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Goldman's "How much of that shitty deal did you sell to your clients?"

Politics / Credit Crisis 2010 Apr 30, 2010 - 03:18 AM GMT

By: Mike_Whitney

Politics

Best Financial Markets Analysis ArticleTuesday's hearings of the Permanent Subcommittee on Investigations laid the groundwork for future criminal prosecutions of Goldman Sachs Chief Executive Lloyd Blankfein and his chief lieutenants whose reckless and self-serving actions helped to precipitate the financial crisis. Committee chairman Senator Carl Levin adroitly managed the proceedings in a way that narrowed their scope and focused on four main areas of concern. Through persistent questioning, which bordered on hectoring, Levin was able to prove his central thesis:


   1--That Goldman puts its own interests before those of its clients.
   2--That Goldman knowingly misled it clients and sold them "crap" that it was betting against. 
   3-- That Goldman made billions trading securities that pumped up the housing bubble.
   4--That Goldman made money trading securities that triggered a market crash and led to the deepest recession in 80 years.

The hearings lasted for 8 hours and included interviews with 7 Goldman executives. Every senator had the opportunity to make a statement and question the Goldman employees. But the day belonged to Carl Levin.  Levin was well-prepared, articulate and relentless. He had a game-plan and he stuck to it. He peppered Goldman's Blankfein with question after question like a prosecuting attorney cross-examining a witness.  He never let up and never veered off topic. He knew what he wanted to achieve and he succeeded. Here's a clip from his opening statement:

"The evidence shows that Goldman repeatedly put its own interests and profits ahead of the interests of its clients and our communities.....It profited by taking advantage of its clients' reasonable expectation that it would not sell products that it didn't want to succeed....

Goldman's actions demonstrate that it often saw its clients not as valuable customers, but as objects for its own profit....Goldman documents make clear that in 2007 it was betting heavily against the housing market while it was selling investments in that market to its clients. It sold those clients high-risk mortgage-backed securities and CDOs that it wanted to get off its books in transactions that created a conflict of interest between Goldman's bottom line and its clients' interests." (Senator Carl Levin's opening statement for the Permanent Subcommittee on Investigations)

  Levin's whole statement is worth reading, but these two paragraphs distill his plan for exposing Goldman.  He was determined to "go small" and repeat the same points over and over again. And it worked. From a purely strategic point of view, Levin's battleplan was flawless. The Goldman execs never knew what hit them. They swaggered into the chamber thinking they'd breeze through the hearings and have a few laughs over cocktails afterwards, and left with their heads in their hands. They were outmatched and outmaneuvered.

Senator Carl Levin: "These findings are deeply troubling. They show a Wall Street culture that, while it may once have focused on serving clients and promoting commerce, is now all too often simply self-serving. The ultimate harm here is not just to clients poorly served by their investment bank. It's to all of us. The toxic mortgages and related instruments that these firms injected into our financial system have done incalculable harm to people who had never heard of a mortgage-backed security or a CDO, and who have no defenses against the harm such exotic Wall Street creations can cause...

These facts end the pretense that Goldman's actions were part of its efforts to operate as a mere "market-maker," bringing buyers and sellers together. These short positions didn't represent customer service or necessary hedges against risks that Goldman incurred as it made a market for customers. They represented major bets that the mortgage securities market - a market Goldman helped create - was in for a major decline. Goldman continues to deny that it shorted the mortgage market for profit, despite the evidence...

