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Senate Hearing on Goldman

Goldman on the Defensive Before Senate Panel -

A Republican member, Senator Susan M. Collins of Maine, turned from one witness to the next as she asked repeatedly whether they felt a duty to act in the best interest of their clients. Only one of the four witnesses she questioned seemed to affirm such a duty outright.

In what almost added up to a light moment, Senator Mark L. Pryor, Democrat of Arkansas, said the public wanted to know what went wrong and “how we can fix it,” adding that Americans feel that Wall Street contributed to the financial crisis. “People feel like you are betting with other people’s money and other people’s future,” he said. “Instead of Wall Street, it looks like Las Vegas.”

Senator Ensign said he took offense at the comparison, saying that in Las Vegas the casinos do not manipulate the odds while you are playing the game. The better analogy, he said, would be to someone playing a slot machine while the “guys on Wall Street” were “tweaking the odds in their favor.”

Live-Blogging the Senate Hearing on Goldman - DealBook Blog ...

And so, 10 hours and 43 minutes later, where are we?

Never before have we seen Goldman grilled so much. This is the firm, keep in mind, that government officials typically come to for advice. Some have called it Government Sachs, in part because of the many Goldman alums who have gone into government service. Here’s a look at some of Goldman’s alumni.

We’ve gotten to see a bit of Goldman’s soul today. We’ve seen how an employee and an executive, called out about distasteful behavior, said they regretted not the behavior itself but rather that it was documented in e-mail. (The executive later apologized.) We’ve seen how some Goldman employees do not think they have a duty to their clients on other sides of trades. And we’ve seen how dug in and determined Goldman’s leaders, and the rank and file, are that they’ve done nothing wrong.

At the same time, we’ve seen the anger and pressure that elected officials feel. Both Republicans and Democrats on the Senate subcommittee all found at least something to blame Goldman for. We saw elected officials and financial leaders who finished a day without moving much closer to each other on their viewpoints. And we’re left with central questions about Wall Street’s mission. Do banks like Goldman serve themselves or do they serve their clients? The answer is a mixed one, by all accounts, and perhaps it should be.

What’s more, we got to see the Fabulous Fab — Fabrice P. Tourre — on full display. Goldman Sachs and Mr. Tourre, the Goldman employee accused in the S.E.C.’s securities fraud case, may not face trial in a court for months. But today they faced all of us.

Signing off.

8:16 p.m. |It’s Prime-Time TV, but the Audience Is Vanishing

More than 10 hours after the Senate hearing began, there are only about a dozen people left in the audience of the hearing room. Still, Senator Levin shows no signs of letting up on his questioning of Mr. Blankfein, taking him through pages of Goldman exhibits and e-mails and assailing him for the firm’s big short positions.

8:02 p.m. |Remember A.I.G.? Levin Does — Ruefully

It’s amazing that we’ve gotten to 8 p.m. without a lengthy discussion of A.I.G., that insurance giant that did so many deals with Goldman. But here we are. Let’s go.

Senator Levin, the subcommittee, asks Mr. Blankfein why Goldman received taxpayer money related to its contracts with A.I.G.

Sharply, Mr. Blankfein replies, “No, we got money from A.I.G.”

Mr. Levin retorts, “That was taxpayers.”

Mr. Blankfein says A.I.G. received money from the government that paid it over to Goldman. But the senator doesn’t buy it. He says this logic is circular and then asks if the payments made to Goldman — at 100 cents on the dollar — were justified, given the bailout of A.I.G. “Why isn’t that unjust enrichment?” Mr. Levin asks.

7:48 p.m. |Synthetic Speculation — and Maybe a “Scam”

Senator McCaskill starts to rail against synthetic C.D.O.s, those bundles of mortgage risk that do not actually include any real mortgage bonds at all. (They include derivatives instead.)

She asks Mr. Blankfein what purpose they serve. “There is nothing in a synthetic C.D.O. that is essential,” she says.

Mr. Blankfein says that there’s plenty of speculation that fills an economic role. For instance, he says, a speculator may sit on the other side of a trade that some party needs for economic purposes. He points to contracts on oil, for instance. “They provide the liquidity and opportunity for people who want to hedge themselves.”

The senator is undeterred: “You don’t think there’s a point where we make up stuff to bet on and you guys are tranching it and securitizing it?”

Synthetic C.D.O.s, of course, are the sort that was used for the Abacus, the deal in the S.E.C. case. Senator Jon Tester, Democrat on Montana, questions Mr. Blankfein on that deal and the Goldman chief executive said the deal was not designed to fail. Mr. Blankfein comes up with what might strike some as an unusual definition of sucess and says the deal was successful.

It “succeeded by conveying the risk that people wanted to have, and in a market that’s not a failure,” Mr. Blankfein says.

To which, Mr. Tester replies, “It’s like we’re speaking a different language here.”

Mr. Tester says that he understands the need of some parties to hedge positions, but that with synthetic C.D.O.’s, “it’s more like a scam.”

“Why would the clients believe in Goldman Sachs?” the senator asks.

Mr. Blankfein meanders in his answer. He says he wishes he were better at explaining the situation, the idea that his firm has many different roles. “There are parts of the business where you are a money manager where you owe a duty to the client, and there are parts of the business where you are a principal,” he says.

In the case of being a principal, as a market-maker, Mr. Blankfein says, “The markets couldn’t work if you had to make sure it was good for them.” In market-making, “the market understands when these people are buying,” he says of his own traders, “they’re buying for their own P.&L.”

