Notes on Senate Hearings on Goldman Sachs (Updated as of End of Hearings)

Opening Remarks Overview:
The Senate committee presented a case that sought to refute the prior public statements of Goldman Sachs and establish that Goldman was, in fact, betting against clients and had rampant, and unacceptable, conflicts of interest. Senators Levin, Collins, McCain and McKaskill made statements that seem to anticipate many of the defenses that Goldman might make. An important theme of what the Senators are presenting is that, as Republican Senator McCain stated, Goldman will be judged in the court of public opinion, as well as in the legal courts. Their activity appears to be unethical and such activity needs to be reformed.

In the scheme of things, the committee seems well prepared and working with consistent themes: unethical behavior, non-productive gambling, that caused damage to the country even as Goldman reaped large profits.

Goldman employees read prepared statements that emphasized the prior talking points of the firm. They break no new ground. The statements will soon prove to inadequate to prepare them for the line of questioning that the Senators take.

Senator Levin launches in detailed review of certain particularly toxic 2007 Goldman deals, including Anderson CDO, a Freemont MBS and the Timberwolf CDO. Levin is unable to get Sparks to concede whether he has a duty to let clients know that they were betting against the deals. Levin notes that a Goldman employee identifies that Timberwolf is a “shitty deal” but then continued to make it a number one priority to sell the deal to clients. Sparks stammers and equivocates, and Levin concludes that he is unwilling to answer the question of whether they had a responsibility to reveal Goldman had an adverse interest to potential investors.

It seems clear that the Goldman executives were completely unprepared for this line of hostile questioning and have no ready responses. How this could be and how they could not have anticipated how they would be grilled, is a true mystery.

Collins notes that it seems to be Goldman’s strategy to burn through the time without answering anything. Whether this is true or not may be subject to debate. However, it seems clear that Goldman is doing a good job of making themselves look bad in this type of situation.

Josh Birnbaum is the first Goldman employee being quizzed that seems able to answer questions directly and explain their positions and their rationales. Unlike the other Goldman representatives, he agrees with Senator Collins that Goldman has a duty to act in the interest of its clients. He agrees that it may make sense for regulators to impose a fiduciary duty on broker dealers.

Senator Ted Kaufman highlights a WaMu subprime, second lien deal with 90% stated income loans. Doesn’t it seem fairly likely that a lot of these were going to fail? Sparks tries to argue that investors had an interest in these loans which, in hindsight, turned out to be a problem. Senator Kaufman asks, didn’t they do any diligence on the deals? Didn’t they think it was strange that there was such an explosion in these types of deals? Is it really possible that no one knew that these were going to be a problem?

Sparks replies that they made mistakes about the risk in these loans, but there were people in the firm and outside that wanted to take the long risk on these types of deals. Kaufman asks, how could you turn some lenders down and still accept loans from Long Beach?

Senator Coburn (R-Ok) notes that these questions should also be asked to the other leading banks. Without trust and transparency, markets can’t function properly. His key question for the hearings is: was Goldman making trades contrary to their investors and clients? To the witnesses, this is your chance to explain what was really happening.

Coburn focuses on Swenson’s self evaluation, where Swenson notes that he produced tremendous profits for the firm in 2007. Swenson noted in 2006 that the subprime market was going to have an unhappy ending. Senator Coburn asked if he shared this view with others at the firm or with clients they were selling these bonds to. Swenson’s defense is that in 2006, the market was still strong. Coburn asks if Swenson ever saw anything wrong with the ratings of the securities.

Coburn asks Tourre – Goldman released personal emails that were embarrassing to Tourre. Do you have any thoughts on why Goldman released these embarrassing emails and how did it make you feel?

Senator McKaskill quizzes Tourre and others on the Abacus deal and takes an aggressive stance with them, arguing that ACA was just a fig leaf for Paulson’s position on the deal.  She also notes the close timing with Timberwolf CDO, which was put together by former Goldman employees.  She asks Tourre if it is typical for deal sponsors to put together the securities in a synthetic CDO.  He says that they would always have some input, subject to the deal manager (ACA).

Senator Pryor asks Sparks do you feel like Goldman had any responsibility for the financial crisis? Did you contribute to it? Sparks replies that he does take responsibility for his actions and notes passively that “credit got loose”. Swenson gets the message better – we didn’t do anything wrong. Pryor disagrees, noting that many people believe that Wall Street, if not the individuals in it, was a big cause of the crisis by creating all of the mortgage bonds. He also notes that none of the Goldman people seem to be clear on their ethical standards nor do the Goldman people seem to be taking any responsibility for their actions.

Senator Ensign (R-Nev) argues that Las Vegas casinos would take offense at being compared to Wall Street because Wall Street used other peoples money and changed the rules as the game was being played. He’d like to know if Goldman were more market manipulators than market makers. With that, he launches into a ripe area of attack – the influence of the banks on the rating agencies. Do you know of anyone who tried to influence the agencies? Do you think the agencies models were right? Do you think that Goldman paying the rating agencies for the ratings had the appearance of a conflict of interest? Unfortunately, he gets no response to these questions (interestingly, the rating agency emails the Senate committee released appear to have numerous instances of the banks, including Goldman, trying to push and arbitrage the rating agencies throughout 2006 and 2007).

