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Goldman Execs Grilled over Role in Inflating Housing Bubble and Then Betting on Collapse

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Executives from the bailed-out Wall Street giant Goldman Sachs faced tough questioning on Tuesday at a Senate hearing on their role in the financial crisis. Current and former Goldman officials were grilled on their aggressive marketing of mortgage investments at the same time the firm was betting the investments would fail. We play highlights and speak with investigative journalist Greg Gordon of McClatchy Newspapers and former economist at the Senate Banking Committee, Rob Johnson. [includes rush transcript]

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This is a rush transcript. Copy may not be in its final form.

AMY GOODMAN: Our top story today is what’s happening in the economy, and particularly looking at the grilling of Goldman Sachs.

JUAN GONZALEZ: Yes. Well, Goldman Sachs was on a hot seat on Capitol Hill yesterday. Executives from the bailed-out Wall Street giant were summoned to a Senate panel, where they faced nearly eleven hours of tough questioning on their role in the financial crisis. Senators grilled current and former Goldman officials over their aggressive marketing of mortgage investments to clients at the same time that the firm was betting against them. They accused Goldman of helping to inflate the housing bubble and then making billions off the market’s collapse. The session began with opening remarks from subcommittee chairman, Michigan Democrat Carl Levin.

    SENATOR CARL LEVIN: Goldman Sachs proclaims, quote, “a responsibility to our clients, our shareholders and our employees and our communities to support and fund ideas and facilitate growth,” close-quote. Yet the evidence shows that Goldman repeatedly put its own interests and profits ahead of the interests of its clients and our communities. Its misuse of exotic and complex financial structures helped spread toxic mortgages throughout the financial system. And when the system finally collapsed under the weight of those toxic mortgages, Goldman profited from the collapse.

JUAN GONZALEZ: The Senate panel released a report this week, based on millions of pages of internal Goldman documents, that accuses the firm of assembling risky mortgage-backed investments, making huge bets against the housing market, and acting against the interests of its clients. Senate investigators are building on an SEC case which accuses Goldman of defrauding investors.

Goldman CEO Lloyd Blankfein testified later in the afternoon. He staunchly denied any wrongdoing.

    LLOYD BLANKFEIN: What clients are buying, or customers are buying, is they’re buying an exposure. The thing that we are selling to them is supposed to give them the risk they want. They are not coming to us to represent what our views are. They probably, the institutional clients we have, wouldn’t care what our views are. They shouldn’t care. We do other things at the firm. We’re advisers. We manage their money. There are parts of the business where we are fiduciaries.

    SENATOR CARL LEVIN: Yeah, and that’s the part that’s very confusing to folks, is they think you —


    SENATOR CARL LEVIN: They think you’re fiduciaries.

    LLOYD BLANKFEIN: Not in the market-making context.

    SENATOR CARL LEVIN: Yeah, but they are not told that not only are you not a fiduciary, you are betting against the very security that you’re selling to them. You don’t disclose that.

AMY GOODMAN: Subcommittee chair Carl Levin questioning Goldman CEO Lloyd Blankfein. Yesterday’s hearing was held against the backdrop of a debate about overhauling financial regulation.

On Tuesday, Republicans blocked the Democrats’ financial reform bill from reaching the Senate floor for the second time this week. Another vote is expected as talks continue on reaching a bipartisan deal.

For more, we’re joined by Rob Johnson, former economist at the Senate Banking Committee and the Senate Budget Committee. He’s now the director of the Economic Policy Initiative at the Roosevelt Institute. He’s here with us in New York.

And joining us from Washington, DC is Greg Gordon, an investigative journalist with McClatchy Newspapers. He attended yesterday’s Senate hearing. In November he published a multi-part investigation of Goldman Sachs and how it secretly bet against the housing market.

We welcome you both to Democracy Now! Greg Gordon, let’s begin with you. Describe the scene yesterday in Washington, what you think came out of it, what was most important.

GREG GORDON: Well, it was really a circus. We had people dressed up in prison uniforms demanding jail time, one of them bearing a sign “Martha Stewart spent time in jail for what she did. Why not you?” And the scene was really typical for a Washington tempest, with a packed hearing room, a row of lawyers behind the witnesses who were well prepared, members of the Senate investigations, permanent investigations subcommittee coming in and taking turns grilling Lloyd Blankfein and six other executives of Goldman Sachs.

