Goldman Sachs executives strove to fend off accusations they helped inflate the housing bubble and then made billions off of its collapse, in a high-stakes Senate hearing that shined a harsh spotlight on the powerful investment bank's trading practices.
Facing accusations that they had hurt clients, lenders, and the overall economy, Goldman Sachs Group Inc officials stressed that the firm was managing its risk on individual positions rather than making a broad bet against the future of the housing market.
Fabrice Tourre said he did not hide material information from clients, in his first public appearance since the Securities and Exchange Commission accused him and Goldman of civil fraud for withholding vital information from investors.
The Senate subcommittee fired a broad fusillade against investment banks, but focused on Goldman Sachs, one of the oldest investment banks on Wall Street. Goldman has become a lightning rod for criticism for traders' behavior before and during the worst economic decline since the Great Depression.
The hearings recalled the Pecora Commission hearings that started in 1932 and investigated the causes of the 1929 stock market crash. The hearings found unethical practices ranging from investors linking up to manipulate stock prices to selling stocks to friends of J.P. Morgan at discounted rates.
On Tuesday, senators from both sides of the aisle grilled current and former Goldman employees, walking them through evidence folders nearly six inches thick, crammed with emails and other internal Goldman communications.
In a tense exchange, Senator Carl Levin, chairman of the Permanent Subcommittee on Investigations, asked Dan Sparks, former head of the mortgage department at Goldman Sachs, whether he felt obliged to tell clients when he was betting against their trades.
Levin pointed to a particular transaction that one of Sparks' bosses termed a shi**y deal. The Senator used the phrase shi**y deal at least a half dozen times.
Sparks did not respond directly, and said it was not his own description of the transaction.
A subcommittee statement said Goldman Sachs helped inflate the mortgage market by packaging toxic mortgages into bonds for fees from 2004 through 2007, then repackaging those bonds into complex securities.
When the mortgage market began sinking, Goldman Sachs then shorted it, betting on its decline throughout 2007. It did not disclose its position to clients, the subcommittee said, and sold securities it wanted to get off its books to clients.
Senator John McCain said that he did not know if Goldman Sachs did anything illegal, but added there was no doubt that Goldman Sachs behaved unethically.
Goldman Sachs shares were up 0.5 percent to $152.82 in afternoon trading, defying the drop in the broader market that was hit hard by downgrades in Greek and Portuguese debt.
The subcommittee pointed to a particular trade in which Goldman failed to disclose key information to a ratings analyst and investors. The Securities and Exchange Commission charged Goldman with civil fraud for the same transaction, known as Abacus 2007-AC1.
Goldman's actions demonstrate that it often saw its clients not as valuable customers but as objects for profits, Levin said.
Its conduct brings into question the whole function of Wall Street, Levin said.
In a packed hearing room, the Goldman officials looked on impassively as politicians vilified them.
When Senator Claire McCaskill accused Goldman officials of gambling with little oversight, three of the four witnesses briefly looked down into their laps.
Goldman for its part said it was not prescient about the housing market, it just managed its risk.
The bank's residential mortgage bond positions were losing money daily in December 2006.
There was a vigorous internal debate about the future of the housing market that came to no firm conclusions, but Goldman decided to reduce its exposure given the risk in the market, said Goldman Chief Financial Officer David Viniar.
As Goldman reduced its exposure, it sold positions to investors that saw them as attractive.
As with our own views, their views sometimes proved to be correct and sometimes incorrect, Viniar said.
Goldman Sachs eked out only a small profit from residential mortgages in 2007, and lost money on them in 2008, Viniar said.
The SEC sued Goldman and Tourre on April 16. It contended that Goldman failed to tell investors that it had allowed the hedge fund firm Paulson & Co to choose securities for the Abacus 2007-AC1 transaction. Paulson was betting on the securities tanking in value, and thus for the Abacus deal to generally founder.
Paulson & Co is believed to have made $1 billion from the transaction, roughly the same amount lost by investors including bond insurer ACA and German bank IKB. The firm and its principal, John Paulson, have not been charged.
ACA also selected securities that were packaged into the transaction, but gave Paulson considerable say over what it included, the SEC said.
In his testimony, Tourre said he never told ACA that Paulson & Co would invest in the riskiest part of the Abacus transaction, and was surprised that ACA could have thought otherwise.
He also said the transaction was not designed to fail, that Goldman had no economic motive for it to fail, and that he did not mislead ACA or IKB, two major investors in the transaction.
While Paulson, Goldman Sachs and IKB all had input into the portfolio, ACA ultimately analyzed and approved every security in the deal, he said.
When Goldman Sachs represented to investors that ACA selected the referenced securities, that statement was absolutely correct, Tourre added.
Other Goldman officials are also expected to testify before the Senate subcommittee today, including Chief Executive Lloyd Blankfein.
The subcommittee is looking at causes of the financial crisis, and has in prior sessions looked at rating agencies and Washington Mutual.
(Reporting by Steve Eder and Dan Margolies; Additional reporting by Jonathan Stempel and Dan Wilchins, editing by Dave Zimmerman and Tim Dobbyn)