Piles Of Crap

Senate Subcommittee Investigating Financial Crisis Releases Documents on Role of Investment Banks

April 24, 2010

The Senate Permanent Subcommittee on Investigations released several exhibits that will be among those discussed on Tuesday at the fourth of its hearings on the causes and consequences of the financial crisis.

The exhibits are available at this link.

Using Goldman Sachs as a case study, the April 27 hearing will focus on the role of investment banks in contributing to the worst U.S. economic crisis since the 1930s, resulting in the foreclosure of millions of homes, the shuttering of businesses, and the loss of millions of American jobs. The Subcommittee, whose Chairman is Sen. Carl Levin, D-Mich., and whose Ranking Republican is Sen. Tom Coburn, R-Okla., has conducted a nearly year and a half investigation into the 2008 financial crisis.

“Investment banks such as Goldman Sachs were not simply market-makers, they were self-interested promoters of risky and complicated financial schemes that helped trigger the crisis,” said Sen. Levin. “They bundled toxic mortgages into complex financial instruments, got the credit rating agencies to label them as AAA securities, and sold them to investors, magnifying and spreading risk throughout the financial system, and all too often betting against the instruments they sold and profiting at the expense of their clients.” The 2009 Goldman Sachs annual report stated that the firm “did not generate enormous net revenues by betting against residential related products.” Levin said, “These e-mails show that, in fact, Goldman made a lot of money by betting against the mortgage market.”

Goldman Executives: "No Regrets" for Deals That Accelerated Crisis

One of the testier exchanges thus far was between Sparks of Goldman and Levin. It surrounded one of the offshore deals Goldman peddled called "Timberwolf," which included securities backed by subprime mortgages that were most at risk if the housing market dropped.

Goldman documents show that the firm's sales force was told to make selling Timberwolf a priority. In 2007, Goldman sold about $300 million of Timberwolf securities to a hedge fund that collapsed later that year. A senior Goldman executive later described the deal as follows: "boy that timeberwof (sic) deal was one shitty deal." According to the subcommittee, 94 percent of the securities in the deal were from other offshore deals.

The hearing room then erupted in laughter — low titters at first, and then bigger laughs — as Levin repeatedly asked Sparks about the "shitty" deal and the e-mail.

Levin asked: Did you tell your clients that "this was a shitty deal?"

"Your top priority was to sell that shitty deal."

"Should Goldman be trying to sell a shitty deal?"

Levin later grilled Viniar about the e-mails or comments in which Goldman employees referred to specific deals as "crap" or "shitty" or "junk." What did he think about such disparaging comments — and how would clients feel about them? Levin asked.

MSNBC video [5:58]

Levin grills Wall Street execs

April 27: Sen. Carl Levin, D-Mi., quotes from an email as he repeatedly refers to "a shitty deal" while grilling bank executives during a hearing on Goldman Sachs' activities during the housing crisis.

Is Goldman Sorry It Sold A Security One Employee Described as #$%&*?

Throughout the hearing, Levin kept returning to the argument that Goldman should have told clients its opinion of the security. Goldman should also have told clients if it stood to profit if the security performed poorly, Levin suggested.

The Goldman execs basically disagreed with Levin. They argued that when Goldman sold mortgage securities, it was not acting as an adviser to clients. Instead, they said, the company's role was to sell clients whatever they wanted to buy.

"The investors that we're dealing with on the long side, or on the short side, know what they want to acquire," CEO Lloyd Blankfein said. "I don't think our clients care, or that they should care," what Goldman's opinion is, he said.

It went back and forth like this for hours this afternoon, with variations on the theme. But there was one break in the monotony. It came when Levin was questioning David Viniar, Goldman's CFO:

LEVIN: And when you heard that your employees, in these e-mails, when looking at these deals said, God, what a s***y deal, God what a piece of crap -- when you hear your own employees or read about those in the e-mails, do you feel anything?

VINIAR: I think that's very unfortunate to have on e-mail.

'God, What a Piece ofCrap'

Viniar's answer told us all we need to know about the banal but profound immorality of Goldman's business culture: "I think that's very unfortunate to have on e-mail."

A flabbergasted Levin cut in with "On e-mail? How about feeling that way?" and Viniar, apparently moved by jeers of ridicule from the audience, conceded "I think it is very unfortunate for anyone to have said that in any form." Pressed further by Levin asking, "How about to believe that and sell them?" the CFO finally conceded, "I think that's unfortunate as well." To which Levin responded, "That's what you should have started with."

But Goldman's executives didn't start with any such moral qualms or end with them, as was made clear in the testimony of Goldman Chief Executive Officer Lloyd Blankfein that followed. Blankfein basically pleaded ignorance about the company's scams, making it clear that offering the details of such products was below his pay scale. That would be $68 million in 2007, the highest in Wall Street history, when Goldman's bets against its customers paid off so handsomely. What was clear is that his job was to ensure the company's immense year-end profitability with no questions asked about the methods used. "I did not know" he replied when asked about the details of the company's trades, and at another point he added, "We're not that smart." Then there was "I don't have any knowledge" on selling short, and finally, "We did not know what subsequently occurred in the housing market."

The Senate tries to get the bankers to admit they sold America a pile of crap.

The question at the center of Tuesday's Senate hearing on the role of investment banks in the financial crisis: Are Goldman Sachs bankers criminals or merely a big bunch of jerks?

Put another way: Did the employees of Goldman Sachs deliberately mislead investors by failing to disclose that one of the people creating a certain mortgage-backed security was also betting against it, as a new lawsuit by the Securities and Exchange Commission alleges? Or did they simply recommend mortgage-backed securities to investors, then turn around and bet against them—essentially betting against their own investors?

Investment Banks And The Financial Crisis, Directors
C-Span, Apr 27, 2010: Senate Committee Homeland Security & Governmental Affairs

Related:
Computerized Front-Running: Another Goldman-Dominated Fraud

Also called High Frequency Trading (HFT) or "black box trading," automated program trading uses high-speed computers governed by complex algorithms (instructions to the computer) to analyze data and transact orders in massive quantities at very high speeds. Like the poker player peeking in a mirror to see his opponent's cards, HFT allows the program trader to peek at major incoming orders and jump in front of them to skim profits off the top. Note that these large institutional orders are our money - our pension funds, mutual funds, and 401Ks.

When "market making" (matching buyers with sellers) was done strictly by human brokers on the floor of the stock exchange, manipulations and front-running were considered an acceptable (if morally dubious) price to pay for continuously "liquid" markets. But front-running by computer, using complex trading programs, is an entirely different species of fraud. A minor flaw in the system has morphed into a monster.