What we saw is, I think, kind of remarkable in the current climate, where you have Republicans and Democrats at pretty much of an impasse over financial regulatory reform, and here in the middle of all this you have a subcommittee that is working in a bipartisan way. And you really got to hand it to them, because they subpoenaed this company and went through two million documents to try to piece together exactly what happened as Goldman Sachs became the only Wall Street firm to make a safe exit from the subprime market.

JUAN GONZALEZ: And Greg, in terms of those many emails that were gone over during the hearing, obviously the Goldman officials were saying that they were doing nothing different from what other Wall Street firms were doing, and the senators trying to say, “No, you knew exactly that you were peddling, basically, investments that you knew were going to go down in value and you were betting against.” Could you talk about some of the — were there any real smoking guns that occurred during the hearing, that were revealed during the hearing?

GREG GORDON: Carl Levin was like a jackhammer. I’m sorry, Carl Levin was like a jackhammer. He just went at Lloyd Blankfein again and again about the issue of whether Goldman sold short, whether it did a big short behind the veil of — you know, it was basically with secret bets that its clients didn’t know about while it was unloading all these securities and packaging so-called synthetic securities, which are basically exotic bets between two parties, and often one party, which was betting against the housing market, was Goldman, and the other party was its client, or clients.

And what we saw was, I think, more of a picture of what Goldman was doing. Goldman maintains that it barely made any money on this so-called big short, less than $500 million in 2007, which, for a company its size, is a tiny percentage of its revenues. But Senator Levin finally drove home the point that Goldman was unloading tens of billions of dollars of these securities in late 2006 and 2007, before anybody else in the — certainly in the Wall Street community had awakened to what was happening, and Goldman made a clean exit. And yes, maybe the net result was less than $500 million in profit in 2007 on the secret ballots and a net loss over those years of $1.7 billion on the securities, but Goldman was in deep. It wasn’t the biggest player in the subprime market, but it had tens of billions of dollars invested in these risky mortgages backed by —- or risky mortgage securities backed loans to very shaky borrowers.

AMY GOODMAN: Greg Gordon, we’re going to break, then we’re going to come back, and we’ll also be joined by Rob Johnson. Greg Gordon, investigative journalist with McClatchy Newspapers. Stay with us.


AMY GOODMAN: We turn to another clip from yesterday’s Senate hearing. Lawmakers often pointed to a $1 billion subprime mortgage-linked security called Timberwolf as a prime example of how the bank profited at its customers’ expense. In one email, a Goldman executive uses an expletive to describe how bad the Timberwolf deal was. Senator Carl Levin questioned former Goldman partner Daniel Sparks about the deal.

    SENATOR CARL LEVIN: Look what your sales team was saying about Timberwolf: “Boy, that Timberwolf was one [bleep] deal. They sold that [bleep] deal.”

    DANIEL SPARKS: Mr. Chairman, this email was from the head of the division, not the sales force.

    SENATOR CARL LEVIN: Whatever it was, it’s an internal Goldman document.

    DANIEL SPARKS: This was an email to me in late June -—

    SENATOR CARL LEVIN: Right, and you sold Timberwolf —-

    DANIEL SPARKS: —- after the transaction.

    SENATOR CARL LEVIN: No, no. You sold Timberwolf after, as well.

    DANIEL SPARKS: We did trades after that.

    SENATOR CARL LEVIN: Yeah, OK, it’s the trades after you —-

    DANIEL SPARKS: Some context -—


    DANIEL SPARKS: — might be helpful.

    SENATOR CARL LEVIN: The context — let me tell you, the context is mighty clear. June 22 is the date of this email. “Boy, that Timberwolf was one [bleep] deal.” How much of that [bleep] deal did you sell to your clients after June 22, 2007?

    DANIEL SPARKS: Mr. Chairman, I don’t know the answer to that, but the price would have reflected levels that they wanted to invest at that time.

    SENATOR CARL LEVIN: Oh, of course, but they didn’t know it’s a —- you didn’t tell them you thought it was a [bleep] deal.

    DANIEL SPARKS: Well, I didn’t say that.

    SENATOR CARL LEVIN: No. Who did? Your people, internally. You knew it was a [bleep] deal, and that’s what your email shows.

    DANIEL SPARKS: And again, I think the context, the message that I took from the email from Mr. Montag, was that my performance on that deal wasn’t good. And I think the fact that we had lost money related to that wasn’t good.

