Goldman Sachs Group Inc. (GS) misled
clients and Congress about the firm’s bets on securities tied to
the housing market, the chairman of the U.S. Senate panel that
investigated the causes of the financial crisis said.
Senator Carl Levin, releasing the findings of a two-year
inquiry yesterday, said he wants the Justice Department and the
Securities and Exchange Commission to examine whether Goldman
Sachs violated the law by misleading clients who bought the
complex securities known as collateralized debt obligations
without knowing the firm would benefit if they fell in value.
The Michigan Democrat also said federal prosecutors should
review whether to bring perjury charges against Goldman Sachs
Chief Executive Officer Lloyd Blankfein and other current and
former employees who testified in Congress last year. Levin said
they denied under oath that Goldman Sachs took a financial
position against the mortgage market solely for its own profit,
statements the senator said were untrue.
“In my judgment, Goldman clearly misled their clients and
they misled the Congress,” Levin said at a press briefing
yesterday where he and Senator Tom Coburn, an Oklahoma
Republican, discussed the 640-page report from the Permanent
Subcommittee on Investigations.
Goldman and Deutsche
Much of the blame for the 2008 market collapse belongs to
banks that earned billions of dollars in profits creating and
selling financial products that imploded along with the housing
market, according to the report. The Levin-Coburn panel levied
its harshest criticism at investment banks, in particular
accusing Goldman Sachs and Deutsche Bank AG (DB) of peddling
collateralized debt obligations backed by risky loans that the
banks’ own traders believed were likely to lose value.
In a statement, New York-based Goldman Sachs denied that it
had misled anyone about its activities. “The testimony we gave
was truthful and accurate and this is confirmed by the
subcommittee’s own report,” Goldman Sachs spokesman Lucas van Praag said.
“The report references testimony from Goldman Sachs
witnesses who repeatedly and consistently acknowledged that we
were intermittently net short during 2007. We did not have a
massive net short position because our short positions were
largely offset by our long positions, and our financial results
clearly demonstrate this point,” van Praag said.
‘Divergent Views’
In a statement, Deutsche Bank spokeswoman Michele Allison
said, “As the PSI report correctly states, there were divergent
views within the bank about the U.S. housing market. Moreover,
the bank’s views were fully communicated to the market through
research reports, industry events, trading desk commentary and
press coverage. Despite the bearish views held by some,
Deutsche Bank was long the housing market and endured
significant losses.”
The panel’s report also examined the role of credit-rating
firms in the meltdown, lax oversight by Washington regulators
and the drop in lending standards that fueled the mortgage
bubble and ultimately caused hundreds of bank failures.
The subcommittee’s findings show “without a doubt the lack
of ethics in some of our financial institutions who embraced
known conflicts of interest to accomplish wealth for themselves,
not caring about the outcome for their customers,” said Coburn.
“When that happens, no country can survive and neither can
their financial institutions.”
Final Assessment
The report is likely Washington’s final official assessment
of the turmoil beginning in 2007 that froze credit markets, took
down investment banks Bear Stearns Cos. and Lehman Brothers
Holdings Inc. (LEHMQ), sent housing finance giants Fannie Mae and
Freddie Mac into government conservatorship and caused the worst
economic collapse in the U.S. since the Great Depression.
The $700 billion taxpayer bailout that followed in October
2008 upended the relationship between Wall Street and the
federal government, turning CEOs like Blankfein and Lehman’s
Richard Fuld into political punching bags. Populist anger at
high-paid bank leaders helped fuel the passage of last year’s
Dodd-Frank law, which set out the biggest changes to financial
oversight since the 1930s.
The Senate report comes less than a year after Goldman
Sachs paid $550 million to resolve SEC claims that it failed to
disclose that hedge fund Paulson & Co was betting against, and
influenced the selection of, CDOs the company was packaging and
selling.
Goldman Sachs, in its settlement with the SEC, acknowledged
that marketing materials for the 2007 CDO deal contained
“incomplete information.”
Documents and Footnotes
The Senate subcommittee’s bipartisan report, buttressed by
2,800 footnotes and thousands of internal documents from Goldman
Sachs and other firms, may have more impact than previous
investigations into the crisis.