Back to the synthetic C.D.O.’s:

“Claire’s right,” Mr. Tester concludes, referring to Ms. McCaskill, who has attacked synthetic C.D.O.’s “It’s not about hedging.. This is just playing around from my perspective.”

And to make matters worse, the senator says, this sort of playing around is part of what led to the financial crisis.

6:59 p.m. |The Fabrice File of E-Mails

Senator Coburn, a Republican, tells Mr. Blankfein that he has been focused on ethics throughout the hearing. And on that note, he asks Goldman’s leader why the firm chose to release salacious e-mails from Fabrice Tourre to his girlfriend.

Goldman sharply criticized those e-mails along with scores of others that came out on Saturday morning.

Mr. Tourre’s e-mail messages were so salacious, I’ll tell you, that when I showed them to a Frenchman on the train to Washington on Monday, he blushed, and he apologized for looking at my personal mail. I quickly clarified to him that they were not my notes, and that I was merely interested in his translation of a line from French to English. (Reuters has this article on Mr. Tourre’s e-mails.)

The Senate committee never released the personal e-mails, but of course Goldman did not know that they would not do so eventually.

Mr. Coburn says to Mr. Blankfein that Mr. Tourre is “the guy that’s getting hung out to dry.” He asks why no other employee had personal e-mails released.

Mr. Blankfein says that he was not close to this decision, but that Goldman simply wanted to “get it out so that we could deal with it.” He stammers, saying: “Because at this point, I think you’re aware that the press was just very – maybe the press. I don’t know where we came from. I don’t think we added to the state of knowledge about those e-mails.”

Of course, there was no state of knowledge about the e-mails before Goldman released them.

6:36 p.m. |“We’re Not That Smart”

Brilliance is usually prided on Wall Street, but Senator Kaufman of Delaware has brought us the truth from Lloyd Blankfein himself: “We’re not that smart.”

Let’s back up. Here’s how it’s gone down. Mr. Kaufman asks Mr. Blankfein when he knew that the housing market was doomed, and the Goldman chief executive says he never did. The senator asks again, pointing out that Goldman shut down its C.D.O. warehouses. Mr. Blankfein says he wasn’t involved in that decision.

The senator says he and most people want to know at what precise moment Goldman decided to turn against mortgage-backed securities. “There is this illusion about how smart people are on Wall Street, and the people I know on Wall Street are just really, really smart. And it’s hard for me and it’s hard for American people to believe…”

Mr. Blankfein jumps in to say, “I think we’re not that smart. And maybe there were people who knew it.” He says he did not know after housing had fallen 20 percent if it would fall further or rebound.

As the exchange continues, Mr. Blankfein points out that many financial companies lost tens of billions of dollars because of the sharp decline of the housing market. (Think Citigroup, Merrill Lynch, UBS — the list goes on.)

“I did not know,” he says about housing prices. “All we know is the discipline of mark to market.”

Mr. Kaufman closes out his window of questioning by saying bankers’ pay really grates on people. It’s a comment that’s all the more stinging after hearing the chief executive of one of Wall Street’s giant banks say he’s not that smart.

“The idea that Wall Street came out of this thing just fine, thank you, is just something that just grates on people,” Mr. Kaufman says. “They think you didn’t just come out fine because it was luck. They think you guys just really gamed this thing real well.”

6:21 p.m. |The Endless Hearing

You know the hearing has gone on for a very long time when the protesters leave. The Code Pink squadron just marched out after more than eight hours at the hearing.

6:15 p.m. |The Clash of the Titans

Senator Levin and Lloyd Blankfein just can’t agree.

Like the exchange played out between the senator and Goldman’s chief financial officer, Mr. Blankfein and Mr. Levin volleyed back and forth, with their views miles away from each other.

Mr. Levin asks the question he’s asked over and over again. Should Goldman be telling its clients about its own positions? Is Goldman mistreating its clients by betting against them? Do you think clients should know if Goldman thinks something is a piece of junk (or a word more vulgar)?

Mr. Blankfein insists that Goldman is a principal. “The act of selling something is what gives us the opposite position of what the client has. If the client asks us for a bid the next minute we own it, they don’t,” he says.

It is the nature of market-making, he says, that puts Goldman on the other side of its clients’ bets. “What clients are buying or customers are buying is they’re buying an exposure. They are not coming to us to represent what our views are,” Mr. Blankfein says.

But the senator presses on. He thinks clients should know when Goldman is betting against them.

“You say betting against,” Mr. Blankfein says almost incredulously.

He then tries to explain what he views as simply the way market making works. On housing, he says, “the people who were coming to us for risk in the housing market wanted to have exposure that gave them exposure to the housing market, and that’s what they got it. The unfortunate thing, and it’s unfortunate, is that the housing market went south very quickly.”

What you’re witnessing here is an essential debate over the components of Goldman’s business. As Dan Sparks explained earlier, Goldman both creates new investments (like C.D.O.’s and mortgage bonds) and it provides so-called market making, which is like the air-traffic control room of assets. As a market-maker, Goldman trades assets that were already created. And so Mr. Blankfein’s remarks on market-making and the senator’s remarks on investments created by Goldman are floating past each other like cars headed in opposite directions.

5:23 p.m. |The Finale: Lloyd Blankfein

It’s fitting that Lloyd Blankfein caps off the end of a day focused largely on trading. Mr. Blankfein, of course, came up from the trading ranks at Goldman, starting out over two decades ago in commodities trading.