    SENATOR CARL LEVIN: How about the fact that you sold hundreds of millions of that deal after your people knew it was a [bleep] deal? Does that bother you at all? You sold a customer something -—

    DANIEL SPARKS: I don’t recall selling hundreds of millions of that deal after that.

JUAN GONZALEZ: That was Daniel Sparks, a former Goldman executive, being interviewed by Senator Carl Levin at yesterday’s Senate hearing.

Greg Gordon, Timberwolf, Abacus, what about these investment vehicles that were so much at the center of the hearings yesterday?

GREG GORDON: These are offshore securities almost all based in the Cayman Islands. And so many of them were constructed essentially as a bet. I think it was Senator Claire McCaskill who talked about these basically — Goldman Sachs basically serving as a bookie, setting up bets between its clients, and later Senator Ensign from Nevada took great umbrage at that, at her comparison that — to Las Vegas, and said in Las Vegas the bettors know the odds, and in truth, the bettors didn’t have all the information here. They didn’t know that Goldman — how much Goldman was betting against all these securities. And Senator Levin basically hammered home the point that Goldman Sachs was in conflict with its own clients’ interests, which is totally in conflict with the company’s motto or byword that “we always put our clients first.” Of course, Goldman had a big problem. They had to get out of all these securities, and maybe they also saw some opportunities while there were doing it, as the housing market was going to crash.

AMY GOODMAN: Let’s turn to another clip from yesterday’s hearing. Among the Goldman bankers to testify was Fabrice Tourre, a thirty-one-year-old vice president who helped create and sell mortgage investment that figures in a suit filed this month by the SEC that accuses Goldman of defrauding investors. The transaction was called Abacus 2007-AC1.

    FABRICE TOURRE: The AC1 transaction was not designed to fail. AC and IKB were two of the most important clients to my desk. Moreover, the securities referenced in the transaction did not underperform the other securities of that ratings class and vintage. In fact, all those securities performed poorly because the subprime mortgage market suffered a broad collapse. Goldman Sachs also had no economic motive to design the AC1 transaction to fail. Quite the contrary, we held long exposure in the transaction, just like ACA and just like IKB.

AMY GOODMAN: Fabrice Tourre. A lot of these emails that they were reading from him were emails he wrote to his girlfriend. Greg Gordon, explain what he’s talking about.

GREG GORDON: Well, in the case of the Abacus deal that is the subject of the suit, Fabrice Tourre put that deal together, and he did it at the request of a longtime Goldman client, Paulson and Company, which is a big hedge fund. And Paulson became known as one of the companies that made the most money out of the subprime crash and the housing market crash, because it bet short. It bet against the housing mortgage securities that were all the rage at the time.

And what happened here in this Abacus deal, of course, is that Paulson was allowed to help select the securities that would be part of the bet, and other investors were allegedly not told that Paulson was going to go short. Paulson was in communication with the outfit that was putting — selecting the various securities, known as the collateral, for the deal. And there’s going to be a “he said, she said” at the end here, I think, because Goldman is now stating, as are people from Paulson stating, that the investors on the other side were told about Paulson’s role. And the evidence suggests, or the allegations from the SEC suggest, that the other side, the company that was putting the collateral together and wound up taking a huge bet on that deal, did not know.

JUAN GONZALEZ: Well, we’re also joined by Rob Johnson, a former economist at the Senate Banking Committee.

Rob, welcome to Democracy Now! again.

ROB JOHNSON: Thank you.

JUAN GONZALEZ: Could you talk to us about how this hearing and the investigations into Goldman Sachs are affecting the battles over financial regulation in the Senate?

ROB JOHNSON: Yeah, we’re conducting a purity ritual right now. Politicians in both parties are trying to distance from Wall Street, because the public has been waiting for a year and a half for meaningful legislation, and they fear that these people in both parties have been, as we say, in bed with the financiers. Bismarck used to say you shouldn’t ever see legislation or sausage made. Now we can add finance to that, that there are three things that you shouldn’t see the inside of.

Regardless of what’s legal, you could take this to a small school child, and they’d say, “That’s just wrong.” And what we’re finding out — I mean, Greg’s done great work. Where were the SEC and the Fed? These things — I mean, if they were serious about this, and I believe Senator Levin is, they would have unleashed Bill Black and Eliot Spitzer a year ago on this case. And Goldman’s right, that every one of these banks, the same kind of activities are going on. We just need all of their emails and a lot of time and some staffing to get this done.

