Goldman Sachs executives face senators at D.C. hearing

WASHINGTON - In a clash of Wall Street and Washington Tuesday, Goldman Sachs executives sought to defend themselves from lawmakers' charges of greed, conflicts of interest, and harmful gambles on exotic and toxic mortgage-backed securities.

Faced with a withering daylong grilling by senators from both parties, seven current and former executives of the Wall Street giant denied charges they made billions by betting against the same toxic mortgage-backed securities they sold to investors.

"We didn't have a massive short against the housing market and we certainly did not bet against our clients," said Goldman Sachs chief executive Lloyd Blankfein when he appeared late in the day to testify.

But Sen. Carl Levin (D-Mich.), chairman of the Permanent Subcommittee on Investigations, didn't buy the denial.

"We're talking about betting against the very thing you are selling . . . without disclosing that to your client," Levin said.

He cited internal Goldman e-mails in which sales staff and others describe different securities the company pushed for sale as "crap" and "bad lemons."

Blankfein responded that his company had no obligation to disclose it was taking a short position on the securities it was selling. "The thing we are selling them is supposed to give them [buyers] the risk they want," he said. "They wouldn't care what our views are. They shouldn't care what our views are."

That clash between Levin and Blankfein summed up the fundamental and polar perspectives of Washington and Wall Street on the complex financial dealings involving derivatives and "synthetic" instruments.

Democrats are highlighting the "casino" nature of the transactions and dealings as they propose legislation to tighten and add regulations on Wall Street.

Both parties are seeking to appeal to anti-Wall Street sentiment across the country as they battle over that bill in the Senate.

Blankfein primarily blamed "too much lending and too much leverage in the system" as well as financial deals that had become "overly complex" for the financial crisis. But Goldman chief financial officer David Viniar also conceded, "We share responsibility [for the crisis] because we are a major player in the world's financial markets."

Appearing in the first of three panels Tuesday was a top Goldman executive named in a complaint filed earlier this month by the Securities and Exchange Commission that the company misled and withheld information from investors.

Fabrice Tourre, who in an e-mail described himself as the "fabulous Fab," said he did nothing wrong in creating a mortgage-backed security with the help of a hedge fund, which bet that the security would fail. The fund made $1 billion when it did.

"I deny - categorically - the SEC's allegations," said Tourre, who works in the company's London office. "And I will defend myself in court against this false claim."

Levin and other senators bore down on the executives, referring to e-mails and internal documents that appeared to show a concerted effort to profit by shorting the securities it sold investors. Pressed by Levin, the executives conceded they sold short during most of 2007 as the housing market collapsed, not simply to profit but for "risk management" to cover losses on mortgage-backed securities it held. By the end of 2007, Goldman's net revenue from its mortgage securities was under $500 million, executives said, while other firms took massive hits.

In questioning Viniar, Levin said, "If your employees think it's 'crap' . . . I think it's a conflict of interest" to sell the securities without disclosing the short position.

"I think that's very unfortunate to have on e-mail," Viniar said, prompting a gasp. He later clarified that he thought it was unfortunate for anyone to describe the securities that way.

The Goldman File

The Accusations

Goldman Sachs and a vice president, Fabrice Tourre, sold toxic securities to European banks without disclosing that a New York hedge fund had a hand in choosing the group of mortgage bonds in the package. The hedge fund, Paulson & Co., was betting against the Goldman bond portfolio called Abacus.

The Defense

Tourre disputed the government's claim that the deal was designed to fail to benefit Paulson.

Who Lost Money

The European banks - to the tune of about $1 billion. Goldman Sachs also lost some $90 million on the deal.

Who Made Money

Hedge fund chief John Paulson, who owns a $40 million home in Southampton, made $1 billion in profit on the deal.