Senator Ensign turns to Hudson CDO, a static synthetic mezzanine MBS deal, which he believes was made entirely of positions on Goldman’s books. Goldman was the only party that provided the shorts to the deal. Sparks argue that investors wanted to go long this security. If only Ensign would ask who those investors were!

He further asks if you all made huge amounts of money even when its clients lost huge amounts of money, do you think the right incentives are in place for ethical behavior? Sparks continues to equivocate. Birnbaum continues to confidently state the party line, as does Swenson.

Senator Tester asks Birnbaum when he thinks the housing market started to decline. Birnbaum believes housing prices started to decline at the middle or end of 2006. Did it change your view of the subprime market and did you share these thoughts with others? Birnbaum acknowledges that he did share his thoughts that subprime would be declining. The unfinished thought of the Senator presumably was that despite this view, Goldman continued to sell deals to investors, without sharing these views.

Senator Tester asks Sparks if Goldman did anything wrong. Sparks said he didn’t do anything inappropriate, though they did make mistakes. When questioned on synthetic CDOs, Sparks argues that there were investors who wanted to take long risk in these deals. Why did you issue deals like Abacus, Anderson, Timberwolf, etc. when you knew that subprime would be declining? Sparks did not expect these deals to be reduced to junk, which is bad. Do you think that the investors and ratings had all of the information they needed to rate the deal? Sparks says he is surprised that Moody’s would think that Paulson’s presence in Abacus would be relevant.

Senator Tester acknowledges that there is only so much the Goldman guys can say but he states that we can’t let something like this happen again and it would’ve have been nice to have experts in the industry help.

Back to Levin, who wants to drill down into the Hudson CDO. AIB, a potential investor in the deal, says that it is junk, which apparently, a salesperson acknowledges. The “junk” in the deal is Goldman inventory of MBS. Goldman was the sole buyer of protection on the entire $2 billion deal. Senator argues that the purpose of this deal was to unload Goldman’s junk and profit from the deal if it fails. The pitch book for the deal indicates that Goldman’s interests are aligned with investors and, with a good deal of outrage, states that this was obviously not the case. He then quotes an email where Sparks congratulates his team for “making lemonade from some big old lemons”. Levin then lectures Sparks – you ought to have plenty of regrets for this, but I don’t think you will.

Senator Coburn drills down again on the Abacus deal. Coburn notes that Schwartz of ACA had an email with Pelligrini of Paulson & Co. where Pelligrini thanked her for her efforts on selecting the portfolio.

These hearings aren’t a perfect way to deal with the problems in the market, and are laden with politics and grandstanding. But it is relatively encouraging to see the Senate finally address the types of questions that we’ve been asking on this blog and that many other financial markets observers have been asking, as well. It certainly appeared, for a fairly long period of time, that all of this would continue to get glossed over. In general, I would state that the members of this Senate committee seem to have a fairly good grasp of the complex market issues and the need to come up with a solution to the problems that the CDO and MBS deals created.

Final update (4:20 PM), with some more editorial at the end:

Senator Levin is grilling Tourre on the Abacus deals and how ACA got the impression that Paulson was an equity investor. He’s making Tourre squirm on the issue of whether the statement that ACA and Goldman mutually agreed upon the portfolio is accurate. He gets Tourre to admit that this is not entirely accurate.

He gets Tourre to concede that they did not disclose that Paulson helped select the deals. He then asks if Goldman intended to retain the remaining sliver in the Abacus deal. Tourre says that they did not intend to retain it, though they did end up with it.

Senator Coburn turns to short positions that Goldman took in companies that were sensitive to mortgages, including Merrill and Bear Stearns. Senator Coburn notes that after Goldman sold Timberwolf to Bear Stearns, they took a short position in the stock of Bear Stearns. This seems pretty devastating.

Birnbaum denies knowledge of Bear buying Timberwolf and denies that there was any connection between people buying “shitty” Goldman CDOs and Goldman shorting the companies who bought the bonds. There are many people who would like to see this line of inquiry pursued even further.

I can’t believe that anyone could conclude that this went well for Goldman. They might have avoided making their case with the SEC any worse (which was obviously a primary objective). However, overall the disclosure of their practices and the refusal of the Golman representatives to take any responsibility for their role in the crisis will be very damaging to the firm’s reputation. The Senators laid out evidence that Goldman cleared their own book of risk by dumping it on other investors, that they knew that market was declining but continued to sell deals that had little chance of succeeding, that the reason they were selling these deals was not to meet investor demand but to get them out of MBS and CDO positions, that there were many obvious conflicts of interests utter lack of transparency which accrued to Goldman’s benefit and for which they got paid very well even as their “clients” were suffering massive losses from the same deals.

An answer that the Goldman representatives did not provide, but which seems obvious from the details the Senators discussed, is that the reason Goldman continued to sell these MBS and CDO deals in 2007 even though they strongly suspected the housing market would “not meet a happy end” was so that Goldman could get out of its unsold inventory and positions. This strikes me as a significant inversion of the notion of investor demand. The demand for these deals was from Goldman, so they could clear out their positions and they were willing to tolerate losses on them to accomplish this. This may not have been legally forbidden activity, but it seems quite likely that it will be the subject of additional regulation in the future and that Goldman’s ability to do this next time around may be much more limited. It also seems like a better solution would have been for Goldman not to have been long so much of this inventory in the first place, the accumulation of which probably helped obscure what the real demand for the product was.