In many people’s eyes, Mr. Blankfein has remade Goldman in recent years to be a trader’s shop and, along the way, the rest of Wall Street followed.

Mr. Blankfein starts off by expressing gratitude for the help Goldman received — the bailout, some $10 billion of it. He quickly points out that Goldman paid it back in an amount that he says equaled a 23 percent annualized return.

Goldman has 35,000 “hard-working, diligent and thoughtful” employees, most of whom work in the United States, he says.

His prepared remarks, released by Goldman on Monday, have been read and reviewed by many people now. And he reads his most striking line with little emotion. It’s about the day the S.E.C. announced its securities fraud case against Goldman. “It was one of the worst days in my professional life,” he says, “as I know it was for every person at our firm.”

His voice is forceful, his deputies flank him, photographers cower in front of him.

Lloyd Blankfein, the chief executive who broke all bank chief records with a nearly $70 million payday in 2007, is before the firing squad. And the questions begin.

5:17 p.m. |Now It’s Time for Lloyd Blankfein

Mr. Viniar and Mr. Broderick have finished and Mr. Blankfein has just been sworn in.

5:06 p.m. |Lloyd Is in the House

All heads turned as Lloyd C. Blankfein, Goldman’s chief executive, walked into the hearing room surrounded by over a dozen cameras. He sat in a row off to the side of the panelists, who are still talking. So, it seems, the committee will indeed have the stamina to turn soon to Goldman’s leader.

5:01 p.m. |Viniar’s Dismay Over Vulgarities

Mr. Viniar said Senator Levin was 100 percent correct in the statements he made before the procedural vote. Mr. Viniar said he felt he should have straight off expressed dismay at the vulgar expressions that some at Goldman believed described their own deals.

4:53 p.m. |Strong Words on Deals, Some of Them Vulgar

Senator Levin is back to leading the questions, and his back and forth with Mr. Viniar has captivated the room.

He starts with a basic question, one he and other senators have asked so many others today: Do you think that a customer has a right to believe that you want securities that you sell to succeed?

Mr. Viniar, a numbers guy, stumbles: “I’m not sure what succeed actually means.”

Mr. Levin continues, asking if a customer has a right to believe that Goldman is selling something the firm believes is a solid security.

Mr. Viniar says that “when we sell securities to customers, we don’t necessarily have a view that they’re going to go up or down.”

Mr. Levin says that’s not what he meant. He means that customers do not think Goldman would sell something it thinks is junk, or the more vulgar word that the senator used. (Forgive him, though, he was citing Goldman employees in e-mails.). Mr. Levin says he sees a very clear conflict of interest that needs to be dealt with. He asks Mr. Viniar what he felt when he heard about the things Goldman employees had written about these deals, again using vulgar words.

Mr. Vinar replies, “I think that’s very unfortunate to have on e-mail.”

The room erupted in a gasp.

Mr. Viniar continues: “I think it’s very unfortunate for anyone to have said that in any form.”

The senator presses the chief financial officer, who adds, that he thnks it’s unfortunate in and of itself that his employees thought their deals were junk — or worse, as the words indicated.

Mr. Levin retorts, “That’s where you should have started.”

He then called a brief recess for the procedural vote on the financial bill.

4:48 p.m. |They’re Back

Senators have returned from the procedural vote and resumed the questioning of Mr. Viniar and Mr. Broderick.

4:35 p.m. |Quick Recess

The subcommittee is taking a quick recess for a procedural vote on the financial bill.

4:18 p.m. |The Big Short and the A.I.G. Payments

Mr. Viniar and Senator Levin went back and forth for quite some time, until it started to feel like a name game over the big short (Goldman’s bet against housing).

“It was the big short offsetting the big long,” Mr. Viniar asserts.

Well, Mr. Levin says, “the big short saved your neck.”

Senator Coburn, the Republican ranking member, defends short-selling and then moves onto one of Goldman’s other hotspots: A.I.G.

Mr. Coburn asks Mr. Viniar why it is that Goldman received 100 cents on the dollar on its deals with the American International Group.

“All I can say is it was what they owed us,” Mr. Viniar responds.

3:51 p.m. |So Who Is at This Hearing?

I took some time to talk with people lined up at the door. And I hit on a couple George Washington University sophomores. They say they’re here to try to see for themselves what to make of Wall Street. And they say they’re doing some stock research. One of them owns Goldman shares, and the other owns Citigroup and Bank of America.

Both say they thought it was obnoxious that the S.E.C. announced the Goldman complaint without warning the firm. I ask why they think Goldman should have a warning, and they say they think the surprise made the stock market overreact with financial stocks.

These students are focusing on finance in their studies. One would not tell me his name, but his friend is Alex Durand. Mr. Durand says there is a gap in what he hears people saying about Wall Street when he goes home to Memphis and when he’s in Washington or New York.

He says that in Memphis people have questioned his intention to work in finance – not least his father. “When I told my dad I wanted to be an accountant, he said ‘why do you want to sit in the back office and do projects all day?’ You know he sees all these headlines.”

So, has anything that’s occurred in the last two years deterred them from finance? They quickly say no, but then they add that it’s not like they’re going into trading. They’re thinking more about advisory work, or mergers and acquisition deals, says the student who did not want to be named. Those areas, he said, are different because they’re what Wall Street used to be.

