« Republicans Block Debate on Financial Reform, Reid will Try Again | Main | Do Our Financial Models Still Work? »

Tuesday, April 27, 2010

The Goldman Hearings

Since I'm at a conference, I haven't been able to pay as much attention as I'd like to the Goldman subcommittee hearings being held today in the Senate. Here are a couple of reports:

Goldman Sachs on trial, by Andrew Leonard: Fans and detractors of Goldman Sachs agree on at least one point: The investment bank employs the smartest traders on Wall Street. The best risk managers, the most deadly sharks, the crème de la crème. But at the start of a full day of congressional hearings featuring Goldman Sachs executives, past and present, Sen. Carl Levin, chairman of the Senate's Permanent Subcommittee on Investigations, made Daniel Sparks, Goldman's former head of mortgage trading, look pretty dumb.
The first panel featured four Goldman executives at the heart of Goldman's structured finance division, including Fabrice Tourre, the trader who is the focus of the SEC's allegations of securities fraud against the investment bank. It would not be an exaggeration to describe these four men as the belly of the structured finance beast...
Levin's first question, directed at Sparks, concerned Goldman's efforts to sell to clients a security that referenced mortgage loans originated by New Century Finance -- one of the most notoriously reckless subprime lenders. The loans were terrible, and Goldman knew that they were terrible -- Goldman was hedging its own risk by betting that the security would decline in value.
One of Goldman's clients asked via e-mail, "How do you get comfortable with the collateral behind those securities?" Meaning, basically: Those loans are crap, how in the world can you possibly be comfortable pushing this deal?
Levin wanted to know whether Sparks thought Goldman had a responsibility to tell its client that it was "getting comfortable" by selling the security short, by betting against it. In other words, did Goldman have a responsibility to tell its client that Goldman's own opinion was that the security was likely a bad investment?
And Daniel Sparks simply would not answer the question. ... But a relentless Levin kept pressing the point, which boiled down to something very simple: Did Goldman have a responsibility to its client to indicate its own evaluation of the securities it was pushing?
Susan Collins, the ranking Republican present on the committee, followed up with an even more direct question: "Do you have a responsibility to act in the best interest of your client?" Seems like a simple enough question, but Sparks could not answer it either, saying only, after much pressure: "I believe we have a duty to serve our clients."
Right then and there, Goldman Sachs lost any chance it had of making a positive case to the American public. Right then and there, Goldman Sachs declared to all who were watching that its vaunted dedication to the interests of its clients was just so much hot air.
Goldman's defenders, if you can find them, will say that Goldman's responsibility was just to broker deals, to be a "market maker." If a sophisticated investor wanted to get on the side of a deal that Goldman was betting against, that's OK. ...
That may well be a legally defensible position. But the reality is that most Americans do not understand the definition of "serving your client" to include "pushing your client to invest in a 'shitty deal'" (as one Goldman exec characterized a deal zeroed in on by Levin) on their clients. And that's what Goldman was doing.
Wall Street was, in fact, a factory for turning shitty deals into profit. Goldman was the best in the business, but it was a very, very bad business.

And, one more:

Goldman Sachs execs still don't get it, by Barbara Kiviat: Today's Goldman Sachs hearing in the Senate is fantastic theater. The kind of theater that makes you want to run to the restroom to vomit.

I've been watching the hearing on TV, and I am nauseated to report that they still don't get it. The world came to the brink of financial ruin, and the people driving the mortgage securities death-machine still can only look back and say that at the time it all made sense. To say that the Goldman Sachs executives testifying lack introspection is like saying that the Black Death was a minor health scare.

Consider the following exchange between Senator Ted Kaufman and Daniel Sparks, who ran Goldman's mortgage division from late 2006 until mid-2008. Kaufman wanted to know about stated-income loans—mortgages in which borrowers don't have to prove they make the amount of money they claim to. These loans, which may make sense for rich people with variable income (an entrepreneur, say), came to be sold to all stripes of borrower, including many with subprime credit. Kaufman remarked on one securitization in which 90% of the loans were stated-income. ...

Kaufman went on to detail how Goldman didn't just securitize some stated-income loans, but a lot of them. ... Kaufman then launched into a tirade about how, if the witnesses in front of him were to be believed, the United States had suffered some great natural disaster—an event that had been in no way been man's doing. It was if the financial crisis was something that just kind of happened to us.

I am equally as appalled. ...

Time and again at today's hearing, Goldman executives refused to admit, even in retrospect, that they had crossed a line. Time and again at today's hearing, they defended their actions by saying that they were rightly responding to market demand—as if responding to market demand somehow absolves one of the responsibility to use human judgment. ...

[T]he people who work at Goldman Sachs are terribly smart, and it would be helpful to have them seriously thinking about what went wrong and how we might better manage the financial ecosystem in order to avoid meltdowns in the future. Instead, they seem to be using all their energy to circle the wagons. Senator Kaufman's question about stated-income loans was open-ended and non-confrontational. What might that exchange have looked like if Sparks had started with, "You know, stated-income loans are great for some people, but not for others. In the bubble, they went to the wrong people. It's a good question—how do you design products so that they're not misused?"

What really frightens me in all of this is that it didn't seem like a legal or PR strategy. It seemed like these Goldman executives genuinely had no ability to take a step back and make observations about the system in which they operate. It seemed like they had been so thoroughly inculcated in the culture of high finance that it was literally impossible for them to do the thing intelligent people are supposed to be able to do in the wake of a systemic breakdown—re-evaluate the assumptions that went into building that system.

Perhaps I was expecting too much out of my fellow human beings. ... I just thought—especially after hearing that the Goldman executives agreed to testify without being subpoenaed—that we might learn something useful in these hearings. That we might actually gain some insight instead of just another reason to want to bring these people down a peg.

I was wrong.

Any other reactions???

Update: See also Pete Davis and James Surowiecki.

    Posted by on Tuesday, April 27, 2010 at 03:15 PM in Economics, Financial System, Politics | Permalink  Comments (21)


    Feed You can follow this conversation by subscribing to the comment feed for this post.