Sen. Carl Levin, chairman of the Senate Permanent Subcommittee came out swinging on Tuesday, tearing into Goldman Sachs executives about whether their firm made significant bets against the mortgage industry while selling their clients toxic assets. The grilling continued for over five hours. Mr. Levin, unsatisfied with the early evasiveness of the answers he was hearing, promised he would keep the witnesses all day, if he had to, until he got some straight answers.
In all, there were four Goldman executives at the hearing, including Fabrice Tourre, the London-based vice president, who struggled at times to answer specific questions about the financial debacle, but said he was "sad and humbled about what happened in the market."
After so many investors suffered heavy financial losses while Goldman Sachs profited, it's hard to imagine that the public came away with much sympathy for the investment banking and securities firm. Still, Daniel Sparks, the former head of the Mortgage Department at Goldman Sachs, through deliberate evasiveness and the sheer complexity of the investment industry, managed to go eyeball-to-eyeball with most questions fired at him.
Committee members, especially Mr. Levin and Sen. Susan Collins, didn't seem pleased with Mr. Sparks's long-winded explanations of Goldman policies, which often evaded the heart of the question. Near the end of the long day, Mr. Sparks interrupted Michael Swenson in answering a question he was struggling with, only to hear Levin shout out, "you [Mr. Sparks] haven't been very helpful on other questions, but go ahead.''
Only when Sparks was asked whether Goldman's actions contributed to the financial crisis was he at a loss for words, finally saying he needed to think about that question and get back to the committee.
At the heart of the questioning (and the SEC's suit) is whether or not Goldman neglected to tell buyers that investments were put together by a hedge fund client, Paulson & Co., which was betting on the investments to fail.
When asked about the subject, Tourre responded, "although I don't recall the exact words that I used, I recall informing ACA that Paulson's fund was expected to buy credit protection on some of the senior tranches of the AC-1 transaction. This necessarily meant that Paulson was expected to take some short exposure in the transaction."
Despite defending his actions, Tourre did admit that the portfolio selected by ACA should have made clear the suggestions offered were from Paulson and IKB.
Through Mr. Levin's own admission, the committee hearing was not a criminal investigation or even about the law, but rather a question of "ethics and policy.'' It had the feel of a business ethics seminar with witnesses being peppered with questions about its lack of ethics and the regulatory reforms desperately needed. One recurring question, for instance, was whether investment firms like Sachs have a responsibility to disclose to clients their position on a stock.
Despite the apparent greed, the public tuning into the hearing may have come away with the impression that Goldman itself wasn't as much to blame as was the unregulated financial industry and the complexity of its workings. Sparks repeatedly admitted that many people at Sachs made poor business decisions that they regret making. Implicit in Spark's admission of mistakes was that the culture of the financial industry had spun out of control. "Credit standards got too loose'," Sparks said, "risk wasn't respected across the industry and we participated in an industry that got loose.''
On the question of the lavish bonuses paid out to Goldman executives during the financial crisis, the men defended the company's bonus structure on the grounds that it's based more on just market performance, but takes in other considerations as well, such as ethics and personal performance.
Sen. Jon Tester, after seemingly scratching his head in frustration after getting nothing but ambiguous answers, said there needs to be some level of regulation in the CDO market: "transparency is the bottom line."
What made the questioning all the more difficult during the session were witnesses trying to wade through a thick bulky binder, containing many of the exhibits, including embarrassing emails. Witnesses often struggled to find the document committee members were referring to, making for a long day. One wonders if this confusion could have been avoided if the committee had made use of an overhead projector.
Tuesday's hearing focused on the role of investment banks in the crisis, specifically on the role of Goldman Sachs as a case study. Previous hearings have examined reckless mortgage lending, regulatory agencies and the credit ratings and the agencies that contributed to the crisis.