A few people down the line, I come upon Larry Block, a 67-year-old actor in town in a traveling show. Mr. Block says he is here to understand what it is these Wall Street traders do that makes them oh-so-very rich.

“Where did this money come from,” he says. “Where was all this money before it got in their hands? It doesn’t seem possible that it could be fair.”

Mr. Block, like so many Americans, says he lost money during the financial crisis. That nice chunk of change his mother left him in an account at Morgan Stanley when she passed away has since plummeted.

But Mr. Block is not angry. He had a relative who worked at Lehman Brothers some time ago. He does not dislike bankers, he says.

He just can’t get his head around the zero after zero after zero on their paychecks. Each day when he’s home, he says, he watches the construction workers across from his apartment. They’re working on a higher floor each day, laying two-by-fours. “What they do,” he says. “They climb up on this little place. And they walk out there. Every day I look at them and I understand any level of compensation that they would get for doing that.”

“But what does Lloyd Blankfein do?” he says. “I just can’t imagine that it can be ethical or proper for these workers in finance to make so much money.”

3:46 p.m. |How Short Was Goldman?

Senator Levin starts off the questions to focus on Goldman’s statement in recent days that it was not net short. He asks Mr. Viniar if it was not true that Goldman was short in 2007?

Mr. Viniar says, “Across 2007, we were primarily, although not consistently, short and it was not a large short.”

The senator wants to know whether those short bets – negative ones – against housing made big bucks for Goldman?

Yes, Mr. Viniar says, but “they offset long positions that lost a lot of money.”

Mr. Levin stays on the case: Weren’t those shorts large?

“We had large short positions but they offset large long positions,” Mr. Viniar says.

Mr. Levin says Goldman has been “misleading” in its statements to the public about its short.

Back to Mr. Viniar, who repeats himself again saying the large short was related to the large long.

Here is an article about some of the e-mails that Mr. Levin’s subcommittee released on Saturday. Get ready for Mr. Levin to cite more of these e-mails.

3:41 p.m. |It’s Broderick’s Turn Now

We turn to Craig Broderick, a lesser-known executive from Goldman. But given the bank’s copious talk of its risk management skills, Mr. Broderick, the chief risk officer, must be important.

Mr. Broderick was Goldman’s chief credit officer before he became chief risk officer in 2007, so both roles make him relevant to this hearing.

In his prepared remarks, He walks us through Goldman’s risk framework:

1. Mark to market valuation – this means putting new pricetags on all the assets on its books every day and taking losses and gains as they come (rather than taking them later on , as some banks do).

2. Independence – he says the firm’s controllers group “prevails” if there are ever pricing disputes

3. Governance – you know what that means

4. Risk systems – technology is important in Goldman’s risk reports

5. Limits structures – this means the firm puts caps on certain activities

“Taken together, these core elements enable us to make informed decisions in real time,” Mr. Broderick says.

Now he’s onto VAR and CSW – I’m not going to bore you with these – but suffice it to say they are risk measures. If the senators focus on them, we’ll come back to you with a brief tutorial.

3:32 p.m. |And We’re Back

Alrighty, folks. We’re on to panel two. Yes, panel two of three panels.

David Viniar, Goldman’s chief financial officer, starts off the testimony with his prepared remarks.

He does not dive in on mortgages right away. Instead, it’s broad talk about Goldman’s mission, much like messages the firm itself has written in publications like its annual report.

In particular, he says that Goldman often has long or short positions – that is positive or negative bets. And he says, “This does not mean that we know, or even think, that prices will fall every time we sell or are short, or rise when we buy or are long.”

This section rings reminiscent of Goldman’s recent statement in its annual report that the firm did not know in 2007 what would happen to the housing market.

Now all this does seem to conflict with Mr. Viniar’s own statement in a July 2007 e-mail after looking at some mortgage data that it “tells you what might be happening to people who don’t have the big short.” Pay attention: the lawmakers will likely question Mr. Viniar about his “big short” comment.

Mr. Viniar continues to describe the famous December 2006 meeting when Goldman executives decided to shift direction. He uses the phrase of the day, uttered by others earlier, that Goldman wanted to get “closer to home.”

“That I,” he says, “reduce our overall exposure to the residential housing market consistent with our risk protocols.”

Mr. Viniar says that for Goldman, getting through the crisis was not related to the short bet. Instead, he says, it was related to “more mundanely” to the firm’s marking procedures and “disciplined approach to risk management.”

It makes me wonder: Wasn’t the short bet part of Goldman’s risk management? Mr. Viniar, are those two mutually exclusive?

3:22 p.m. |Fabulous Fab Is Chased

The Goldman workers are released and a Goldman spokesman flanks Mr. Tourre as they rush out the backdoor. The protesters yell out, “How do you live with yourself, Fab?” The photographers chase the fabulous Fab like a celebrity.

Mr. Sparks and the other two walk out more quietly, steps behind. Mr. Sparks pats Mr. Birnbaum on the shoulder as they exit.

3:15 p.m. |First Panel Finally Ends

After angrily lecturing the four men from Goldman, Senator Levin has finally called a 10-minute recess — nearly five hours and 15 minutes after the hearing began.

2:59 p.m. |Levin Tears Into Tourre

Senator Levin just grilled Fabrice Tourre on the Abacus deal in the S.E.C. case — perhaps providing him with good practice for investigators’ future questions.

