Goldman Clashes With Senate’s Levin Ahead of Blankfein Hearing
By Christine Harper and Ryan J. Donmoyer
April 25 (Bloomberg) -- Goldman Sachs Group Inc. and U.S. Senator Carl Levin fired opening shots ahead of a congressional hearing this week, releasing conflicting evidence of the investment bank’s tactics during the mortgage market’s collapse.
Levin, a Michigan Democrat who leads the Senate’s Permanent Subcommittee on Investigations, posted internal Goldman Sachs e- mails on his website yesterday that he said show the firm “made a lot of money by betting against the mortgage market.” Goldman Sachs responded with documents indicating the firm lost money on mortgages in 2008 and that executives didn’t know the market would fall.
Chief Executive Officer Lloyd Blankfein, 55, and six current and former Goldman Sachs employees will have to face questions from Levin’s panel against the backdrop of fraud claims from the U.S. Securities and Exchange Commission. The regulator sued the firm on April 16, saying it defrauded investors when selling a debt instrument tied to mortgages.
Goldman Sachs, which contests the SEC’s claims, said Levin’s committee has “cherry-picked” evidence and jumped to conclusions “even before holding a hearing.”
“Investment banks such as Goldman Sachs were not simply market-makers, they were self-interested promoters of risky and complicated financial schemes that helped trigger the crisis,” Levin, 75, said in a statement released with the e-mails.
One of the e-mails provided by Levin yesterday shows Blankfein telling colleagues on Nov. 18, 2007, that the firm was making more money from its so-called short bets on mortgages than it lost on its investments related to home loans.
‘Mortgage Mess’
“Of course we didn’t dodge the mortgage mess,” Blankfein wrote in an e-mail dated Nov. 18, 2007, that was among eight pages of documents made public by the Senate’s Permanent Subcommittee on Investigations. “We lost money, then made more than we lost because of shorts. Also, it’s not over, so who knows how it will turn out ultimately.”
Another document contains an exchange between Chief Financial Officer David Viniar and Gary Cohn, the firm’s president and chief operating officer, about the fixed-income division’s profit and loss statement in July 2007. Cohn’s e-mail describes how the firm’s mortgage unit is up “in the index book,” while recording writedowns on residential mortgages and collateralized debt obligations. One method the firm used to make bets against the mortgage market was to take short positions on the so-called ABX index.
“Tells you what might be happening to people who don’t have the big short,” Viniar replies, according to the documents.
Losses Overwhelmed Gains
Documents released yesterday by Goldman Sachs show that the firm’s gains from shorting subprime mortgages in 2007 were overwhelmed by losses in 2008 when higher-quality mortgages suffered more than the firm anticipated.
“Goldman Sachs did not have access to any special information that caused us to know that the U.S. housing market would collapse,” the firm stated in an “executive summary” of its arguments released yesterday. “As a result of the spread of the crisis from subprime to all residential mortgages, Goldman Sachs had overall net losses of approximately $1.7 billion with respect to residential mortgage-related products for fiscal 2008.”
A lawyer for Goldman Sachs wrote a letter to Levin April 23 asking the subcommittee to warn the firm of any information the panel plans to release so it has a chance to respond. The letter followed Levin’s statement at a hearing the same day that “investment banks such as Goldman Sachs were not market makers helping clients; they were self-interested promoters of risky and complicated financial schemes that were a major part of the 2008 crisis.”
‘Already Drawn Conclusions’
“The statement suggests that you and the subcommittee have already drawn conclusions about the conduct of Goldman Sachs,” K. Lee Blalack II from the law firm O’Melveny & Myers LLP wrote to Levin. “We strongly disagree with your statement at today’s hearing and believe that, if we were provided an opportunity to respond to your specific findings, Goldman Sachs could produce to you information that establishes that your findings are incorrect.”
Blalack, a partner in the Washington office of O’Melveny & Myers, is a former chief counsel and staff director of the Permanent Subcommittee on Investigations, according to his biography on the firm’s website.
As other banks struggled throughout the financial crisis, Goldman Sachs posted record earnings in 2007 and then set a new record in 2009. In late 2008, following the collapse of Lehman Brothers Holdings Inc., the firm was allowed to convert to a bank under the oversight of the Federal Reserve and received $10 billion of taxpayer money, which it repaid with interest about eight months later. Blankfein, whose $67.9 million bonus in 2007 was a record for a Wall Street CEO, received no bonus in 2008 and a $9 million all-stock bonus for last year.
Making Markets
Goldman Sachs disputes the criticism that the firm’s short position on mortgage securities during 2007 constituted a bet against its own clients. In a letter to shareholders earlier this month, Blankfein and President Gary Cohn said the positions “served to offset our long positions. Our goal was, and is, to be in a position to make markets for our clients while managing our risk within prescribed limits.”
The interrogation of Goldman Sachs, the most profitable securities firm in Wall Street history, may echo Ferdinand Pecora’s Depression-era investigation of powerful financiers like J.P. Morgan Jr., said some historians. Levin, who has served in the Senate for more than 30 years, and his panel have a reputation for thorough research.
“This is Pecora II,” said Charles Geisst, a finance professor at Manhattan College in Riverdale, New York, who has written about Wall Street’s history. “They have to squirm and they have to answer the questions.”
Pecora Commission
The Senate investigation into the causes of the Wall Street crash of 1929 became known as the Pecora Commission, after the former New York City assistant district attorney who was appointed its chief counsel. Congress went on to pass the Securities Act of 1933 and the Securities Exchange Act of 1934, portions of which Goldman Sachs and an employee, Fabrice Tourre, are accused of violating in the Securities and Exchange Commission’s suit filed on April 16.
The SEC said Goldman Sachs and Tourre, 31, failed to inform investors in a 2007 collateralized debt obligation that hedge fund Paulson & Co., led by billionaire John Paulson, played a role in choosing the mortgage securities that underpinned the CDO and planned to bet on its failure.
Goldman Sachs said it would never mislead investors and that ACA Management LLC and IKB Deutsche Industriebank AG, investors in the deal, had all the material information they needed. Tourre will tell Levin’s panel he did nothing wrong, according to a person briefed on his planned testimony.
SEC Enforcement Chief
Robert Khuzami, the SEC’s enforcement chief, oversaw a group that helped create CDOs when he worked at Deutsche Bank AG, the Wall Street Journal reported April 23, citing unidentified people familiar with the matter. It isn’t clear whether Khuzami reviewed a