MercoPress. South Atlantic News Agency

US Senate Claims Goldman Sachs Knowingly Profited from Mortgage Collapse

CEO Lloyd Blankfein, “one of the worst days in my professional life”

The chairman of an inquiry into the causes of United States' financial meltdown has attacked the role of Goldman Sachs. Senator Carl Levin spoke of the reckless greed that infected Wall Street's financial community.

In his opening address to the hearing in Washington, Mr. Carl Levin said Goldman Sachs executives had caused widespread harm to their fellow citizens. Several Goldman executives are giving evidence at the hearing, and all have denied they acted improperly.

Mr. Levin, chairman of the Senate Permanent Subcommittee on Investigations, said that GS had proclaimed a responsibility to its clients, “yet the evidence shows that Goldman repeatedly put its own interests and profits ahead of the interests of its clients and our communities”.

The firm packaged complex mortgage-backed securities and then sold them to investors not only knowing that the housing market was about to collapse but also profiting from it, the committee alleges. Goldman is also facing specific allegations from the Securities and Exchange Commission (SEC) that it defrauded investors by not telling them that one of its financial products was designed by a firm that was betting it would fail.

Goldman says the SEC allegations are wrong in “fact and law”. Levin said it was not his committee's role to judge the legality of the SEC claims, adding that the hearing was concerned with “ethics and policy”. But he said that Goldman's actions reverberated around the United States. The firm's “misuse of exotic and complex financial structures helped spread toxic mortgages throughout the financial system,” he said. “And when the system finally collapsed under the weight of those toxic mortgages, Goldman profited from the collapse,” Levin added.

Goldman executives at the hearing include Fabrice Tourre, Daniel Sparks, Joshua Birnbaum, and Michael Swenson. Lloyd Blankfein, the firm's chief executive, is due to appear later.

In the opening session, Mr. Levin and other committee members challenged the Goldman executives about their duty to clients and the amount of money the firm made in the housing market. Clearly frustrated at some of their answers, Mr. Levin accused the executives of evading the questions and of having “a strategy” to waste time. “We're going to stay here as long as it takes to get this information,” Mr. Levin warned the executives.

In a series of tense exchanges, Mr. Levin quizzed Mr. Sparks, former head of mortgages, about whether he felt obliged to tell clients when Goldman was betting against investments that he sold. The senator highlighted one particular investment portfolio that Mr. Sparks' own bosses had described in highly derogatory terms. Mr. Sparks did not respond directly, repeating that the description of the investment product used by his bosses was not his own.

Tuesday's hearing is the fourth in a series that is focusing on what lay behind the financial crisis and the collapse of the housing market. This latest hearing focuses on the role of investment banks, and specifically that played by Goldman.

During five hours of questioning the executives rejected suggestions from the committee that they contributed to the financial crisis. “We did not cause the financial crisis I do not think that we did anything wrong,” said Mr. Swenson, who runs Goldman's structured products division.

Mr. Tourre said: “I am saddened and humbled by what happened in the market in 2007 and 2008... But I believe my conduct was proper.” In a statement released ahead of the hearing and later read to the senators, Mr. Tourre denied wrong-doing and said he would clear his name in court. Mr. Tourre, the only individual to be charged, said: “I deny—categorically—the SEC allegations. And I will defend myself in court against this false claim.”

Mr. Blankfein also denies that his investment bank bet against its own clients in the US property market. The under-fire banker will argue that Goldman was simply “managing [its] risk” in betting on market falls. He will also say that the bank lost 1.2 billion USD as a result of the collapse in house prices in 2008.

In a text of his prepared testimony, Mr. Blankfein said the bank “strongly disagreed” with the SEC complaint, calling the episode “one of the worst days in my professional life”.

“We have been a client-centred firm for 140 years and if our clients believe that we don't deserve their trust, we cannot survive.” He added that the accusation that the bank made money from bets on market falls (“short” positions) was simply not true.

“We didn't have a massive short against the housing market and we certainly did not bet against our clients,” he said. “Rather, we believe that we managed our risk as our shareholders and our regulators would expect.”

BBC