Mr. Tourre defended his actions, but he did admit he should have written that the deal’s portfolio was selected by ACA with suggestions from John Paulson and IKB. That comment cuts to the heart of the S.E.C.’s allegations, that it was misleading that Goldman only said the Abacus deal’s portfolio was selected by ACA Management (and leaving out Mr. Paulson’s role).

In addition, Mr. Tourre admitted that Goldman never wanted to keep part of that Abacus deal. The firm got stuck with some $83 million of it, but he said, “we tried to hedge our risk by selling that piece as well.”

I wrote last week about Mr. Tourre’s efforts to sell that piece.

How does Mr. Tourre’s statement square with that of Greg Palm, Goldman’s general counsel? Mr. Palm told analysts in a call last week that “G.S. had no economic motivation for this transaction to fail … If we believed there was something wrong with this transaction, we obviously wouldn’t have put our skin in the game in that way.”

2:33 p.m. |And the Questions Just Keep Coming

Mr. Coburn and Mr. Levin have been throwing out a multitude of questions at the witnesses, and Mr. Tourre is on the hot seat at the moment. Still, the hearing has been going on for four and a half hours, and we’re wondering when the subcommittee will get to David Viniar, Goldman’s chief financial officer, and Craig Broderick, the chief risk officer. And will there even be time today for Lloyd Blankfein?

2:12 p.m. |Goldman’s Noted Author

Senator Levin points to exhibit #170c. We’re back to the Hudson Mezzanine deal, which The New York Times highlighted back in December. The e-mail at #170c was set by a Goldman salesman named Tetsuya Ishikawa, better known inside Goldman as Tets. He relays comments that a certain party may be “too smart to buy this kind of junk.”

If Mr. Ishikawa’s name sounds familiar to you, it might be from your book club. The former Goldman salesman went on to write a book called “How I Caused the Credit Crunch.” (More on that book can be found here.) The book includes Mr. Ishikawa’s reflections on “the drugs, prostitutes, booze and general excessive nightlife that many bankers were engaged in.”

Bankers who scored riches on credit products, he wrote, deserted their clients who had bought them. “We had moved on to hurting others in our quest for self-preservation,” he wrote.

1:59 p.m. |What About Those Bad Deals?

The senators keep pounding the table about Goldman’s duty to clients. How, they ask, can Goldman say it served its clients if the firm also bet against mortgages it sold?

Mr. Sparks, for the most part, answers for the unit, as his former colleagues sit by quietly. Of the deals that went so bad, so very fast, he says, “At the time we did those deals, we expected those deals to perform.”

But Mr. Sparks argues that firms like Goldman have to manage their risks. Shorting some of the mortgage bonds was part of that. “If you don’t prudently manage your risks, you won’t be around to work for your clients,” he says.

And then there’s the issue of pay. Senator John Ensign, Republican of Nevada, and Jon Tester, Democrat of Montana, point out that Goldman workers like the men sitting here right now were paid out of 2007 profits, and they got to keep that money, despite how Goldman did the next year.

1:45 p.m. |Are They Sorry?

Senator Pryor’s tone is softer than that of some of his peers. No fire-breathing, more like a session with a counselor. And he asks the Goldman witnesses: do they regret their actions? Do they feel they did something wrong? Did they, did Goldman, contribute to the recession that hurt so many Americans?

Mr. Birnbaum says, “I think it’s important to distinguish our role in terms of the products we were trading … are you asking us to sort of editorialize about the financial system and how investment banks play a role?”

Mr. Birnbaum continues, saying that he did not work in many areas of Goldman and that things may have happened. He’s of course sympathetic to the pain out there, from the credit bubble. Ah-ha, there’s the answer: “To the extent that investment banks and commercial banks may’ve extended too much credit,” he says.

The senator shakes his head and says it seems the bankers do not seem to be taking responsibility.

Mr. Sparks pipes in: “I do take responsibility for my actions. If I left you with that impression. I want to be clear. I do take responsibility for my actions … I think it’s clear that credit standards over all got loose, too loose and that there were assumptions made. And I think risk over all wasn’t respected across the industry and we participated in that industry. I’m not trying to avoid your questions, senator. I mentioned my feelings about what I did. I don’t have regrets about doing things … but we were participants in an industry that got loose.”

Mr. Swenson is more defensive. “We did not cause the financial crisis,” he says. “Specifically to the mortgage desk, I do not think that we did anything wrong.”

And last but not least, Mr. Tourre says he is “sad and humbled about what happened in the market.” But he says he agrees with his colleagues’ assessment that their conduct was proper.

Mr. Pryor concludes that the panelists — and their industry — just do not get it when it comes to ethics. “All of you have said basically throughout the course of this hearing that really there’s not a real clear ethical standard,” he says. “That there aren’t bright lines about what you can and can’t do, and you wear different hats.”

The senator suggests that he and his colleagues should spend some time thinking about Wall Street’s ethical code, or lack thereof.

1:25 p.m. |A Lesson in Market-Making

Dan Sparks, the former head of mortgage trading, has taken on the professorial role of the hearing. Perhaps it’s fitting, since Mr. Sparks has been a guest instructor at his alma mater, Texas A&M. And Mr. Sparks is perhaps the most neutral person on the panel — if anyone is — because, as he notes, he’s not on Wall Street anymore.

Market-making, Mr. Sparks says, is different from the creation of new investments. He points out that creating a deal like Abacus has its own sets of rules around disclosures, but that was only a piece of Goldman’s mortgage business. The other part, he says, is market-making. In that area, banks like Goldman offer to buy and sell various investments from parties all over the markets. That keeps the markets rolling. The banks provide what they call liquidity — i.e., the juice that keeps market trading flowing.

