For a moment last week as the Goldman Sachs drama unfolded, it looked as if the bank might defend itself against a sensational civil fraud charge by hanging out to dry one of its vice presidents, the fabulous Frenchman, Fabrice Tourre.
“This all seems to be at root about whether someone intentionally misled someone, and that’s not something we would approve of or sanction,” Goldman Co-General Counsel Greg Palm told analysts last week.
Now, given the testimony of the Goldman guys before a Senate subcommittee yesterday, we can infer a different meaning from Palm’s statement. It’s a denial that anyone at Goldman misled anyone else.
As senators eager to score points against Wall Street cross-examined bank executive after former executive, what emerged from the witness table was a unified defense.
There was no misconduct. Not by Tourre. Not by Goldman.
Yes, there were misjudgments. Sure, some bad deals resulted. Real bad deals.
Several e-mails were ill-advised. Some “could have been more accurate,” as Tourre put it.
And of course everyone is so very sympathetic to all those people who don’t know a CDO from a CDS and yet lost their homes, their savings, their jobs, their retirement incomes to the recession while Goldman raked in billions.
Chief Executive Officer Lloyd Blankfein said Goldman does bear some responsibility for that.
As for securities fraud, no way.
Yesterday’s testimony won’t do much to cool public fury at Wall Street, except to the degree that senatorial bullying and hypocrisy transform villains into victims.
But as a legal defense, Goldman’s all-out denial just might work. It certainly stands a greater chance than any rogue- employee strategy, which would have offered no cover at all. The law clearly makes the employer vicariously liable for the conduct of its agent. Besides, Tourre wasn’t acting alone.
For more than five hours -- without so much as a bathroom break for the witnesses -- a panel of four current and former Goldman executives insisted that no, they didn’t “bet” against clients or even the mortgage market.
They simply put together securities that clients could and did evaluate for themselves. They have no obligation to tell clients when Goldman essentially shorted a security, since Goldman’s positions so often change, and there is no disclosure obligation, anyway.
Plus, as Blankfein later testified, investors have different reasons for wanting or avoiding exposure to certain industries or securities, as does Goldman.
Designed to Fail
And, no, the firm didn’t design any collateral debt obligation to fail, Goldman witnesses said. Not even when a client -- say hedge fund Paulson & Co. Inc. -- wanted to go short on the mortgage market.
As for the specific transaction featured in the Securities and Exchange Commission complaint, everything that should have been disclosed to potential investors was disclosed, they maintain. Yes, Paulson had a role in picking the portfolio, but so did the customer who wanted to go long. The collateral manager, ACA, made the final choices, witnesses insisted.
Whether the e-mails, memos and witnesses will eventually support that claim or the SEC’s remains to be seen.
But by itself, the argument Goldman offered the Senate Permanent Subcommittee on Investigations just might prevail in court, if not in public opinion.
Most of the Goldman witnesses freely claimed that they hadn’t predicted the collapse of the mortgage market. These financial wizards knew less than the outsiders who populate Michael Lewis’s book, “The Big Short.” They read the humongous red letters written so clearly on the wall and knew with certainty that the mortgage market would collapse.
If Goldman had seen the future, the bank would be far more culpable for what went wrong, at least morally. The fancy derivatives it created spread risk so broadly that when obviously unsound mortgages began to fail, the sky fell.
And if Goldman could see that happening and kept on selling mortgage-backed securities that the bank was secretly shorting, then the bank’s claim to follow the highest of ethical standards should make us all very worried. If that’s the most ethical conduct we can expect, then we might as well stuff cash into mattresses and head for the mountains.
Add to that the transaction the SEC finds fishy, and you can smell the stench.
The big message delivered through Goldman’s witnesses was that, while internal debate raged over the future of the subprime mortgage market, the bank in late 2006 decided to “go flat” on related securities. And that meant being less long and more short because Goldman was at that point very, very long.
All it was doing was reducing risk, as Chief Financial Officer David Viniar said when it was his turn at the table. The upshot was a “small net short,” Viniar said.
“You call it reducing risk. I call it making billions,” retorted Carl Levin, chairman of the Senate Permanent Subcommittee on Investigations.
And what about all those e-mails, the ones that called some of the Goldman-created securities essentially worthless?
Quoting from such messages, Levin asked Viniar whether his customers have a right to assume that, with Goldman’s name on the security, “you don’t think it’s ‘junk,’ that you don’t think it’s ‘crap.’”
Viniar said, “that’s very unfortunate to have on e-mail” (which was an unfortunate thing for Viniar to say).
Next came Blankfein, who seemed stumped by the question of whether Goldman should tell clients its assessment of the derivatives it packages.
Different clients will have divergent views on a security’s value and price it accordingly. Sometimes, for any number of reasons, Goldman will want to sell something others want to buy.
So what? No conflict of interest there.
That’s the sort of thing that makes Wall Street look bad, and makes Congress want to rein it in.
But as for defeating the SEC case against Goldman, it just might work.
(Ann Woolner is a Bloomberg News columnist. The opinions expressed are her own.)
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