The firm cannot successfully continue to portray itself as working on behalf of its clients if it was selling mortgage related products to those clients while it was betting its own money against those same products or the mortgage market as a whole. The scope of this conflict is reflected in an internal company email sent on May 17, 2007, discussing the collapse of two mortgage-related instruments, tied to WaMu-issued mortgages, that Goldman helped assemble and sell. The "bad news," a Goldman employee says, is that the firm lost $2.5 million on the collapse. But the "good news," he reports, is that the company had bet that the securities would collapse, and made $5 million on that bet. They lost money on the mortgage related products they still held, and of course the clients they sold these products to lost big time. But Goldman Sachs also made out big time in its bet against its own products and its own clients." (Sen. Carl Levin)

Levin had all the facts at his fingertips and put them to good use. Goldman's execs were on their heels from the start and never really regained their footing.  Even worse, the hearings showed that Goldman cannot be trusted. Their reputation is in ruins. Levin proved that if Goldman has junk in its portfolio, it won't hesitate to dump it on its clients and then pass around high-fives at the prop-desk. Here's a typical exchange between Levin and the former head of Goldman's mortgage department, Dan Sparks:

SEN. CARL LEVIN: June 22 is the date of this e-mail. "Boy, that Timberwolf was one shitty deal."
How much of that "shitty deal" did you sell to your clients after June 22, 2007?

DAN SPARKS: Mr. Chairman, I don't know the answer to that. But the price would have reflected levels that they wanted to invest...

SEN. CARL LEVIN: Oh, of course.

DAN SPARKS: ... at that time.

SEN. CARL LEVIN: But you didn't tell them you thought it was a shitty deal.

DAN SPARKS: Well, I didn't say that.

SEN. CARL LEVIN: Who did? Your people, internally. You knew it was a shitty deal, and that's what your...

DAN SPARKS: I think the context, the message that I took from the e-mail from Mr. Montag, was that my performance on that deal wasn't good.

SEN. CARL LEVIN: How about the fact that you sold hundreds of millions of that deal after your people knew it was a shitty deal? Does that bother you at all; you sold the customers something?

DAN SPARKS: I don't recall selling hundreds of millions of that deal after that.

Levin was just as tough on Blankfein,  reiterating the same question over and over again: "Is there not a conflict when you sell something to somebody, and then you bet against that same security, and you don't disclose that to the person you're selling it to? Do you see a problem?"

At first, Blankfein acted like he'd never considered the question before, as if "putting himself in his client's shoes" was something that never even entered his mind. His look of utter bewilderment was revealing. Then he launched into the excuses, the evasions, and the elaborate, long-winded ruminations that one expects from schoolboys and hucksters.  But Levin never gave and inch. He kept pushing until Blankfein finally gave up and responded.

"No," he stammered, "In the context of market-making that's not a conflict."

   Blankfein's answer was a triumph for Levin, and he knew it. To the millions of people watching the sequence on TV,  Blankfein's denial was as good as an admission of guilt.  It showed that Wall Street kingpins don't share the same morals as everyone else. In fact, Blankfein seemed genuinely confused that morality would even be an issue. After all, it wasn't for him.
 
Levin covered some old ground,  pointing to Goldman's dealings with Washington Mutual's Long Beach unit which was a "conveyor belt" for garbage  subprimes which frequently blew up just months after they were issued. It's clear that Goldman knew the mortgages were junk that were “polluting the financial system”,  but that made no difference. Goldman feels that it's responsible to its shareholders alone, not the people who bailed it out.

All in all, it was a bad day for the holding company that's come to embody everything that's wrong with Wall Street. Goldman entered the hearings as the most successful financial institution in the country, and left with its reputation in tatters and its future uncertain.  Its CEO came across as shifty and jesuitical while his executives seemed arrogant and uncooperative.  At no point during the hearings did any of the Goldman throng look at ease with themselves or their answers. They remained rigid and sullen throughout. On top of that, they were unable to defend themselves against the main charge, that they don't mind sticking it to their clients if it means a bigger slice of the pie for themselves.

The truth is, the Golden boys were handled quite capably by an elderly statesman who took them to the woodshed and gave them a good hiding. Levin's stunning performance is likely to draw more attention to the upcoming SEC proceedings and, hopefully, build momentum for more subpoenas, indictments, arrests, and long prison sentences.

By Mike Whitney

Email: fergiewhitney@msn.com

Mike is a well respected freelance writer living in Washington state, interested in politics and economics from a libertarian perspective.

© 2010 Copyright Mike Whitney - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Mike Whitney Archive

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