The Goldman hearings

Sachs and the shitty

A ghastly day on Capitol Hill for Goldman Sachs’s top brass

Apr 29th 2010 | NEW YORK | From The Economist print edition

“ONE of the worst days of my professional life” was Lloyd Blankfein’s characterisation of April 16th. That was when the Securities and Exchange Commission (SEC) filed civil fraud charges against Goldman Sachs and an employee for alleged failure to disclose that a hedge fund that had influenced the composition of a complex mortgage-debt transaction was also shorting it. April 27th was surely not much better, either for the Wall Street firm’s boss or for the six other current and former Goldman bankers who testified before the Senate Permanent Subcommittee on Investigations. The roasting, which lasted more than ten hours, was as dramatic as any discussion of synthetic collateralised-debt obligations (CDOs) could be.

Goldman’s persecutor-in-chief was the panel’s chairman, Carl Levin. The gruff Democrat went beyond the SEC’s complaint, accusing the firm of having concocted several deals, not just one, to profit from the collapse of the housing market, and also of being riddled with “inherent conflicts of interest”. Not content merely to skewer America’s pre-eminent investment house, the senator harrumphed that its conduct “brings into question the whole function of Wall Street”. His attack rested, in part, on internal Goldman e-mails. In one, a senior executive described a Goldman-underwritten CDO as “one shitty deal”. In another, a colleague applauded the structured-products team for making “lemonade from some big old lemons”.

The team’s representatives at the hearing squirmed in the spotlight. Fabrice Tourre, the charged employee, firmly denied misleading investors. But he and some of his colleagues—clearly fearful of committing a legal faux pas—often seemed evasive. At times the dialogue resembled a Pinter play: a question, then a long pause, followed by a spare, cryptic response.

The firm’s senior executives put up a stronger, clearer defence. In response to Mr Levin’s assertion that Goldman had profited from others’ misery with a “big short”, David Viniar, the chief financial officer, said that its net revenues in mortgages were a mere $500m in 2007, with a loss of $1.2 billion in 2007 and 2008 combined.

Mr Blankfein gurned incredulously at some of the senators’ questions, doubtless baffled that they would characterise as immoral profiteering what he views as prudent risk management. (He must have wondered whether Goldman would have been better off politically had it incurred giant losses, like Citigroup.) He argued that criticism of Goldman’s motives rested on a misunderstanding of the market-making business. Marketmakers owe no fiduciary duty to clients, and offer no warranties; their responsibility, he argued, is to make sure those they serve are getting the risk exposures they seek. But Mr Blankfein also struck a conciliatory tone, expressing gratitude for support from taxpayers and declaring that everyone in the industry has to “ratchet up their standards”.

The hearing produced no smoking gun, but there was much that looked bad for Goldman. Even its staunchest supporters would accept that its interests appear murky to outsiders. The reputational damage is hard to gauge, but it was not a good sign that Goldman was the butt of jokes this week at the Milken Institute’s Global Conference, an annual gathering of businesspeople and policymakers in Los Angeles. One panellist even drew a parallel with Drexel Burnham Lambert, an investment bank that went from best to bust in short order 20 years ago. Some of Goldman’s institutional clients, such as CalSTRS, a Californian pension fund, have publicly expressed concern.

Goldman’s grilling also eases the passage of the Volcker rule, which clamps down on banks’ proprietary trading and investments in hedge funds and private equity, as part of broader reform. And it adds to pressure for broker-dealers to have the same fiduciary duties towards their clients as investment advisers. No wonder the usually chirpy Mr Blankfein looked so drained by the time he was let go, after almost four hours in the hot seat.