It’s an open question whether the Justice Department and
the SEC will review its findings. Levin does not have the power
to refer the allegations to federal authorities on his own. The
subcommittee has a formal process for making referrals, which
requires Levin to get the support of Coburn before making an
official referral. Levin is going to recommend that the
subcommittee make referrals, though he has not done it yet,
staff members said.
The Levin report will be examined by policy makers
including the SEC and Commodity Futures Trading Commission,
which are writing hundreds of Dodd-Frank rules governing
derivatives, mortgage securities and proprietary trading.
Coburn, the senior Republican on the subcommittee, said the
review carries more heft than the three separate reports issued
earlier this year by a politically divided Financial Crisis
Inquiry Commission.
Goldman Practices
“We don’t need commissions to do our job and this proves
it,” Coburn said. The FCIC “spent $8 million and 15 months”
on its inquiry and “didn’t report anything of significance.”
The panel said Goldman Sachs relied on “abusive” sales
practices and was rife with conflicts of interest that
encouraged putting profits ahead of clients.
“While we disagree with many of the conclusions of the
report, we take seriously the issues explored by the
subcommittee,” van Praag said.
Van Praag pointed to the firm’s recent examination of its
business practices that prompted it to make “significant
changes that will strengthen relationships with clients, improve
transparency and disclosure and enhance standards for the
review, approval and suitability of complex instruments.”
In the case of one CDO, Hudson Mezzanine Funding 2006-1,
Goldman Sachs told investors its interests were “aligned” with
theirs while the firm held 100 percent of the short side,
according to the report.
Gemstone CDO
The report detailed a $1.1 billion Deutsche Bank CDO known
as Gemstone VII, which was backed with subprime loans that its
then-top trader, Greg Lippmann, referred to as “crap.” The
head of the bank’s CDO group, Michael Lamont, said in an e-mail
cited in the report that he would try to sell the CDO “before
the market falls off a cliff.”
On lending, the panel alleges that executives at failed
thrift Washington Mutual Inc. (WAMUQ) dumped its bad loans on clients
while misleading them about their value.
“WaMu selected delinquency-prone loans for sale in order
to move risk from the banks’ books to the investors in WaMu
securities,” Levin said.
Compounding that problem, the subcommittee found, was an
apparently cozy relationship between WaMu and its regulator, the
Office of Thrift Supervision.
WaMu E-Mail
The report cited a July 2008 e-mail from then-OTS director
John Reich to WaMu CEO Kerry Killinger, in which Reich said the
regulator would issue a memorandum of understanding regarding
the bank’s problems.
“If someone were looking over our shoulders, they would
probably be surprised we don’t already have one in place,”
Reich wrote, apologizing twice for communicating the decision in
an e-mail.
Under the Dodd-Frank regulatory overhaul, the OTS will be
folded into other regulators in July.
“The head of OTS knew his agency had been providing
preferential treatment to the bank,” Levin said. “The OTS was
abolished by Dodd-Frank, and for good reasons.”
At yesterday’s press briefing Levin called credit rating
firms Moody’s Investors Service and Standard & Poor’s “a key
cause to the crisis.”
Triple-A Ratings
The raters, which the report says stamped the highest
Triple-A grades on securities they knew were souring, were
hamstrung by a system that has a built-in conflict of interest,
Levin said. The Wall Street banks pay the firms for their
ratings, leading to competitive pressure between the firms that
may have pushed them to more readily place a high rating on a
product.
The panel released nine “findings of fact” on the
failures of the credit raters, including inadequate resources,
inaccurate rating models and a failure to reevaluate old ratings
when they recognized they might be inaccurate.
The raters also “shocked the financial markets” with mass
downgrades of thousands of residential mortgage-backed
securities and CDO ratings, according to the report.
“Perhaps more than any other single event, the sudden mass
downgrades of RMBS and CDO ratings were the immediate trigger
for the financial crisis,” the report said.
To contact the reporters on this story:
Robert Schmidt in Washington at
rschmidt5@bloomberg.net;
Clea Benson in Washington at
cbenson20@bloomberg.net;
Phil Mattingly in Washington at
pmattingly@bloomberg.net.
To contact the editor responsible for this story:
Lawrence Roberts at
lroberts13@bloomberg.net
http://www.bloomberg.com/news/print/2011-04-14/goldman-sachs-misled-congress-after-duping-clients-over-cdos-levin-says.html
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