Blankfein will defend Goldman's actions, agree to need for reform

Goldman Sachs didn't have a massive short against the housing market or bet against its clients, CEO Lloyd Blankfein is expected to tell a Senate panel Tuesday.

Blankfein called a lawsuit filed by the Securities and Exchange Commission "one of the worst days in my professional life, as I know it was for every person at our firm," the testimony says. 

"While we strongly disagree with the SEC's complaint, I also recognize how such a complicated transaction may look to many people," he says. 

Goldman Sachs has been accused of committing financial fraud by the SEC, which charges the bank with setting up a mortgaged-back security that was designed to fail. The SEC argues Goldman set up the security by working with a hedge fund that chose the financial instruments that were to be included and then bet against the investment. Blankfein will say the SEC charges show the independent body believes things are out of control on Wall Street.

"To them, it is confirmation of how out of control they believe Wall Street has become, no matter how sophisticated the parties or what disclosures were made. We have to do a better job of striking the balance between what an informed client believes is important to his or her investing goals and what the public believes is overly complex and risky," he will say.

Blankfein said internal risk processes showed uncertainty in the housing market and the firm attempted to reduce its overall risk.

He will highlight that Goldman was not consistently or significantly net "short the market" in residential mortgage-related products in 2007 and 2008. He'll also note that  the firm's performance in the market confirms this.

Although Goldman showed a profit since the 2008 financial crisis, the company lost about $1.2 billion for its involvement in the residential housing market, Blankfein says in his testimony.

"We believe that we managed our risk as our shareholders and our regulators would expect," Blankfein will say in prepared testimony before the Senate Permanent Subcommittee on Investigations. 

Blankfein will take some responsbility for the financial crisis.

He'll say that Goldman and other banks, rating agencies and regulators failed to "sound the alarm" that there was too much lending and credit had become too cheap.

Blankfein will emphasize his bank's support for reforming derivatives, a tool that helps companies and financial institutions manage risk. He'll say derivatives require more transparency and that there should be safeguards.

"This is why Goldman Sachs, in supporting financial regulatory reform, has made it clear that it supports clearinghouses for eligible derivatives and higher capital requirements for non-standard instruments," Blankfein will say.