Banking/Financial Institutions

More than 60 lawmakers signed a letter calling for a criminal investigation of Goldman Sachs.

Goldman Sachs had too much debt leading up to the 2008 financial crisis, the head of the investment bank said Tuesday night. 

Because of the economic collapse, firms will probably operate more conservatively into the future but legislation is still needed to end the 'too big to fail' mentality, CEO Lloyd Blankfein told lawmakers on the Senate Permanent Subcommittee on Investigations. 

"With the benefit of hindsight we were too leveraged," he said. Goldman Sachs has cut its ratio of debt to equity in half since they accepted help from the federal government, he said. 

He advocated requiring firms to hold more capital and liquidity, especially because most financial companies and their actions are interconnected. 

"Some additional legislation is warranted," he said and, "I would like to be helpful."

A financial regulatory reform bill has at least one supporter outside of Congressional Democrats, Lloyd Blankfein.

Goldman Sachs CEO Lloyd Blankfein told lawmakers Tuesday night he hadn't heard anything that proves his firm did something wrong leading up to the 2008 financial crisis. 

"I heard nothing today that makes me think anything went wrong," Blankfein told the Senate Permanent Subcommittee on Investigations about his company's actions. 

But he made a point to say he'd heard about transactions he didn't know about before today's hearing with Goldman Sachs executives who spent all day on Capitol Hill. 

In an exchange between Goldman Sachs CEO Lloyd Blankfein and Sen. Edward Kaufman (D-Del.), the senator theorized that public outrage over recent actions by the firm was more about executive bonuses than misleading investors on securities that eventually soured, but still made money for the bank. 

"It may be totally a chance, it may be something beyond our control, but the idea that Wall Street came out of this just fine, thank you, is just something that grates on people," Kaufman said. "And I think they think that you just didn't come out fine because it was luck. They think that you guys really gamed this thing real, real well." 

Blankfein told lawmakers that after receiving $10 billion in TARP funds, the bank rebounded by earning approximately $13 billion for 2009 and $3.46 billion in the first quarter of 2010. 

Under intense grilling by Sen. Carl Levin, Goldman Sachs CEO Lloyd Blankfein said he does not believe his bank has a moral obligation to tell investors that the bank is betting against investments being sold to investors.

"I don't think we would have to disclose that," he told Levin. 

Levin was floored by the response.  

Senate Republicans are drafting an alternate financial overhaul bill that differs in major ways from the Democratic bill pending in the Senate.

According to a 20-page draft summary of the bill, Republicans have significantly different ways of dissolving failing financial firms, bolstering consumer protections and restricting the Federal Reserve. Republicans are terming the bill the, "Financial Regulatory Improvement and Taxpayer Protection Act," according to a summary dated April 26.

"The legislation is still in the drafting stages," said a Republican aide. "Whether and when it is introduced remains to be seen. We remain willing to work to reach a bipartisan compromise."

Among the key provisions:

1. Republicans would create a system to dissolve failing financial firms that requires the Federal Deposit Insurance Corporation (FDIC) to liquidate a firm and would give the FDIC power to recoup money from the firm's creditors that is in excess of what they would have gotten in bankruptcy. The FDIC, with the consent of the Treasury Secretary, would be allowed to issue guarantees, purchase assets and advance funds to creditors. Republicans do not include any sort of industry-supported fund to cover the costs of winding down a firm. The Democratic bill includes a $50 billion fund supported by the industry. 

2. Republicans want to create a Council for Consumer Protection that would have rulewriting and restricted enforcement power. The council would be made up of Federal Reserve, Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency. The council would have primary supervision of large financial institutions, large non-bank mortgage originators, and "other financial services providers who have violated the consumer protection statutes." The council would have backup enforcement power over regional banks and credit unions, while supervision and enforcement of small banks would remain with existing regulators.

Democrats include an independent bureau of consumer protection at the Federal Reserve that would have broader rulewriting and enforcement power and an autonomous budget.

3. Senate Republicans are planning on preserving federal preemption of state laws on consumer protections. Consumer advocates and Democrats have pushed for states to be able to pursue stronger regulations than the federal government.

4. On derivatives, Republicans would give the Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC) and Federal Reserve power to set clearing requirements. Republicans appear to have a much broader "end user" exemption for derivatives users. "End users who are not contributing to potential system failure but rather utilize swaps to reduce or offset risk inherent to their business will not be required to clear their transactions, thereby avoiding the additional costs of clearing," according to the summary.

5. Republicans are looking to cut off federal support for Fannie Mae and Freddie Mac, the mortgage finance giants taken over by the government. Democrats have said they will pursue an overhaul of Fannie and Freddie in separate legislation.

Senate Republicans have blocked a financial overhaul bill for the second day in a row.

Goldman Sachs stock survived the Senate grilling of its executives relatively unscathed on Tuesday.

Up more than 1 percent throughout most of trading on Tuesday, Goldman shares gained a little more than half a percentage point while the Dow Jones Industrial Average sank nearly 2 percent. The action occurred while the firm's leaders testified before the Senate Permanent Subcommittee on Investigations.

Goldman executives denied that their firm played a role in the 2008 financial crisis. They also collectively said they didn't do anything wrong in responding to a lawsuit filed nearly two weeks ago by the Securities and Exchange Commission that charges the firm defrauded its customers.

Two Senate leaders agree that a financial regulatory reform bill isn't finished but they disagree about how to ready it for passage. 

Senate Majority Leader Harry Reid (D-Nev.) vowed an open amendment process if Republicans will agree to begin debate on the measure. 

Whereas Senate Minority Leader Mitch McConnell (R-Ky.) has taken a closer look at the legislation and wants it tightened before starting debate. 

"It's not a finished product but it's certainly ready for prime time," Reid told reporters after the party lunches. "We've worked on this bill for weeks and weeks and we can't solve problems if we're not willing to talk about them."