Panel: Goldman Sachs misled investors

A Senate investigatory panel claims Goldman Sachs misled investors and Congress in its dealings before the financial crisis and has referred its findings to the Department of Justice and the Securities and Exchange Commission (SEC).

Sen. Carl Levin (D-Mich.), who chaired the Senate Permanent Subcommittee on Investigations, said Goldman Sachs executives engaged in "disgraceful" tactics to profit themselves at the expense of some clients and then misrepresented their actions when called to testify before Congress. He stopped short of saying anything illegal occurred, instead referring that matter to federal investigators.

"In my judgment, Goldman clearly misled their clients and they misled the Congress," he said. "Whether or not that constitutes perjury … is for someone else to decide ... It needs to be decided by an appropriate authority."

But when asked for his thoughts about the fact that no major Wall Street players have gone to prison over the financial crisis, he responded: "There's still time. Hope springs eternal."

His comments came as the subcommittee released a lengthy new report that concluded its two-year investigation into the financial crisis. The 635-page document spreads blame far and wide, with the common culprit being widespread conflicts of interests from all parties involved.

"That's the thread that runs through all of this material," Levin said.

In particular, the report claims that Goldman misled investors when it put together a risky security and marketed it by saying the bank had "aligned incentives" by investing in a portion of it. While Goldman did invest $6 million in the so-called Hudson collateralized debt obligation (CDO), it did not tell investors that it had bet $2 billion against it.

"This was a fundamental misrepresentation," said Levin.

A Goldman spokesman said the bank disagrees with many of the conclusions drawn in the report even though it takes the issues investigated by the subcommittee seriously. 

"We recently issued the results of a comprehensive examination of our business standards and practices and committed to making significant changes that will strengthen relationships with clients, improve transparency and disclosure and enhance standards for the review, approval and suitability of complex instruments,” the Goldman spokesman said.

Deutsche Bank is also criticized in the report for similarly putting together a CDO of risky assets while failing to inform investors of the concern of one of its top traders, who called the assets "crap" and "pigs" in emails.

Additionally, the report takes Washington Mutual to task for pursuing profits through high-risk mortgages. At one time the nation's sixth largest bank with $300 billion in assets, Washington Mutual ultimately went into receivership in 2008 and was sold to JPMorgan for $1.9 billion.

The report found that from 2003 to 2006, the ratio of low-risk, fixed-rate mortgages created by the bank fell from 65 percent to 25, while at the same time its high-risk loans, which were more profitable for the bank in the short term, climbed from 19 percent to 55.

Levin lauded the subcommittee's report as "a bipartisan product of a bipartisan investigation that was bipartisan every step of the way."

Sen. Tom Coburn (R-Okla.), the ranking member of the subcommittee, said the report is "backed up by facts and it shows without a doubt the lack of ethics in some of our financial institutions, who embraced known conflicts of interest to accomplish wealth for themselves, not caring about the outcome for their customers."

"I'm pleased to join Sen. Levin on this report," Coburn added. "I think it's a model for every other committee in Congress.

Coburn reserved some blame for Congress, saying the crisis could have been avoided if lawmakers exerted proper oversight beforehand.

The report also casts blame on federal regulators, in particular the now-defunct Office of Thrift Supervision (OTS), which was eliminated as part of the Dodd-Frank financial reform law.

"The OTS was abolished by Dodd-Frank for good reason," Levin said.

Although OTS identified nearly 500 deficiencies at the bank from 2003 to 2008, it failed to take any corrective action, the report stated.

It also details a "turf war" between OTS and fellow regulator the Federal Deposit Insurance Corporation (FDIC). It says OTS regulators resisted FDIC advice, and actually began to "impede FDIC oversight efforts" at Washington Mutual, by limiting the FDIC's access to information and resources at the bank.

Levin highlighted a July 2008 email sent by OTS Director John Reich to Kerry Killinger, the chief executive office of Washington Mutual, where he said OTS would be pursuing enforcement action against the firm.

Levin decried the email, in which Killinger indicates OTS must pursue the tougher of two regulatory actions even though he would like to use a softer alternative, as apologetic.

"He would like to say a weaker action on his part would be appropriate, but he doesn't believe it," Levin said. "Instead of lowering the boom on WaMu, he sends this kind of message."

Credit rating agencies also receive a share of the scorn, as the report said Moody's Investors Service and Standard & Poor’s boosted ratings on risky securities to secure "lucrative fees" from Wall Street firms selling them. Over 90 percent of the triple-A ratings given to mortgage-backed securities in 2006 and 2007 ultimately were downgraded to junk status.

The report recommends that the SEC begin ranking credit rating agencies based on their accuracy.