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  1. Mannwich

    Went through one tub of popcorn. Time to go make some more. This is getting interesting.

    Arrogant stupidity by Goldie to not quietly settle out of court. I can’t see how their reputation recovers.

    1. BruiserND

      Hank Paulson was in on this… Chicago Climate Exchange (CCX),Obama’s Connection and WHY Goldman Sachs is Willing to Take the Heat « Romanticpoet’s Weblog
      Here’s how your global government will destroy the industrialized world.
      I was a 35 year old Vice President & Member of the CBOT at Drexel Burnham in 1985 under Dr Richard Sandor … the slimiest human being I ever met.
      Mike Milken was there at that time too.
      This will be one of the most important e- mails that you ever recieve.
      Beck is 100 % perfect in his facts.

  2. Will

    So, on that blog that follows the WSJ from 1930 and that bank in Austria that failed… was there any activity on a Sunday, like we had this Sunday on the Greek debt situation, was there then any announcement from Very Important People that everything was under control? Did the markets go ahead and tank anyway after they pulled the trigger on their last best hope to stop the slide before it started? This reminds me of Lehman, with all this weekend activity, and of 1929, with these pronouncement that everything is under control, no need to worry. The combination of a Sunday press conference and a Tuesday debt downgrade makes me want a Naked Capitalism entry on the subject because by 5 pm it will be well on its way to where it’s going and I’ll have missed the prophecy.

  3. freedomlover

    Anyone that still defends Goldman Sachs and the loads of bullshit they call “investments” have proven themselves to be completely worthless.

  4. Joel

    M. Tourre appears to have completely missed the point of Sen. Coburn’s question about the e-mails.

    I don’t think he’s an unintelligent young man, so he must be willfully deluding himself.

    Free advice to Fabby Fab: Decline company legal representation and get yourself a private attorney. Work out your own deal with the prosecutor. Goldman is not on your side, they are just keeping you around until they can saddle you with as much poisoned baggage as they can before they dump you off the side of a cliff.

    1. Bates

      I was thinking the same thing when Fab-Fab was questioned about the motive of GS releasing personal email between him and his significant other. An excellent strategy by the Senate committee to drive a wedge between Fab and GS.

      I believe the Senators were slyly trying to tell Fab-Fab that he is being set up by GS to be thrown under the bus (figuratively?).

      I agree that it was a dumb move on the part of GS to take the part they played in the melt down of the economy high profile. Today, GS lost in the court of public opinion imo.

      Today, GS demonstrated that Wall St could care less about Main St.

      1. Joel

        Agreed. Reputation should be the most valuable asset on their books, and I can’t see any easy way for them to rebuild that.

        I mean, today it was all laid out on the table. GS is perfectly willing to analyze a portfolio, deem it “shitty,” and then pay a sharp premium to its sales force to go out and peddle that shitty lemon paper like it was perfume-soaked gold or something.

        Who wants to buy anything from them ever again after that?

        1. DownSouth

          People who are “investing” other people’s money—-pension funds, the United States government, executives whose fidelity is to their bonus and not to their share holders, etc.

  5. Hoi Polloi

    Of course GoldSacks employees were unprepared for hostile questions and Fab Fab missed the points about his romance emails. I mean, they were making money and since when is that wrong in the US of A??

  6. KnotRP

    After this part:

    Coburn asks Tourre – Goldman released personal emails that were embarrassing to Tourre. Do you have any thoughts on why Goldman released these embarrassing emails and how did it make you feel?

    Coburn then asks if *goldman* (the same folks who outed his personal emails) was also *paying* for his legal representation.

    The scape goat (Tourre) replies in the affirmative, with no apparent notice of the irony that his legal representation is
    being funded by the same folks who outed emails showing
    his personal life in a bad light. He may be a two-timer with
    girl friends, but he’s completely ignorant if he thinks his
    lawyers are on his side.

  7. KnotRP

    Ah, Joel already posted about it….

    Either Tourre is stupid, or he knows he’s taking one for the team, and has already arranged the quid pro quo.

  8. Doug Terpstra

    >> “It seems clear that the Goldman executives were completely unprepared for this line of hostile questioning and have no ready responses. How this could be and how they could not have anticipated how they would be grilled, is a true mystery.”

    It is indeed inconceivable that GS was that unprepared. Rather, it is more plausible that it’s in the script and that the hearings are “all sound and fury, signifying nothing,” at least where legal jeopardy is concerned. But the court of public opinion is way ahead of that and the permanent damage to trust in the market is hard to calculate. The fact that all but one exec refused to say that GS had an obligation to act in the best interests of its clients is breathtaking.

    In a now very rare event, the DOW is down over 200 points today, at present.

  9. mms

    Does anyone know if any good academic articles exist looking at complex financial products through the products liability legal structure that evolved through the first half of the 20th Century? Since those laws developed to protect consumers at a time when manufacturing was making it exceedingly costly and difficult for buyers to individually scrutinize the underlying products, it seems like they might create some parallels to the modern world of finance.

