I was tooling around the internet for awhile yesterday, looking for a transcript of the Congressional hearings that featured Goldman Sachs executives and traders as the star witnesses, before I realized that nowhere in print was there any real sense of what had gone on. Congressional hearings may have been effective at some point in the past, but these days, the witnesses are usually far too polished and used to dissembling for hours at a time to be of any real value, and the senators and congressmen who are asking the questions are usually too polite to do more than ask questions of little or no value.

Senator Carl Levin tried to deviate from that formula on Tuesday. He was harsh, unyielding and relentless. "Your clients lost. Goldman profits" rang out several times during his opening address. But Senator Levin didn’t have enough of an understanding of the business to really pin back the ears of any of the witnesses, including Lloyd Blankfein, Goldman Sachs chairman. I couldn’t figure out for the life of me why his staffers didn’t line up a few disgruntled traders and insiders to give the senator a three or four day crash course on the business. His gambling analogies were something that might appeal to my grandmother, who puts gambling of any kind up there with the cardinal sins, but missed the mark when it came to characterizing Wall Street’s shenanigans.

He would have been much better served to key on the “new math” theme. "Your entire investment philosophy is based on the belief that you can make 2 + 2 = 5" would have been a much more accurate metaphor with which to pummel Mr. Blankfein and company. 

In any case, Senator Levin’s opening statement in his questioning of Goldman Sachs chairman Lloyd Blankfein framed the reason behind the entire hearing so well, I sat down and transcribed it myself:  

 

We’ve heard in earlier panels today example after example where Goldman was selling securities to people and then not telling them that were taking and intended to maintain a short position against those same securities. I’m deeply troubled by that, and it’s made worst when your own employees believed that those securities are junk, or a piece of crap, or a shitty deal, words that those emails show your employees believed about a number of those deals.

Billion dollar Timberwolf Synthetic CDO squared. CDO’s get squared now. A senior executive called it a shitty transaction, but the Goldman sales force was told it was a priority item for two straight months. Goldman sold $600 million dollars worth of Timberwolf while at the same time holding a short position – in other words betting  against it.

Your investors lost big time. Goldman won on that deal.

In the $500 million Long Beach deal, Goldman shorted it while at the same time selling it to clients.  Securities defaulted in a few years with a 65% delinquency rate. The bad news, in your own words was “your clients lose money.” But, the good news is that, “Goldman Sachs made money” on that deal.

The next one, $700 million dollar Fremont deal, this was an RMBS of subprime loans. A notoriously bad lender . Your folks knew it. One of your clients talks to your sales force about it. And your sales force, among themselves, call it “crap loans.” They go out and sell them anyway. At the same time that your sales people are selling those items they are shorting the deal. So you short them so Goldman makes money, when this security fails, which it did in 10 months.

On the $300 million dollar Anderson synthetic CDO. CDO is stuffed with New Century loans. These are known to be shoddy loans.  I think it was one or two on the list of bad loan producers. A client of yours asks, “how did Goldman Sachs get comfortable with this deal?” Goldman Sachs, in other words, pointing out that it was New Century.  Goldman Sachs did not respond, and did not say, “we’re not comfortable, we’re shorting it, we’re betting against it, we’re shorting this deal.” Asked a direct question, “how could you guys get comfortable with this deal involving those loans, and instead of responding honestly, “we’ve got problems too, we’re not taking any chances on this deal, we may be selling it, and we’re also betting against it.” That’s not what happened.

Instead, the client was told that Goldman was an equity holder, which it was, at the same time that that was a half truth, because it was also betting against that same security. That CDO failed within 7 months.

Your clients lost. Goldman profits.

The $2 billion dollar Hudson Synthetic CDO, Goldman Sachs was the sole protection buyer on this CDO with a $2 billion dollar short. In other words, they were betting against it. The Goldman salesperson described it as junk. Not to the buyer, of course, but inside. The CDO imploded within 2 years.  Your client lost. Goldman profited.

Now, there’s such a fundamental conflict it seems to me. When Goldman is selling securities, which, particularly when its own people believe they are bad items, described in the way these emails show they were described and how they were, what your own sales people believed about them . To go out and sell these securities to people, and then bet against those same securities, it seems to me, is a fundamental conflict of interest and raises a real ethical issue.

And  I’d like to ask you  whether or not if you believed that Goldman, in fact, treated those clients properly. And as you say, “if clients believe we don’t deserve their trust, you’re not going to survive”, those are the ringing words you give us in your opening statement, given that kind of a history here, going heavily short in the market, which you did, you made a strategic decision to do that, but then on these specific examples, to be betting against the very securities which you’re selling to your clients, and, internally, your own people believe that these are crappy securities, how do you expect to deserve the trust of your clients and is there not an inherent conflict here?

 

What Goldman Sachs does is what every investment bank does, which is to marry penny stock jobber sensibilities with market statesman imagery. They and their brethren continue to swear by the concept of the “Chinese Wall” between underwriters and brokers, a theory that is very, very hard to uphold when lots of money is on the line.  And every investment bank in the business trades on the idea that they can take an asset, or group of assets, and increase their value faster than they would have normally appreciated as a part of their mystique.    

But when you start concocting air filled, investment grade confections for sale out of rotting subprime mortgage loans, mortgage loans that were destined for default from their origination, you have either begun to believe your own bullshit or you have lost your mind.