A protester displays a sign as Goldman Sachs executive Fabrice Tourre testifies before a U.S. Senate panel on Tuesday.JIM YOUNG
The furor surrounding the actions of Wall Street's top investment bank just keeps getting louder.
U.S. lawmakers unleashed a series of new critiques of Goldman Sachs in a day of combative hearings focused on the firm's activities in the housing boom and bust.
Goldman is already facing a legal battle over a 2007 deal in which U.S. regulators have accused the firm of civil fraud. Tuesday's hearings looked at the firm's conduct from an even broader lens, suggesting its troubles are far from over.
Referring to 900 pages of e-mails and documents, senators said Goldman applied a double standard in its trading as the financial crisis approached. Contrary to the firm's assertions, they said, Goldman laid a major wager that the housing market was heading south. At the same time, they said, it worked to unload housing investments it had created onto clients, even when the firm itself thought they were garbage.
Such actions were unethical at best, several senators said, and provide further justification for placing sharp restrictions on Wall Street firms in the financial reform bill now under consideration by the U.S. Congress.
Goldman's behaviour shows "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," Sen. Carl Levin of Michigan said as the hearings began.
Mr. Levin referred to an e-mail sent by one senior Goldman executive, where he described a complex housing investment being sold to clients as "one shi**y deal." In another instance, a senior trader talked about congratulating a team for selling off another housing-related deal, a feat he said amounted to making "lemonade from some big old lemons." Meanwhile, Goldman positioned itself to profit if the investment unravelled.
Seven current and former Goldman traders and executives were sworn in and then grilled for hours on Tuesday by the members of the Permanent Senate Committee on Investigations. Among those questioned were the firm's CEO, Lloyd Blankfein, and Fabrice Tourre, the 31-year old who is at the centre of the fraud allegations.
Mr. Tourre Tuesday categorically denied the allegations of fraud, saying he never misled the investors in the complicated housing investment dubbed "Abacus 2007-AC1" that is the focus of the charges levelled by the Securities and Exchange Commission. Under questioning, he also said that he is represented by lawyers paid for by Goldman.
In their testimony Goldman's traders and executives said they did nothing wrong, except perhaps participate in a market where lending standards became too lax. Goldman has vigorously denied the SEC's fraud charges. It also says its bets against the housing market were not a "massive short" and amounted to no more than prudent risk management, rather than wagers against its clients.
The tone of Tuesday's hearings was often belligerent, with senators likening Goldman to a bookie or casino operator. Such comments reflected deep skepticism of executives' assertions, and also a desire by lawmakers to score political points by criticizing the firm, now highly unpopular in the eyes of the American public.
Senators repeatedly attempted to distill a number of complex investments and trading strategies to a simple conflict of interest between Goldman and its clients. Mr. Blankfein and Mr. Levin tangled at length over whether Goldman had an obligation to tell clients it was going to bet against a security which it was selling to them. Mr. Blankfein said "I don't think our clients care or should care" what Goldman planned to do.
That echoed an exchange earlier in the day between Sen. Susan Collins of Maine and Daniel Sparks, Goldman's former mortgage chief. "Do you have a duty to act in the best interests of your clients?" Ms. Collins asked. "I believe we have a duty to serve our clients well," responded Mr. Sparks.
Simon Johnson, a former economist at the International Monetary Fund, likened Tuesday's testimony to the famous Pecora hearings that electrified the American public several years after the Great Depression began and generated momentum for major legislation to overhaul the banking system. "Does anyone feel better about Goldman after this?" he asked. "I think they feel worse."