  10. craazyman

    Let thy sins be laid upon them, yeah, and even as they were exalted they are laid low and casteth out, like chaf from the wheat, as demons casteth out of a man possessed. And the Lord turns his back on them and seeth them not. And as thy sins be upon them, yeah, ye are lightened of thine own burdens just as the oxen rejoice when thy yoke is taken from him. Wherefore ye see the wonderous works of the Lord and ye see the Savior in the clouds and ye see the great walls of the temple fall upon thy adversary. And wherefore will ye be when these things have come to pass, and the divine Lord of Hosts sees into thy hearts as into a glass. Oh ye children of Babylon, ye merchants and high priests, there be time for penitence and prayer when the anger of the Lord comes before thee and reveals himself to yee. In that day there shall be not but contumenly and chains and torments as all is revealed, yeah even that hidden in the hearts of the people.

    Book VII, v. iii – ix

  11. Allen C

    It is encouraging that some of our elected representatives are actually representing the people at large. Seems like good work.

  12. Finance

    Viniar’s last gaffe was classic. As long as it isn’t in email it is OK.

    This is why AIG’s emails need to be released and the FED needs to be completed audited.

    1. Make money by securitizing unpayable loans. ( Going Long)
    2. Sell those loans to clients for 100%
    3. Repeat 1 until the market is overleveraged
    4. Create synthetic CDOs to allow for even more betting
    5. Once overleveraged, try sell your long book to clients
    6. Once sold, short the market via the synthetic CDOs.
    7. Short the other companies that have bought the junk debt.
    8. Buy off the regulators and government to ensure your shorts will get paid off.

    Until the government decides to outlaw buying/selling derivatives when you don’t own the underlying security or require the commodity, this will continue. One is useful hedging, the other is gambling, pure and simple.

    And Citibank…running up the price of oil by leasing tankers and having the oil sit in the Gulf doesn’t count as requiring the commodity.

    1. Yearning to Learn

      Until the government decides to outlaw buying/selling derivatives when you don’t own the underlying security or require the commodity, this will continue. One is useful hedging, the other is gambling, pure and simple.

      yep. there is no reason to even have these synthetic CDOs or naked CDS contracts. they are only there for leverage, off balance sheet gimmicks, and accounting tricks.

      ban them. or at least make it so that no depository institution or retirement fund can buy them. let the hedgies trade them with themselves.

      1. VenusVictrix

        You are absolutely right about banning naked CDSs. They are a scam.

        They’re merely a way to compensate lenders and bankers for making loans that are guaranteed to default. They create a perverse incentive to do precisely the opposite of what they should be doing.

        See “The Producers” for a good analogy (or just read the synopsis on Wikipedia).

  13. leigh-anne

    So, I’m curious to know why there is not already a fiduciary duty on these broker dealers. Is it only because the clients are not retail investors?

      1. mo

        Fiduciary duty applies to Registered Investment Advisers under the “Investment Advisers Act of 1940”. That act exempted broker/dealers – whose advice was thought to be incidental to a transaction – from a fiduciary standard. Most of the “advisers” you meet at Merrill, Morgan Stanley, Ameriprise, etc. are technically brokers (i.e. sales people or product pushers). They are held to a much lower “suitability” standard and are overseen by the SRO – FINRA.

        I’m more familiar with the workings of this on the retail level. I don’t know how it flies in the institutional world. I suspect the thinking is that the institutional folks should know better and that is why there is so much focus on the disclosures that were left out of the prospectuses.

        BTW – some of the financial reform legislation is attempting to address the fiduciary issue at the retail level. The situation is very confusing to consumers and I believe the big brokers want to keep it that way. I was disappointed when I found out that things like annuities and variable life insurance products would not come under the purview of the Consumer Finance Protection Agency. The stories I could tell…

  14. Alain Maronani

    Fabulous Fab…Fabrice Tourre graduated from one the most difficult engineering school in France (Ecole Centrale de Paris). Being french and knowing the kind of theorical mathematical, physics and chemical knowledge necessary for entering this school (after a grueling pre-admission exam competition) I can tell you is everything but stupid (He has a Master degree on the side….). As people immersed in Goldmann Sachs culture he has probably lost all sense of reality….wrong or right, true or false….

    1. Yves Smith


      Plenty of highly educated people have no common sense. Have you read about Taleb’s Fat Tony?

      1. colinc

        The preponderance of evidence indicates there is no such thing as “common sense.” First, one must define “sense,” I’ll guarantee you’ll get at least 1,000 different answers from 1,000 or more people, then you’ll have a vastly more difficult time trying to define “common.” Ergo, “common sense” cannot exist in today’s world of the under-educated, cognitive dissonant plethora of make-believe “realities.”

  15. Elizabeth

    Someone asked about the lack of fiduciary responsibility.

    Dating back to finanical reform legislation of the great depression, there has been a distinction made between a broker (who supposedly just sells stuff) and an investment advisor (who can tell you that you should buy stuff). The former has no fiduciary, the latter has fiduciary.

    In reality, to a client, both look the same. A broker says “I think this is a great buy – you should grab it while you can”, and is off the hook from fiduciary responsibility by adding a disclaimer in tiny print on term sheets that “any advice is incidental to brokerage services offered”

    GIANT loophole that should be closed.

