It was designed to be a scolding of Goldman Sachs’ brass in search of assigning blame for the mortgage crisis — but it ended up revealing how little Congress understands about the gold-plated firm’s business.
Some of Goldman’s best and brightest minds yesterday faced a withering verbal assault from lawmakers who often betrayed their lack of understanding of Goldman’s role in many of the transactions now drawing fire.
At one point, Michigan Sen. Carl Levin, chairman of the Senate Subcommittee on Permanent Investigations, accused Goldman of being “rife with conflicts of interest,” and declared the firm wasn’t worthy of trust.
Many of the issues that were sticking points for members of the panel, appeared to be rooted in different interpretations of Goldman’s role as a so-called “market maker,” or an entity that links buyers and sellers.
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While the senators repeatedly argued that Goldman created securities solely for the purpose of betting against them, Goldman CEO Lloyd Blankfein and others fended off those charges by trying to explain that investors, all of whom are savvy enough to understand the bank’s role, weren’t interested in whether Goldman was betting for or against a security it created.
“You keep using the word betting ‘against,'” Blankfein exclaimed at one point to Levin. “We are principals.”
“The nature of the principal business and market making is that we are the other side of what our client wants to do,” he said. “And in the context of market making, that is not a conflict. I don’t think our clients care or should care [if Goldman is taking a short position],” he added.
“I don’t view it as [a conflict of interest],” CFO David Viniar told Sen. Ted Kaufman in explaining Goldman’s dual role.
Earlier in the day, several members of the subcommittee tussled with former mortgage-trading desk boss Dan Sparks, who argued Goldman was under no obligation to disclose its position with a security it was selling because that position might change day to day.
“Should you have told that client you were going short, if you were?” Levin demanded of Sparks.
“Currently, that is not an obligation,” Sparks said. “I think it would create a number of issues because those positions change a lot [and] you don’t know what those positions are [at any given moment].”
But the misunderstandings didn’t stop there. At one point, a number of senators declared that Goldman had a fiduciary responsibility to be completely transparent about its activities with each security, even though that responsibility doesn’t exist with market makers.
In another instance, some lawmakers attempted to equate a futures contract to speculate on the price of corn with a structured-mortgage product like a collateralized debt obligation.
“It’s complicated,” Goldman CEO Lloyd Blankfein said at one point during his testimony.
“Well, a lot of these things are fairly complicated, Mr. Blankfein,” Sen. John McCain fired back.
That exchange typified the more than nearly 11 hours of testimony that started out with current and former members of Goldman’s mortgage-trading desk and wrapped up with Blankfein.
Among the highlights was testimony from Fabrice Tourre, a Goldman exec who was named in a civil fraud suit against Goldman by the Securities and Exchange Commission, which has accused the bank of misleading investors about the involvement of billionaire hedge funder John Paulson in a CDO called Abacus.
On Saturday, Goldman released a series e-mails from Tourre’s work account. The messages spoke about his take on the collateralized debt obligation (CDO) market that it is “a little like Frankenstein turning against his own inventor.”
In earlier testimony yesterday, Tourre told the Senate subcommittee that the e-mails “reflect badly on the firm and on myself and I wish I hadn’t sent these.” mark.decambre@nypost.com