But what they’re trying to do is, Senator Dodd overstated his bill. It will end too big to fail. Even Ted Kaufman, a Democrat, objected to that. We come back to the other side, and Mitch McConnell says, “These guys are in bed with Wall Street.” At that point, the White House pulled the trigger on a file that they had about Goldman Sachs to show they’re not in bed with Wall Street, they’re taking on Goldman Sachs. And now they’re the scapegoat. And everybody’s trying to increase the public’s, what you might call, confidence that the legislature really means business. What the public has to do is keep the floodlights on, not only through Senate passage, but when we go to the conference, when they try to do things with the lobbyists in the dark again.

JUAN GONZALEZ: Well, that’s what I want to ask you about, because while all of the attention is on Goldman Sachs, there are reports that — the frenzy of lobbyists that are trying on behalf of different sectors of the American economy that are trying to get carve-outs in the financial legislation to protect them from new regulatory requirements. Could you talk about some of these interests, and what are they trying to save from this financial — new financial regulation bill?

ROB JOHNSON: First of all, you have six banks, which includes Goldman Sachs, that own about 97 percent of the market-making in derivatives. They make about $35 billion a year. If you did proper reform that made the system safer, they’d lose 20 to 30 percent of that profit. They’re spending over $400 million a year lobbying to stop these improvements. And I always say, it’s something the American people should be very, very angry about.

But you see particular cases. The front page of the Wall Street Journal yesterday showed how Warren Buffett, who’s called these “weapons of mass destruction,” has Ben Nelson of Nebraska, who’s the Democrat that voted against cloture on Monday, lobbying for a special exemption for Warren Buffett, because of collateral requirements. Now, Mr. Buffett is sensible. He’s got a great deal of financial power. On the other hand, do you want to create exemptions for a whole bunch of people? Then you essentially don’t have rules. He should abide by those rules. Money in politics means he might not have to.

AMY GOODMAN: Republicans have blocked the Democratic bill twice this week.


AMY GOODMAN: What’s going to happen? And Obama is out on the campaign trail saying they won’t even talk about it.

ROB JOHNSON: The problem right now is that both teams are spending tremendous amount of money on pollsters, and they’re trying to find out which message wins. Does the Republican message, that this is a bad bill and doesn’t protect you, win? And there is some reason to believe that the bill’s not strong enough. It could certainly be improved a great deal.

AMY GOODMAN: How? Exactly how should it be strengthened?

ROB JOHNSON: It should close all kinds of loopholes related to derivatives and users and certain contract swaps, foreign exchange, that are exempted from the derivatives regulation. It should be much tougher. They should raise the salaries of bank examiners and bank supervisors. They should increase the numbers. They should invest in systems so they have real-time data. We need — we’re basically in the middle of a big sociological change right now about finance. And what we need is these people to submit to being governed, and the systems need to be built so that they are governed.

JUAN GONZALEZ: But to ask you about that whole issue of derivatives again, is — it turns out that it’s not just banks that were involved in derivatives, but you have many other industries that produce products, but then invest their money in derivatives as a way to sort of insure against possible losses in their industry, I mean, whether it’s the automobile industry or agricultural producers.

ROB JOHNSON: Sure, jet fuel, all those kinds of things.

JUAN GONZALEZ: What is this doing to — what is this derivatives market doing to the actual functioning of the economy, that so many of these industries are concerned about being able to preserve their ability to invest in derivatives?

ROB JOHNSON: Well, my sense is that a market that, what you might call, provides insurance does do some social good. When a market turns into a wild casino, it blows things all over the map. Look at last year, 2009. Oil prices — excuse me, it was 2008. Oil prices went from $38 to $147 and back. Nothing happened in the world that warranted that. But it dislocated so many industries. Their cost structures were blown off their moorings. You need proper transparent structures for derivatives so that the insurance market can work, but the momentum of the speculative market is somewhat diminished.

AMY GOODMAN: We’re going to continue on the economy with a new film out that’s called Plunder. Rob Johnson, I want to thank you very much for being with us. He’s a former economist at the Senate Banking Committee, director now of the Economic Policy Initiative at the Roosevelt Institute. And thanks very much to Greg Gordon, who is with us in Washington, investigative journalist with McClatchy Newspapers.

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