    1. Peripheral Visionary

      Yes, this is a giant loophole that has been around for a long time; I suspect its origins was when there was a major divide between B/Ds and I/As, e.g., when they were literally different firms. Currently, joint B/D/I/A firms can jump between fiduciary and non-fiduciary duties, with little more than a notification to the client that they are acting as a market maker and not as an investment adviser.

      From a high level perspective, I simply do not see how an I/A can meet a fiduciary standard to its client as long as it can retreat into B/D mode any time it is convenient, e.g., when acting as principal on a trade (particularly egregious when it is the underwriter of the security in question.)

      I believe there have been proposals to fix this, but I am not sure if they made it into the current bill, but I suspect that they did not.

      1. jinel

        Fiduciary is a legal term of art. Elizabeth is right about how it fundamentally operates. BUT there is a reason why a large institution like GS does not have a fiduciary duty as a market-maker: there would be no such thing as a market-maker if each had to take a fiduciary duty to the investors they sell to. Analysis is expensive and no one is going to do it for the benefit of another FOR FREE. The Senate might have a case about GS’s reputation re small-time buyers. But for large investors? Give me a break. Goldman isn’t calling up mom ‘n’ pop trying to sell these things. GS is calling managers who MAKE IT THEIR BUSINESS TO BUY/SELL using millions of dollars. Yes they are trading other people’s money, but they are sophisticated. If money managers are pretending to be experts in a market, it is the manager who is pretending (aka hedgefund managers who obviously weren’t as smart as GS) who should be on the hot seat, not the person/company that entered into the other side of the deal.

        This hearing is the biggest display of inadequate representation/problem solving by a Senate that doesn’t understand the market they are regulating looking to get reelected that this financial crisis has seen yet. I am disgusted. Go after the managers who failed, those who pretended to know what they were doing and were actually fiduciaries to their individual investors (i.e. the people who bought w/o doing due diligence to know what they were betting on). The information was out there. Check your assumptions and stress-test your MBSs.

        1. DownSouth


          That’s a great choice you give us to describe those employed in the financial services industry, either master thieves and deceivers like Goldman, or feckless bumblers like Goldman’s victims.

          And these are the same guys who control the country’s financial future and wellbeing, and knock down multi-million dollar pay packages for either being 1) crackerjack liars or 2) stupid?

          And where has homo economicus disappeared to? Maybe the market utopia, like Erewhon, is nowhere.

          1. Siggy

            When does GS have a fiduciary duty to its clients and counter parties? When its acts as an agent it has no fiduciary duty other than to perform in accordance with the contract that is agreed to.

            When it acts as principal it has a fiduciary duty to disclose all material information relative to the transaction act hand. That information would not include whether they were long or short the securities of interest. What would be required would advice and consul as to the feasibility and suitabilty of the transaction at hand. When acting as principal the guiding dictum is similar to that of medicine, ‘first do no harm’.

            The purchase of a CDO as a stand alone vehicle is not rational, its rational acquisition demands the purchase of a CDS against the CDO. This aspect of the transactions upon which the panel’s inquiries were based did not acknowledge this true character of the CDO/CDS trade. The CDO/CDS trade is the big short.

  16. Jerry

    I’m wondering if we will ever get any justice in US…It looks like Italy plans to …”In Italy, the troubles have raised the prospect that bankers may do jail time. Two weeks ago, an Italian court indicted 11 officials at four global banks, including New York-based J.P. Morgan Chase and Germany’s Deutsche Bank, on fraud charges linked to the sale of interest rate swaps to the city of Milan. Those swaps, authorities say, have cost Italy’s fashion and financial capital $140 million since 2003 and were knowingly misrepresented to city officials. All four banks have denied the charges.”

  17. Bas

    Blankfein utterly annihilates the Senators.

    Well, I guess I’m glad the Master of our Universe at least outsmarts these idiots.

    Generally, an intelligent man has to be REALLY depraved to be as insufferable as a stupid man..

    1. DownSouth

      Blankfein “utterly annihilates the Senators?”

      You call feigning ignorance “utterly annihilating the Senators?”

      Well maybe so, but it appears in the courtroom of public opinion Blankfein has painted himself into a corner.

      For if “we’re not that smart,” as Blankfein claimed during his testimony, then how, pray tell, does he justify the $70 million pay package he knocked down in 2007?

  18. Vinny

    More bread and circuses for the chumps. That’s all this is.

    I’m sure Blankfein’s got them all these senators in his backpocket.


  19. Steve Diamond

    I don’t think these Senators understand what a market maker is or how it survives in a volatile market. If they do then they are being disingenuous.

    1. Bas

      I guess the latter, except maybe McCain – he’s just senile.

      Still, doesn’t the market maker acquire these AAA ratings? They were investment grade as far as these supersophisticated clients of them knew. So how does that square with his assesment that his clients wanted greater exposure to risk?

      And why did they allow Blankfein to just declare this subject out of range for the Senate hearing?

    2. DownSouth

      Steve Diamond,

      So what are you trying to say here? Are you claiming that originating “kamikaze” loans and packaging them into “suicide” bond products—-products designed to fail so that Goldman could take short positions against them—-fits your definition of “market making?”

