, managed 22 CDOs with approximately $16 billion in assets. IKB, a large German bank, had a separate mortgage group and was an active participant in the CDO market.
According to IKB, as of January 2007, they had launched and managed more than $16.8 billion of CLOs and CDOs and viewed securitizations and CDO investments as an integral part of their business model.
Second, I never told ACA, the portfolio selection agent, that Paulson & Company would be an equity investor in the AC-1 transaction or would take any long position in the deal. Although I don’t recall the exact words that I used, I recall informing ACA that Paulson’s fund was expected to buy credit protection on some of the senior tranches of the AC-1 transaction. This necessarily meant that Paulson was expected to take some short exposure in the deal. Moreover, from the early stages of the transaction in January 2007 to its completion several months later, none of the offering documents, including the term sheets, flip book and offering circular, provided to ACA indicated that Paulson’s fund would be an equity investor.
If ACA was confused about Paulson’s role in the transaction, it had every opportunity to clarify the issue. Representatives of Paulson’s fund participated directly in all of my meetings with ACA regarding the transaction. I do not ever recall ACA asking me or Paulson’s representatives if Paulson’s fund would be an equity investor. Indeed, ACA and Paulson had several discussions about the transaction and at least one meeting without any Goldman Sachs representatives present. Quite frankly, I am surprised that ACA could have believed that the Paulson fund was an equity or long investor in the deal.
Third, the AC-1 transaction was not designed to fail. ACA and IKB were two of the most important clients of my desk. Moreover, the securities referenced in the transaction did not underperform the other securities of that ratings class and vintage. All of the securities of that ratings class and vintage performed poorly because the subprime mortgage market suffered a broad collapse. Goldman Sachs also had no economic motive to design the AC-1 transaction to fail. Quite the contrary, we held long exposure in the transaction just like ACA and IKB. When the securities referenced in AC-1 declined in value, we lost money too. Goldman Sachs’ overall losses in connection with the transaction exceeded $100 million, including $83 million with respect to the retained long position.
Finally, ACA selected the portfolio of securities referenced in the transaction — not Paulson & Company. ACA had sole authority to decide what securities would be referenced in the transaction, and it does not dispute that point. Neither the Paulson fund nor Goldman Sachs could dictate to ACA the securities referenced in the deal. Paulson’s fund made suggestions to ACA, as did IKB and Goldman Sachs. And the SEC complaint concedes that ACA rejected most of Paulson’s suggestions while accepting others. So, while Paulson, Goldman Sachs and IKB all had input into the reference portfolio for AC-1, ACA ultimately analyzed and approved every security in the deal. Thus, when Goldman Sachs represented to investors that ACA selected the referenced securities, that statement was absolutely correct.
Mr. Chairman, the last week has been challenging for me and my family, 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. I will be pleased to answer any questions that the Subcommittee may have.