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Senate panel concludes Goldman Sachs profited from financial crisis

A two-year investigation says the investment bank deceived investors and Congress about its bets against the subprime mortgage market.

April 14, 2011|By Jim Puzzanghera and Nathaniel Popper, Los Angeles Times
  • A Senate panel report made public Wednesday says Goldman Sachs Chief Executive Lloyd Blankfein, shown above, and other executives at the investment banking giant misled the Senates Permanent Subcommittee on Investigations. They did so, the report says, when they appeared before the subcommittee last April and testified that the investment bank had not consistently tilted its own investments heavily against the housing market  a position known as being net short.
A Senate panel report made public Wednesday says Goldman Sachs Chief Executive… (Jim Watson, AFP/Getty Images )

After a two-year bipartisan probe, a Senate panel has concluded that Goldman Sachs Group Inc. profited from the financial crisis by betting billions against the subprime mortgage market, then deceived investors and Congress about the firm's conduct.

Some of the findings in the report by the Senate's Permanent Subcommittee on Investigations will be referred to the Justice Department and the Securities and Exchange Commission for possible criminal or civil action, said Sen. Carl Levin (D-Mich.), the panel's chairman.

"In my judgment, Goldman clearly misled their clients and they misled the Congress," Levin told reporters before the report was made public late Wednesday.

Goldman said it disagreed with many of the subcommittee's conclusions and denied its executives misled Congress. The firm agreed last year to pay $550 million to settle a civil fraud case brought by the SEC regarding its actions in the market for mortgage securities. The latest allegations go beyond the conduct covered by the SEC suit.

The giant investment bank was just one focus of the subcommittee's probe into Wall Street's role in the financial crisis. The 639-page report — based on internal memos, emails and interviews with employees of financial firms and regulators — casts broad blame, saying the crisis was caused by "conflicts of interest, heedless risk-taking and failures of federal oversight."

"It shows without a doubt the lack of ethics in some of our financial institutions," said Sen. Tom Coburn (R-Okla.), the subcommittee's top Republican, who approved the report along with Levin.

Among the culprits cited by the panel are Washington Mutual, a major mortgage lender that failed in 2008, as well as the Office of Thrift Supervision, a federal bank regulator, and credit rating firms. The report makes 19 recommendations about how to prevent a future crisis, many of which were adopted in last year's overhaul of financial rules.

The subcommittee's conclusions about the cause of the crisis are similar to those of the Financial Crisis Inquiry Commission created by Congress. But that body's findings were marred by an inability to reach bipartisan consensus.

Much of the report centers on Goldman, whose executives were called before the committee last year for an intensive grilling. Levin was one of the chief inquisitors at that hearing and has been outspoken about Goldman's role in the crisis.

"Goldman was, I think, the only major bank that did well during the recession. We tried to find out, 'How is it they did well?' " Levin said Wednesday. "The tactics that they used … were disgraceful. And sticking it to their own clients violates their own claim that the clients come first."

Asked if he was disappointed that no Wall Street figures had gone to jail in connection with the crisis, Levin responded, "There's still time."

The report could be damaging for Goldman, particularly if it results in fresh charges against the firm. But from a public relations point of view, it's unclear whether the latest allegations will be seen as significant revelations.

"Everyone already kind of has a feeling that whatever the report stipulates, that Goldman has already done that," said Morningstar Inc. bank analyst Michael Wong. "They've already been put through the wringer."

One of the report's main allegations against Goldman was that it deceived clients who bought its mortgage-related securities, failing to tell those investors the firm was betting against those investments at the same time.

The SEC suit that Goldman settled last year alleged that the firm had misled investors in a complex mortgage-related security known as Abacus. The Senate report cites three similar securities that it said Goldman betted against, or shorted, without informing its clients.

The report also says Goldman Chief Executive Lloyd Blankfein and other executives misled the subcommittee when they appeared before the subcommittee last April and testified that the investment bank had not consistently tilted its own investments heavily against the housing market — a position known as being "net short."

The subcommittee has estimated that in 2007 Goldman's bets against the mortgage markets more than balanced out the bank's mortgage losses and led to a $1.2-billion profit in the mortgage department alone that year.

Goldman was so focused on shorting the market it even tried a strategy called a "short squeeze" to drive down the price of obtaining short positions, the report said.

In a statement issued Wednesday, Goldman said that during the subcommittee's hearing last year, its executives "repeatedly and consistently acknowledged that we were intermittently net short during 2007. We did not have a massive net short position because our short positions were largely offset by our long positions, and our financial results clearly demonstrate this point."

But the subcommittee report says such denials by Goldman "are directly contradicted by its own financial records and internal communications."

jim.puzzanghera@latimes.com

nathaniel.popper@latimes.com

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