      I think the senators fully understand what market making is. It is Blankfein and the other Goldman execs, along with yourself, who are trying to confuse the issue, to pass off outright fraud, deception and securities theft as “market making,” as this comment from the NY Times indicates:

      As Dan Sparks explained earlier, Goldman both creates new investments (like C.D.O.’s and mortgage bonds) and it provides so-called market making, which is like the air-traffic control room of assets. As a market-maker, Goldman trades assets that were already created. And so Mr. Blankfein’s remarks on market-making and the senator’s remarks on investments created by Goldman are floating past each other like cars headed in opposite directions.

  20. Peripheral Visionary

    On a more trivial note, couldn’t they have downloaded all those exhibits onto a Kindle . . . ?

  21. Vinny

    Coburn was the most comical of all. His whole “inquiry” looked more like a cheap, late-night Goldman Sachs informercial.

    I tell ya, we’ve got to watch this guy. Next thing we know, he’s pushing CDO’s on our kids down the block…lol


  22. steve from virginia

    What a charade! I guess Goldman snuck up on the wagon train. The hypocracy is nauseating.

    If GS was a problem = and they were prior to 2007, why did the Senate vote to bail them out in 2008?

    What gets lost in all the discussion is the timing. The mortgage market had already turned into a pumpkin by the time GS was shorting its clients’ ‘investments’. Residential real estate was doomed when Greenspan started raising rates – because of rising oil prices – back in 2004.

    The GSE’s were questionably solvent during the boom w/ 1.5% funds. Finance was a mess long before Paulson and ‘Fabulous Fab’ or whatever it was appeared on the scene.

    The only thing this exhibition proves is how broken the government really is. It also means that the onrushing deleverageing will not result in bailouts of Goldman Sachs. Better get your chinstrap tightened, kids.

  23. Finance

    Nobody at the hearing has brought up that the $1 Billion to pay off Paulson came from the German and British Governments due to bailing out Royal Bank of Scotland (ABN-Amro) and IKB.

    Just like the AIG bailout, it was funneled from governments to private players.
    This time instead of Goldman keeping the money, Goldman passed it along to Paulson ( who had an unbeknownst involvement in picking the portfolio).

    1. Did Goldman/Paulson have CDS on ABN-Amro or IKG to get its $1 billion either way, if the firms couldn’t pay out?

    Supposedly this is how Blankfein argues that the AIG bailout wasn’t really necessary, because they had CDS on AIG if it defaulted.

    2. The ABN-Amro and IKG bankers shafted British and German taxpayers and walked away with millions as well. What about clawbacks?

    3. Who are Paulson’s investors? Institutions, Goldman alumni?

  24. Richard

    In spite of all the bs we hear about how synthetic derivatives are too complex for ordinary mortals to comprehend, there are very few indications that they perform any fundamentally necessary role in a functioning capitalist system.

    So how about a solution so simple that even Senators can understand it:

    Since rich guys are always going to find a way to sit down at the gambling table and wager about how macho they are, let them have at it.

    If the US economy is going to serve as the casino, we should be able to charge for the use of the tables. Therefore:
    1- Require all participants and terms of all derivative transactions to be fully disclosed in the public record within 48 hours of the deal closing.
    2- Make non-disclosure a criminal act with mandatory jail time for the corporate senior officers involved, just like we do for repeat shoplifters.
    3- Collect a transaction fee— lets say 1% of all the action — just like other casinos do. This would either slow derivative activity to the point where it no longer threatens the entire economic system, or go a long way toward balancing the national budget!

    1. rkf

      agree completely with criminal act for nondisclosure. The heart of all of this is motivation. Unless lawmakers build in some negative reinforcement, the only thing driving the traders is MONEY. SENATE STAFFERS IF YOU ARE READING THIS BLOG: Get to the motivation behind each of the transactions and put a negative reinforcement GREATER than the monetary incentive. The negative reiforcement MUST BE CRIMINAL punishable with a minimum 10 year prison sentence. Monetary fines for bad behavior won’t work because these guys make more than you do in a lifetime! Wake up! Talk to the right people. Don’t talk to insiders on Wall Street, they are just using you as a sucker!

  25. Doc Holiday

    Re: “Collins notes that it seems to be Goldman’s strategy to burn through the time without answering anything”..

    Amen baby! As usual, no one had a clue what was going on, including the CEO, but they do have great recall as to the deals they made with Warren Buffett — and as for burning the clock, the Senators play that game very well as they try to look prepared for the voters back home, many of whom think there is more to this, than just bribes and collusion. My money is on Goldman and their silence and the stupidity of this investigation — because the mafia always wins, and they own the house! The voters are too dumb to get beyond the headlines. Game over, Goldman can go back to selling shitty narcotics to teachers, nurses and all the little people who think Warren is a sweet old bugger.

  26. Brett

    “I can’t believe that anyone could conclude that this went well for Goldman.”

    I’m watching CNBC spin this as a Goldman win. Spinning it as Goldman fulfilling its duty to their board and to shareholders, and that everybody involved were “sophisticated” enough to avoid getting into this bad bet, that this whole mess was really the fault of Fannie Mae and Freddie Mac for loosening credit requirements.