But, Mr. Sparks says that in market-making, “it’s just trading products that were already created.”

Senator Mark Pryor, a Democrat from Arkansas, hears the financial lesson, but he wants to move to the course known as “Ethics.” He asks Mr. Sparks what ethical standards there are in market-making. Mr. Sparks says there were sessions held at Goldman on ethics. He says the sessions followed Goldman standards but they factored in industry standards.

“I found them to be typically very well thought out,” Mr. Sparks says.

1:02 p.m. |A “Fig Leaf” for Paulson

Senator McCaskill, Democrat of Missouri, wants to talk about the Goldman deals, and she starts off on Abacus 2007-AC1, the deal that is at the center of the S.E.C. case.

She turns to Mr. Tourre and he attempts explain the involvement of John A. Paulson, a hedge fund manager who was negative on housing. And he says, “Ultimately, ACA selected the reference portfolio,” referring to ACA Management, the firm that was supposed to pick what went inside the deal.

But Ms. McCaskill is accepting none of that. “I don’t think anybody was ever in the room but Paulson … Let’s be honest — this was a Paulson deal.” She adds, “You put ACA in there as some sort of fig leaf.”

Now she moves on to Timberwolf, one of the 2007 C.D.O.’s the committee is focusing on. She notes that it was managed by Greywolf Capital, which is run by former Goldman workers. (Go here for details about the Greywolf team.)

She then points to e-mails that the four Goldman witnesses can’t find in the mounds of exhibits. Mr. Sparks, his face turning red, speaks up and tries to clarify about some of her points. He tries to explain the nuances of bid and ask spreads — the verbiage of trading with a dealer like Goldman.

The senator returns to ACA Management and she initially pronounces the firm as one word, as if it sounds like “Ah-Ca.”

Mr. Tourre corrected her. “Oh, A.C.A., senator,” he responds, pronouncing each letter, as is typically done in that firm’s name.

[A sharp reader corrected us after we initially attributed the "Ah-Ca" pronunciation to Mr. Tourre.]

12:39 p.m. |Those Mushy-Gushy E-Mails from “Fabulous Fab”

Senator Coburn ranges through several topics and dry answers full of technical wording proceed. But then he turns to Fabrice Tourre and asks him about those mushy-gushy e-mail messages he wrote back in 2007. Last weekend, Goldman, not the Senate, was first to release Mr. Tourre’s e-mails with a girlfriend. (See this article.)

Mr. Coburn asks, “How’d it make you feel when they were released publicly?”

Mr. Tourre, who is on a paid leave from Goldman, replies: “As I will repeat again, Dr. Coburn, I regret these e-mails. They reflect very badly on the firm and on myself, and I think you know I wish I hadn’t sent those.”

Mr. Coburn wants to know about Mr. Tourre’s lawyers. Has he spoken to Goldman’s lawyers? Yes, Mr. Tourre says.

And what about Mr. Tourre’s own lawyers, like Pamela Chepiga of Allen & Overy, Mr. Coburn asks. Are Mr. Tourre’s lawyers paid for by Goldman Sachs?

Mr. Tourre replies, “Yes.”

The woman behind me groans, “Geez.”

12:25 p.m. |Coburn Joins the Fray

Senator Tom Coburn, the ranking Republican member of the committee, has arrived. Mr. Coburn was tied up at a meeting on the national debt at the White House. (More details on that meeting can be found here.) He says the debt problem is “a little bit bigger than this one.”

Mr. Coburn delivers his opening remarks, belatedly. He says, “The questions we’re going to ask the witnesses today should also be asked to the other leading Wall Street banks.”

The key question, he says, is “whether Goldman Sachs was making proprietary trades that were contrary to the financial interests of their clients.”

Then he dives into his questions. First one is for Mr. Swenson, the most reserved panelist, and points to a document in which Mr. Swenson was not so reserved. It is Mr. Swenson’s personal self-evaluation from 2007, in which he wrote he saved Goldman “hundreds of millions of dollars” by not shoring up a mortgage bond program called GSAMP. That was a program that Goldman’s clients wanted the bank to support in pricing, since the bank had created it.

Let’s pause for a moment, for those of you interested in the way Goldman workers review themselves. These evaluations and others written by these panelists can be found in exhibits 54 and 55 of the document dossier. Flipping to the self-review by Mr. Tourre, for instance, shows that he wrote that he had “acted as a mentor for 2 analysts this year … have been able to help them take career advice, guide them through the choices they have to make…”

The names of the workers mentored by Mr. Tourre have been blacked out. But if any of those workers want to speak up about the advice Mr. Tourre gave them, feel free to e-mail me at [email protected].

12:10 p.m. |Kaufman Tackles Wall Street’s Risk-Taking

Senator Kaufman is roaring. You may recall he was appointed in 2008 to take over Joe Biden’s seat in Delaware, when Mr. Biden was elected vice president.

Mr. Kaufman has proposed some of the regulatory legislation that would go the furthest. He’d flip Wall Street on its head, if he had the chance, bringing back rules to split up large financial companies so that trading was separate from deposit taking. He would also like to cut down the size of firms like Goldman.

Mr. Kaufman’s starting concern is the bad loans that were pumped out. Goldman, of course, did not make many of those loans, despite its ownership of some on-the-ground mortgage companies like Avelo, Senderra and later Litton Loans. (Here is a Web site that has some information on some Goldman-related mortgage entities.)

