By Jay Heflin - 04/28/10 12:25 AM EDT
Senators from both parties clashed angrily Tuesday with representatives of one of the most powerful and storied banks on Wall Street during an all-day spectacle on Capitol Hill.
Executives from Goldman Sachs traveled from the heart of the nation’s financial center for an expected grilling, but ended up frustrating senators by avoiding specific answers about the financial crisis and the bank’s relationship with its investors.
The political theater took place against the backdrop of a fierce debate over financial reform legislation that Republicans blocked from consideration for a second day in a row Tuesday.
Goldman Sachs has been a chief character in that fight ever since the SEC accused it nearly two weeks ago of selling a financial instrument it had designed to fail, an allegation the executives continued to deny fiercely on Tuesday. Congressional Democrats have suggested their legislation would prevent other banks from doing the same thing.
If the fight over Wall Street reform has been another partisan battle, however, Democrats and Republicans on the Senate Permanent Committee on Investigations appeared unified in their irritations with the executives for dodging questions.
The stalling tactic started immediately after opening statements when former Goldman partner Daniel Sparks took more than 15 minutes to comprehend a question asked by Sen. Carl Levin (D-Mich.), the committee’s chairman.
Levin, who argued in the days leading up to the hearing that Goldman had repeatedly designed and sold mortgage-backed securities that had been designed to fail, referenced an e-mail from Goldman that said the bank was “comfortable” with holding mortgage-related securities that were losing value, and asked Sparks to explain why the bank was at ease with its position.
The former Goldman executive said he did not understand the senator’s question.
Levin then repeated the question several times, reducing it to a hypothetical at one point, but each time Sparks said he did not understand the question.
After nearly 20 minutes, Levin gave up and turned the questioning over to Sen. Susan Collins (Maine), the panel’s ranking Republican, who quickly announced her own frustration, with the witness.
“I’m starting to share the chairman’s frustration and I’ve only used 30 seconds of my time,” Collins said.
Goldman CEO and Chairman Lloyd Blankfein did not appear before the panel until Tuesday evening because of the lengthy proceedings.
He then engaged with Levin in an animated exchange over whether bank representatives had a moral obligation to tell investors when Goldman bet against investments held by investors.
“I don't think we would have to disclose that,” Blankfein finally said to Levin, who appeared floored by the response.
Earlier, Collins was visibly frustrated when three of the four witnesses on an opening panel from Goldman avoided directly answering her question about whether they believed they had a duty to work on their clients’ behalf.
Goldman’s former managing director, Joshua Birnbaum, said: “Not only do I believe that we do, I believe that we did.”
But the other executives indicated confusion with the question or said their responsibility ended with supplying clients with rudimentary information about the investments.
Sen. Mark Pryor (D-Ark.) said the stonewalling contributed mightily to the hearing becoming a daylong event; Levin at one point threatened to keep the witnesses in his hearing room all day if they did not answer questions.
During a break, Pryor expressed his irritation: “They have done everything they can do to not answer the questions,” he told The Hill. “They have parsed word and have not been forthcoming at all.”
Despite Blankfein’s presence, Tourre was arguably the most highly anticipated witness of the day given his central role in the SEC complaint.
Tourre appeared tense as he and the other Goldman representatives took their places in the hearing room before a mob of photographers. He also gave the hearing a personal touch, telling the panel in accented English that the weeks since the SEC probe had been difficult for his family, and lambasting the “unfounded attacks” on his character and motives.
Categorically denying the SEC allegations, Tourre said the investment at the center of the charges was not designed to fail and that Goldman Sachs had no incentive for it to fall apart.
ACA, an investor in the security, was involved in setting it up and chose the portfolio of transactions that were included, Tourre testified. Tourre emphasized that the firms that invested had depths of experience in such trades.
Tourre acknowledged regret about private e-mails made public by the SEC in which he described himself as “fabulous” Fab and questioned whether he would be the only “survivor” of a financial collapse.
“I regret those e-mails,” he told the committee. “They reflect very badly on the firm and on myself. And I wish I hadn’t sent them.”
Under heavy questioning, Tourre also confirmed that documents to investors did not say that hedge fund billionaire John Paulson, who helped create the investment that lost so much money, was betting against the investment.
“Paulson was not disclosed,” Tourre said.
Tourre also confirmed that Goldman never intended to hold the investment over a long period of time, which Levin said contradicts the bank’s original statement.
Sparks defended the bank’s position by saying that disclosure requirements vary when products are sold to investors.
He argued that since the securities in question were peddled by “market markers,” there was no need to tell investors that Goldman and Paulson had both bet against the very product bought by investors.
“Market making itself, as long as people know what they are investing in, I don’t think that knowledge of the position of their counterparty is something that has to be disclosed and I don’t think it currently is disclosed by market makers,” Sparks said, adding, “[Goldman’s] position isn’t going to affect how that instrument performs.”