    Lets blame community reinvestment while we’re at it. I’ve heard this even among lefty bloggers. Oh, and lets blame the people who took out mortgages, as if it’s their duty to decide their own credit worthiness, as if loan officers we’re being paid to do just that.

    This hearing isn’t our Pecora moment, though. I don’t know when that comes. And the Financial Crisis Inquiry Commission is a joke.

    More forensics are definitely called for. I doubt very much whether either congress or the Obama administration have the will to undertake this. I don’t know who has the requisite fire in the belly on this.

  27. Doc Holiday

    Re: Senator Ensign (R-Nev) argues that Las Vegas casinos would take offense at being compared to Wall Street because Wall Street used other peoples money and changed the rules as the game was being played.

    >> Meanwhile in Vegas, the housing boom went on and on, while good people in the Senate looked the other way ….. priceless stuff here and great dance steps; what great entertainmnet … and to think, all this will be forgotten during the election… phhfttt.

    > Just catching up; thanks for the updates!!!

  28. run75441


    They are being sued by the SEC which has a monetary consequence to it. Tactically the SEC and the Senate F*cked err screwed up. The Senate Hearing should have been first and then the lawsuit. Goldman employees are not going to say much with the SEC suing them

    1. Yves Smith


      I doubt there was coordination (indeed this might taint the case). And I differ with you on how this plays out.

      The real action is the SEC suit. Even if the SEC loses (which I think is unlikely; it won’t be hard to establish that there was misrepresentation; the case will hinge on whether the misrepresentation was material), the discovery process will be very damaging to Goldman, and will surface all kinds of evidence that will help plaintiffs in other cases, both against Goldman and against other dealers.

      As a plantiff, you are always better off if you have an idea of how your opponent will respond to your charges. While Goldman may have tried not to show all its cards, it did preview at least some of the arguments it will make in court.

      Moreover, this session was under oath. If anything said today is contradicted by what the SEC finds in discovery, that isn’t too pretty either.

  29. Brett

    They seem worried about whether Wall Street can be trusted. I think they have the idea that it can’t. Oh, and they blame “politicians” for throwing mud at “the center of the US economy”.

  30. Doc Holiday

    Re: “Goldman may have tried not to show all its cards, it did preview at least some of the arguments”

    ++> Yes, that is somewhat helpful to the cause, because, “if” SEC does its job, which it seldom ever does, then this investigation does help establish a foundation to build from (on both sides, as Goldman well understands). SEC never really did much damage to Enron in court IMHO … oh yah, dis SEC take Enron to court … I forget (trix questions everywhere these days).

  31. Doc Holiday

    I can’t help myself; RANT TIME:

    What happens to our global society, if wall street firms are enabled to not just bet against housing, dotcom bubbles, tulips or cars — but empowered to bet against food, drugs, diseases, cancer, war or conditions of humanity? Goldman stands by the narcotic dealer mentality, that there re two sides to almost any bet — but how will “society” feel about Goldman being a middleman for people that bet on death, or bet that a genetically engineered corn plant will cause cancer, or maybe we should they need to come out in the open and support taking bets on cancer patients and the outcomes of experimental drugs — maybe the patient could take one bet, while a doctor and a drug company take the other side of that. Goldman and the narcotic derivative dealers on wall street are parasites who will stoop as low as possible to be in between two reckless idiots, and as such, it’s too bad that Goldman doesn’t get crushed in-between the train-wrecks it helps engineer – and pilot, up-until the time of the collusion. It’s too F’ing easy for these drug-dealing slime to walk away from the harm they do to society — there certainly needs to be an effort made to contain these pigs and to out all the congressional crooks that are connected to the corruption. These hearings are a scam, designed to appease angry voters — but maybe, just maybe, somebody that is an elected representative of the American people, will step up and risk losing their job, in order to save their soul, in an effort to help America!

  32. Mark

    How can you say the senator’s were prepared? They came off as idiots pardon my french. They obviously don’t have a grasp on this very esoteric market…which even Allan Greenspan has admitted to understanding. The hearing was just a grandstand for these senators ahead of the November elections. They completely missed the main points…this was a systematic issue. The meltdown was the result of a multitude of factors from easy credit, lax regulation, poor oversight, sleezy mortgage brokers, greed Wall St execs, and Congress. Goldman did nothing illegal; they did not act ethically but they did what the market allowed.

  33. Hugh

    Various observations in no particular order:

    Unless these hearings result in much improved financial reform legislation, they are kabuki.

    This is not to say they weren’t entertaining and damaging to Goldman’s image. Goldman may not have a fiduciary responsibility to its clients but its clients likely do have such an obligation, and it is a little hard to see how they can discharge that duty if they continue to trade with Goldman. Clients who deal with Goldman could open themselves up to suits for fiduciary failure.

    Goldman is following the strategy of never admitting the con which I predicted.