But Goldman was a player in the securitization world — that’s the space that became so popular before the financial crisis but is now basically dead. In securitization, bankers packaged loans, like mortgages, up into vehicles and sold shares in them. Some of these vehicles were then bundled again, into C.D.O.s.

So Mr. Kaufman turns to Mr. Sparks, the Texan former mortgage head. The senator asks, “Did you ever say, ‘I wonder what’s going on with those loans?’”

Mr. Sparks says he was concerned. “I was concerned about risk that we…”

The senator says it was not simply O.K. that everyone on Wall Street was grabbing risky mortgages to bundle. “These halls are full of folks who’ve come before Senate committees and said, ‘Well, everybody was doing it.’”

The two go back and forth, and then Mr. Sparks says he has a point to make: “I would like to make a point that that team may’ve liked that risk and in fact did.”

Mr. Kaufman asks, “Liked the risk?” He questions how investors could want mortgage bonds based on mortgages where homeowners could simply make up their incomes. These loans, known as stated-income loans, have turned out to perform horribly.

The senator says: “I don’t think anybody in America wants to buy a mortgage from someone whose income is what they stated their income to be. I don’t think anybody wants to buy that. Is that fair?”

Of course, there were investors who wanted these mortgages, in so far as they purchased bonds that included them. But the train of who knew what on the risks in the system and the quality of these loans lingers.

11:55 a.m. |Discussing Tourre’s E-Mail

Ms. Collins has her documents ready to go. First to #61. In that e-mail message, Mr. Tourre wrote about the sorts of investors he was looking for back in December 2006. He and his colleague, Jonathan M. Egol, were circulating a list of “correlation clients.” (They were “correlation traders,” which means they bet on the likelihood that mortgage bonds were or were not likely to behave in similar ways.)

Mr. Tourre wrote, “This list might be a little skewed towards sophisticated hedge funds with which we should not expect to make much money.” He notes that these investors “know exactly how things work and will not let us work for too much $$$.”

Mr. Egol is not here today, and he has not been charged in the S.E.C. case. But he is known to have masterminded many of Goldman’s Abacus deals. And we wrote about him in December (see here).

The questions continue, and Senator Collins says she thinks the Goldman team is dissembling.

Senator Levin pipes up to say that there will be no dodging of questions. “We’re going to stay here as long as it takes to get the answers.”

Now, onto Senator Kaufman…

11:47 a.m. |What Is Wall Street’s Duty?

Senator Collins takes over the interrogator’s role, and she has a question, one that’s on so many people’s minds: What duty do Wall Street firms have to clients? Do they have a duty to act in the best interests of clients? (This is piercing, of course, because Abacus and other Goldman deals did not turn out well for the people who bought them.)

Ms. Collins goes person by person, from Mr. Sparks to Mr. Tourre.

Mr. Sparks says “I believe we have a duty to serve our clients.”

Mr. Swenson and Mr. Tourre both say that Goldman’s responsibility is to provide market prices, bid and asks and “fair market prices,” as Mr. Swenson says. Mr. Tourre adds, “I do not believe we are acting as investment advisers for our clients.”

Mr. Birnbaum’s answer, though, is music to the senator’s ears. The former Goldman trader (who now runs his own hedge fund) says yes, there is a duty to act in clients’ best interests. And, he says, “I believe we did.”

And, later, Mr. Birnbaum offers that “I want to clarify I worked with these gentlemen for years, and I think they share my sentiments on this issue, even if that’s not what you’re getting from them right now.”

Ms. Collins scoffs. She asks Mr. Birnbaum if he thinks Congress should create a law that puts more responsibility on banks to act in the best interest of his clients.

He’s hesitant. “I think conceptually that that does not seem like an issue,” he says.

11:38 a.m. |Subprime Loans and Goldman’s Bets

Now we’re onto document #73, turn the page. The topic is Fremont loans – those mortgages made by one of the worst subprime originators.

The e-mail is from a woman named Melanie Herald-Granoff, someone not here today, sent to Gail Kreitman. Mr. Sparks asks for time to read it. And he says: “Fremont originated subprime loans. People understood that.”

He points out that it appears to him from the e-mail that the client did not jump in on the deal. He says he thinks Goldman lost money on positive bets in the deal, but Mr. Levin is only interested in what Goldman might have made in negative bets in the deal.

Onward! Turn the page again, to document #105 to talk about the Timberwolf C.D.O. — keep your fingers moving to stay up to speed.

Mr. Levin reads an e-mail that was sent on June 22, 2007, from Tom Montag to Mr. Sparks that refers to Timberwolf as bad deal, using a vulgar term.

Mr. Levin says the e-mail was from the sales force, and Mr. Sparks jumps in, “Mr. Chairman, this e-mail was from the head of the division, not the sales force.”

(Mr. Montag later joined Merrill Lynch in the summer of 2008 and is now a top executive at Bank of America, running that bank’s investment bank and trading operations.)

Mr. Levin says Goldman continued to sell Timberwolf after that e-mail. Mr. Sparks says he does not recall. Mr. Levin uses the vulgar term referring to the deal many more times.

Mr. Sparks gives his own interpretation of Mr. Montag’s e-mail, saying: “The message I took from Mr. Montag was that my performance on that deal was not good.”

11:23 a.m. |On to the Q.&A.

