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Goldman Sachs E-mails Spur Democrats to Push Wall Street Rules

Senator Sherrod Brown, a Democrat from Ohio, speaks at the Hamilton Project economic forum in Washington, on April 20, 2010. Photographer: Brendan Hoffman/Bloomberg
Senator Sherrod Brown, a Democrat from Ohio, speaks at the Hamilton Project economic forum in Washington, on April 20, 2010. Photographer: Brendan Hoffman/Bloomberg

White House officials and Democratic lawmakers seized on internal e-mails from Goldman Sachs Group Inc. to push for curbs including a ban on proprietary trading as they brace for a Senate showdown on Wall Street oversight.

Democratic Senator Christopher Dodd, chairman of the Senate Banking Committee, and Senator Sherrod Brown, also a Democrat on the panel, said yesterday the e-mails help show why rules such as the Volcker rule are needed. Obama administration adviser Austan Goolsbee called the proposal to end trading for a bank’s own account “highly relevant” to ending conflicts of interest.

“These e-mails signify that there are all kinds of conflicts of interest on Wall Street, that Wall Street is working for its clients and working against its clients in the same sort of bundled toxic securities,” Ohio’s Brown said yesterday on ABC’s “This Week,” where Goolsbee also appeared. “That’s why we need the Volcker rule. That’s why we need really strong reform that will separate the proprietary trading from banking functions.”

Lawmakers are using the e-mails to bolster support for rules that could crimp earnings at Goldman Sachs, the most profitable firm in Wall Street history, 10 days after it was sued for fraud by the Securities and Exchange Commission. The Volcker rule, named for former Federal Reserve Chairman Paul Volcker, now an adviser to President Barack Obama, is included in Dodd’s financial-rules overhaul, which faces a test vote in the Senate today. The Democrats need at least one Republican vote to open the debate.

‘10-ish Percent’

About “10-ish percent” of Goldman Sachs’s revenue comes from “walled-off proprietary business that has nothing to do with clients,” Chief Financial Officer David Viniar said on a conference call in January.

Senator Carl Levin, a Michigan Democrat who leads the Permanent Subcommittee on Investigations, released the e-mails on his website April 24 and said they show that Goldman Sachs “made a lot of money by betting against the mortgage market.” The firm was “magnifying and spreading risk throughout the financial system” by selling “toxic” mortgage-backed securities that carried top grades from credit-rating companies.

Levin’s panel is set to question Chief Executive Officer Lloyd Blankfein, 55, and six other current and former Goldman Sachs employees on Tuesday, in a hearing that some historians liken to Ferdinand Pecora’s Depression-era investigation of powerful financiers such as J.P. Morgan Jr. Yesterday, Levin’s investigators interviewed Fabrice Tourre, who was also sued by the SEC and who is among those appearing at the hearing, the Wall Street Journal reported.

‘Completely Unfounded’

Investigators for the Levin panel also obtained e-mails that show Goldman Sachs executives criticizing each other for putting information in e-mails and using the term LDL for “let’s discuss live” when sensitive topics arose, the Journal reported, citing unidentified people familiar with the matter.

Voicemails and e-mails to Levin’s staff for comment weren’t returned. Nor was a call to Tourre’s lawyer, Pamela Chepiga, at the New York law firm Allen & Overy.

Goldman Sachs calls the SEC suit “completely unfounded.” It responded to the e-mails with documents indicating the firm lost money on mortgages in 2008 and that executives didn’t know the market would fall.

“Individual emails without context can easily give the wrong impression, and sometimes they can be embarrassing, but they don’t tell the whole story,” Lucas van Praag, a spokesman for Goldman Sachs in New York, said in an e-mail yesterday. “We did not have a big negative bet on the housing market. We were trying to manage our business prudently.”

‘Conceptually Close’

The SEC accused Goldman Sachs, based in New York, of misleading investors in a collateralized debt obligation about the role played by hedge fund Paulson & Co. in assembling the deal and the fund’s intention to bet against a CDO known as Abacus. The firm, run by billionaire investor John Paulson, wasn’t accused of wrongdoing.

Dodd, from Connecticut, has been working with Richard Shelby, the top Republican on the banking committee, since last year to try to broker a compromise on the legislation to revamp financial regulation.

Shelby, speaking with Dodd on NBC’s “Meet the Press,” said that while he and Dodd are “conceptually very, very close” on the legislation, he doubts they will reach an agreement by today.

Republicans say the Democratic measure would set up a permanent bailout of Wall Street banks and create new bureaucracies. Democrats say the legislation would save the government from having to use taxpayer money to prop up failing financial firms whose collapse would disrupt the economy.

‘Casino Atmosphere’

“We’ve got to end, once and for all, the casino atmosphere on Wall Street,” Shelby said.

One e-mail provided by Levin shows Blankfein telling colleagues on Nov. 18, 2007, that the firm was making more money from its so-called short bets on mortgages than it lost on its investments related to home loans.

“Of course we didn’t dodge the mortgage mess,” Blankfein wrote in an e-mail dated Nov. 18, 2007, that was among eight pages of documents made public by Levin’s panel. “We lost money, then made more than we lost because of shorts. Also, it’s not over, so who knows how it will turn out ultimately.”

Some e-mails indicate that selling securities to customers was part of the firm’s effort to get rid of its mortgage risk and take a negative stance on the market.

No ‘Special Information’

“My basic message is let’s be aggressive distributing things because there will be very good opportunities as the markets goes (sic) into what is likely to be even greater distress and we want to be in a position to take advantage of them,” Viniar wrote in a Dec. 15, 2006, e-mail to a colleague.

Documents released on April 24 by Goldman Sachs show that the firm’s gains from shorting subprime mortgages in 2007 were overwhelmed by losses in 2008 when higher-quality mortgages suffered more than the firm anticipated. Goldman said it had $1.7 billion in net mortgage losses in its 2008 fiscal year.

“Goldman Sachs did not have access to any special information that caused us to know that the U.S. housing market would collapse,” the firm stated in an “executive summary” of its arguments released April 24.

The interrogation of Goldman Sachs may echo the Pecora panel, said Charles Geisst, a finance professor at Manhattan College in Riverdale, New York, who has written about Wall Street’s history. The commission was named for the former New York City assistant district attorney who became its chief counsel.

Goldman May ‘Squirm’

“This is Pecora II,” Geisst said in an interview. “They have to squirm and they have to answer the questions.”

Congress went on to pass the Securities Act of 1933 and the Securities Exchange Act of 1934, portions of which Goldman Sachs and Tourre are accused of violating by the SEC.

Larry Summers, the director of the White House National Economic Council, said the e-mails underscore “what is at the center” of Obama’s plan for overhauling financial regulation.

Elijah Cummings and Peter DeFazio, both Democratic Representatives, said yesterday that 58 Democrats joined them in calling for an investigation by the SEC into 24 other Abacus CDOs created by Goldman Sachs.

“The silver lining is this is going to reinforce the need for moving forward with financial regulatory reform,” Jon Corzine, the former Democratic New Jersey governor and senator who ran Goldman Sachs from 1994 to 1999, said in an interview yesterday on ABC News’s “Good Morning America.” “Goldman is actually in the hot seat right now, but it was a much bigger problem.”

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