By Jay Heflin - 04/26/10 09:01 PM EDT
Sen. Carl Levin (D-Mich.) on Monday said investment firm giant Goldman Sachs misled investors when selling them mortgage-backed securities.
Email exchanges obtained by the senator's office showed the bank sold these securities to investors as the firm made billions by betting against the very same investments.
“The evidence shows that Goldman repeatedly put its own
interest and profits ahead of the interest of its clients,” Levin told reporters,
adding, “It bet against some of the same securities that Goldman had sold to
clients who made the reasonable assumption that they [the investments] were designed
Goldman maintains it did not know that hedge fund billionaire John Paulson, who helped create the securities, sought a windfall profit by betting the investments would eventually collapse. The bank contends that since Paulson's motives were unknown to them there is no way that it could have misled investors about the instruments.
However, bank emails show Goldman and Paulson were both betting against these investments. In 2007, the bank took steps to reduce its inventory of mortgage-related instruments yet still instructed its sales force to push these products onto customers. The senator contends this created a conflict of interest at the investment firm that cost investors billions.
“My best estimate is that the firm cannot successfully continue to portray itself as working on behalf of its clients,” Levin said. “It is betting its own money against the mortgage market that at the same time it is selling those securities to those markets.”
Levin believes other banks are also facing similar a conflict of interest.
"We think other investment houses engaged in similar activity," he said, but stopped short of saying these banks had misled investors.
Goldman made approximately $3.7 billion in 2007 by betting against the mortgage securities it sold to clients, Levin said.
The senator also said there is very little chance that Goldman CEO Lloyd Blankfein was unaware of these transactions since they were made known to the board.
“It is possible that one [investment] desk doesn’t know precisely what the other desk is doing,” he told The Hill. “But there is no way that the people at the top that were looking at the whole picture would not know. In fact, that is what was presented to the board.”
Levin said bets by Goldman against these securities far outpaced those of other firms. He also believes the bank withheld this information from investors to protect it sales department.
"Who is going to buy their securities if these folks [Goldman] are betting against the securities," Levin said. "It would hurt their business."
Blankfein and 6 other Goldman executives are expected to appear before Levin’s investigations committee on Tuesday and explain how they profited from the collapse of securities while selling them to customers who were banking on their appreciation.