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Senate Panel Says Goldman Bet Against Clients, Misled Congress

Goldman Sachs Group Inc. (GS) designed, marketed and sold collateralized debt obligations that misled investors and created conflicts of interest as the company built short positions before the U.S. housing market collapsed, a Senate panel said in its report on the financial crisis.

In the case of one CDO, Hudson Mezzanine, Goldman Sachs told investors its interests were aligned with theirs while the firm held 100 percent of the short side, according to the report released today by the Senate’s Permanent Subcommittee on Investigations. Senator Carl Levin, the Michigan Democrat who leads the panel, urged regulators to review all of the structured finance transactions described in the report.

At a briefing today, Levin said he believed Goldman Sachs executives weren’t truthful about the company’s transactions in testimony before the subcommittee at an April 2010 hearing. He said he would refer the testimony to the Justice Department for possible perjury charges.

“In my judgment, Goldman clearly misled their clients and they misled the Congress,” Levin said.

With today’s release, the Senate panel completes a two-year investigation of mortgage firms, federal regulators and Wall Street banks highlighted by the expletive-laden interrogation of Goldman Sachs executives including Chairman and Chief Executive Officer Lloyd Blankfein a year ago this month.

“Our investigation found a financial snake pit rife with greed, conflicts of interest, and wrongdoing,” Levin told reporters today.

Public Hearings

Levin and Senator Tom Coburn of Oklahoma, the panel’s top Republican, held four public hearings on the financial crisis last year, examining regulatory failures, the collapse of Washington Mutual Inc. (WAMUQ), the role of credit-rating firms in fueling bets on high-risk debt and the business practices of Goldman Sachs and rival investment banks.

The report comes less than a year after Goldman Sachs paid $550 million to resolve Securities and Exchange Commission claims that it misled investors in a collateralized debt obligation and its executives were called to testify before two congressional panels and a commission formed to investigate the worst financial crisis since the Great Depression. A committee of Goldman Sachs employees led by E. Gerald Corrigan and J. Michael Evans released 39 recommendations on Jan. 11 for the company to reform its business practices.

The Senate report also faults Deutsche Bank AG (DB), saying the Frankfurt-based company created a $1.1 billion CDO with assets that its traders referred to as “crap” and then attempted to sell “before the market falls off a cliff.”

Photographer: Bloomberg

The two-year Senate probe investigated the role of banks, rating agencies and complex financial instruments in the housing market meltdown. Close

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Photographer: Bloomberg

The two-year Senate probe investigated the role of banks, rating agencies and complex financial instruments in the housing market meltdown.

The subcommittee urged regulators to “identify any violations of law” in the investment-bank transactions described in the report.

To contact the reporters on this story: Phil Mattingly in Washington at pmattingly@bloomberg.net; Clea Benson in Washington at Cbenson20@bloomberg.net

To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net

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