    Congressional hearings come in different varieties but have common weaknesses. Contrast the appearance of Bill Black, for example, with the Goldman boys. There is a huge and immediately obvious difference between witnesses who want to convey information and those who do not. It is like night and day. With witnesses who obfuscate and stonewall, you can still acquire information but negatively. It is in what they don’t say, the subjects that they will talk about versus those they refuse to, or choose to have poor memories or quibble about. Running out the clock, not answering the question, fumbling with notes and exhibits are all classic dodges. We saw a lot of that today. The other aspect is the generally poor quality of the questioning. Yes, there is a lot of grandstanding and setting up the soundbite for the constituents back home. Even so the questioning was better than average today. Still there is the lack of follow up to really drive a point home. There was also a marked difference in response to untethered questions about Goldman’s operations as compared to Levin’s going through the exhibits with the witnesses. The reason for that is that real evidence at hand increases exponentially the risk of perjury for the obfuscating witness.

  34. Andrew G

    This seems like too much of a charade – the absolutely worst case scenario for the Wall St is that Goldman Sachs will be sacrificed to appease the angry peasants and another Goldman Blows will appear. Just like Lehman Bros may be dead but the Lehman banksters are still alive and kicking.

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  36. rkf

    I agree with Yves on this sentence. It captures my feelings exactly: “These hearings aren’t a perfect way to deal with the problems in the market, and are laden with politics and grandstanding. But it is relatively encouraging to see the Senate finally address the types of questions that we’ve been asking on this blog…”

    I was able to watch most of the hearings or listen in my car on C-SPAN radio. I think Lloyd did better than the rest of his minions, Sparks second best (too bad they let him go). I also felt the senators got many things RIGHT, many more than I would have thought going into this. I heard lots of my co-workers whining that the Senators don’t understand it well enough. I have to say I’m sick of hearing this. Not many of the people INVOLVED in the business understand it all completely either! Considering Levin is 77 years old and not a life-long Wall Street banker (like Lloyd who’s been with GS for 20 years), I thought he did pretty well. Although I WISH ELIOT SPITZER or BILL BLACK had been up there asking the questions. It would have been EVEN BETTER! Overall, the hearings allow the public to see the septic tank that is Structured Products and Financial Engineering on Wall Street. Will anything change? God help us if it stays the same!

  37. onwee

    Is packaging a CDO market-making, underwriting, or something in between? That’s a legitimate question missed yesterday and in comments here. I think it’s in between and regulators now get to decide what duty a packager has to clients. Did GS have a duty to have a better model than S&P? What would the market have done if the banks said the top of a CDO should be rated BBB but S&P said AAA?

    Goldman packaging up BS items to get them off its book? How is that different from selling items off its books? I’d say no duty to disclose. Again, that’s a question for regulation, but Goldman’s right that the market convention was for the “buyer” of risk to examine the portfolio and read the contract and make a determination that way. I never witnessed nor heard of a buyer declaring that they bought because they thought the packager was endorsing the collateral.

    Blankfein made one good point: just because CDS can produce some good (hedging; reducing risk) does not mean it’s bads might not outweigh its goods. Regulators should pay attention to that notion. To the extent CDS is effectively leverage, and excess leverage raises systemic risk, perhaps the uses of and capital/positions behind CDS should be severely constrained.

    Finally, perhaps ironically, there was a lot of attention paid to the potential that had the buyers of Abacus only known that Goldman/Paulson was short the collateral/equivalent then they would possibly not have bought (the disclosure issue). It’s worth noting that had the buyers bought the deal specifically because they had known Paulson/Goldman was long (assuming they had been) then the buyers would NOT have been doing appropriate due diligence and their management/clients should have been displeased. It was the buyer’s responsibility to evaluate the collateral independently of implied or imagined endorsements from others. That is also why GS expressed surprise that the rating agencies would have cared – what part of an agency rating is based on some investor liking a deal? By the same token, what part of due diligence depends on knowing somebody does not like a deal/collateral? There are always people who don’t like the value of any investment at any time. The senators seemed to think it’s a broker’s responsibility to like what they sell. Institutions should not care what brokers like.

  38. MichaelC

    What I saw was confirmation that GS as a firm was too clever by half.

    The SPG group saved the firm. The deals were revolting and the bad press is fully warranted. That business should be made extinct.

    GS long mortgage book was as bad as everyone elses. In this book GS was as stupid as its peers. Without SPG they would have been toast. I think that was Levin’s point as he told Viniar to STFU about the non substantial “Net” short position in mortgages in order to focus attention on the role the shorts played in bailing out the rest of the firm.
    He made it appear that the SPG group existed to provide hedges to the mortgage book, but that doesn’t bear scrutiny.

    The Hudson deal, where GS offloaded 2b of GS own book was the key.

    GS was badly positioned in the mortgage book. As a firm they realized this too late. At the same time the SPG group had the right view and they said effectively, fuck the rest of the firm we’re going short. They were right.

    It looks to me that there was an internal conflict between the longs and shorts within the firm. The longs were proven wrong and the products developed by the SPG group for their short hedge fund clients were deployed (i.e. Hudson) hastily, late, but successfully to bail the long side of GS out of their shitty long positions.

    Barely surviving, GS spin was to emphasize their brilliance at risk management. In normal circumstances they might be able to successfully make a case that the Paulson like deals were business as usual, where they sit in the middle and take a cut. That argument completely collapses when they actually used the same structure to get rid of their own shit.

    Viniar’s “its the NET, stupid” spin distracts from properly analyzing the gross numbers. Levin wasn’t buying it.

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