Allegations against Goldman Sachs are mounting, as executives from the venerable investment bank prepare to testify before a Senate panel tomorrow. Goldman Sachs’ emails released this weekend by the Senate subcommittee haven’t helped repair the firms now-sagging reputation.
Earlier this month, we reported that the Securities and Exchange Commission (SEC) had filed a civil suit against Goldman Sachs, as well as Vice President Fabrice Tourre, over a financial product called Abacus 2007-AC1. As we reported previously, Abacus was a collateralized debt obligation linked to the performance of subprime mortgages that the SEC says was designed to lose money.
According to the SEC complaint, Goldman Sachs failed to disclose the role that hedge fund manager John A. Paulson played in selecting the Abacus portfolio, and did not reveal the fact that his hedge fund had taken a short position against it. Instead, marketing documents for Abacus indicated that the mortgage bond portfolio would be selected by a firm called ACA Management. According to the SEC, Paulson selected mortgage bonds for Abacus that he believed were most likely to lose value. When Abacus tanked, the Goldman Sachs clients who invested in it lost more than $1 billion.
Over the weekend, the Senate Permanent Subcommittee on Investigations released internal Goldman Sachs’ emails that did little to quell suspicions about its conduct in regards to the mortgage boom and meltdown.
“Investment banks such as Goldman Sachs were not simply market-makers, they were self-interested promoters of risky and complicated financial schemes that helped trigger the crisis,” Senator Carl Levin, D-Mich, chairman of the Subcommittee on Investigations, said in a statement.
“They bundled toxic mortgages into complex financial instruments, got the credit rating agencies to label them as AAA securities, and sold them to investors, magnifying and spreading risk throughout the financial system, and all too often betting against the instruments they sold and profiting at the expense of their clients,” Levin said.
According to The Wall Street Journal, one email released by Levin’s Subcommittee indicated the firm made a $5 million trading profit by betting against securities Goldman sold in a Long Beach Mortgage Co., which was part of Washington Mutual. Like Abacus, that offering lost money for investors, and may have raised conflict with Goldman’s clients, The Journal said.
Levin’s statement also noted that the 2009 Goldman Sachs annual report claimed that the firm didn’t “generate enormous net revenues by betting against residential related products.” According to the Senator, the emails revealed by his subcommittee over the weekend conflict with that claim.
In one of the emails, Goldman Sachs President Gary Cohn writes to the firm’s chief executive and other officials that while the bank had $322 million of write-downs on collateralized debt obligations, collateralized loan obligations and other mortgage-related positions, it also made $373 million from mortgage-related positions in its “index book..”
To that, Goldman chief financial officer David Viniar responded: “Tells you what might be happening to people who don’t have the big short.”
These emails, along with the SEC lawsuit have increased calls for a major reform of the banking system. Tomorrow, Goldman Sachs executives, including CEO Lloyd Blankfein Viniar, and several other Goldman executives will have a chance to explain themselves to Levin and other Senators on his subcomittee. Among the other Goldman officials expected to testify is Fabrice Tourre, who was named in the SEC suit.
The hearing is expected to begin at 10:00 a.m. EST.