The questions begin. Each senator will have up to 20 minutes for questions.There are nine senators sitting upfront as of now. So do the time-clock math.

Mr. Levin starts with Dan Sparks and tells him to take out the hulking exhibit book. Like a student in an oral exam, Mr. Sparks takes up the book, turns to the instructed page and gets ready for the grilling.

Mr. Levin starts with the Anderson Mezzanine deal, one spun out by Goldman in early 2007 and one that contained short positions within it. It was, like most of the controversial deals now, a synthetic C.D.O. It had no real mortgage bonds in it. Rather, it was constructed of derivatives called credit default swaps. These are insurance policies on mortgage bonds.

Document 94 – about halfway through. Here we see the list of mortgage bonds that were insured by Goldman. Mr. Levin points to the name “Goldman Sachs-Other Desk” listed next to so many of the short positions.

Mr. Sparks says, “That doesn’t mean that Goldman Sachs wasn’t doing that trade with another client.” He says he cannot tell from this document if Goldman was in fact doing some other sort of trade with clients to pass on this position.

Mr. Sparks, calmly, slowly says, “Anybody participating in it should look at the assets themselves.”

It’s the sort of free-world, free-market, watch-your-own-back sort of logic that Wall Street has come to tout. The investors in these deals are sophisticated investors. And many on Wall Street, including Goldman, say that means those investors should analyze the risks for themselves.

But Mr. Levin wants to know about moral obligations. He says, “Don’t you also have a duty to disclose an adverse interest to your clients?”

Mr. Sparks says, “The question about how the firm is positioned ? Or our desk is positioned?”

Mr. Levin demands, “If you have an adverse position… ”

Mr. Sparks replies back, “Mr. Chairman, I’m just trying to understand…”

Mr. Levin, “No, I don’t think you want to answer … You’re not going to answer the question it’s obvious.”

Mr. Levin goes on to say that the Anderson deal was downgraded from AAA to junk in seven months.

11:08 a.m. |Hearing Turns to “Fabulous Fab”

Now to the Goldman employee who has gained perhaps the most notoriety in the last few weeks, Fabrice Tourre, or “the fabulous Fab” as he called himself in an e-mail message a two years ago.

Mr. Levin turns to him, “Mr. Tourre,” and asks the question on many people’s minds: Am I pronouncing that right? (News programs have oscillated between pronouncing it as “Tour-ray” and as “Tour.”) Turns out it sounds like “tour.”

Mr. Tourre, of course, is the single Goldman employee who was named in the S.E.C.’s complaint. Mr. Tourre oversaw Abacus 2007-AC1, a mortgage deal in the spring of 2007 that came out even after Goldman’s top executives had realized the problems in the mortgage market.

Mr. Tourre jumps right to the case. “I deny — categorically — the S.E.C.’s allegation. And I will defend myself in court against this false claim,” he declares, his French accent ringing.

The hedge fund manager John Paulson was negative on mortgages and Mr. Tourre allowed him to help design Abacus 2007-AC1. The S.E.C. says his involvement should have been disclosed and that ACA Management, the deal manager, was misled.

Mr. Tourre says that he was “surprised” that ACA could have believed that Paulson was long on the deal.

“I did not mislead IKB or ACA, two of the most sophisticated investors in these products anywhere in the world.” IKB is a German bank.

Mr. Tourre also says that “none of my clients were individual, retail investors.”

That, of course, rings oddly next to an e-mail message he sent in 2007, as released by Goldman on Saturday. That e-mail message says to a girlfriend, who also worked at Goldman. “Just made it to the country of your favorite clients [Belgians]!!! I’m managed to sell a few abacus bonds to widows and orphans that I ran into at the airport, apparently these Belgians adore synthetic abs cdo2.”

Mr. Tourre did not mention that e-mail in his testimony.

11:03 a.m. |A Similar Story From Michael Swenson

Michael Swenson starts to read his own testimony. He has been at Goldman since 2000, a relative newcomer compared to the previous two workers. He worked very closely with Mr. Birnbaum on the asset-backed security trading desk.

Mr. Swenson tells a similar story to Mr. Birnbaum’s on their mounting long position in late 2006, as they serviced clients who wanted to sell the ABX index to them. He also tells about the Dec. 14, 2006 meeting that Mr. Sparks described. He uses the same catchphrase as the others. Goldman executives, he says, instructed them to get “closer to home.”

He says that in the spring of 2007 his desk in fact reduced the short positions – negative bets they had put on against problems in the mortgage market, but then, he say, “later in the quarter, the ABS desk increased its short position after it took on the C.D.O. warehouse inventory from the C.D.O. origination group.”

What he’s referring to is a consolidation that occurred within the firm. As other workers were pushed out, Goldman managers took over old C.D.O. positions and put them into a consolidated book. Mr. Swenson is attributing the shorts in this period to the need to balance those positions.

Mr. Swenson’s point, it seems, is that his desk bought and sold as a “market maker” rather than as a market player. He says on many occasions the bank took positions that reduced profits. “By reducing short positions, we left money on the table,” he says.

10:55 a.m. |Josh Birnbaum’s Turn

Josh Birnbaum is up next. Like Mr. Sparks he points out that he joined Goldman right after graduating from college. (He went to the Wharton School at the University of Pennsylvania.)

Mr. Birnbaum worked in 2006-2007 on Goldman’s asset-backed securities desk. Before the crisis hit, that desk was a bit like the returns counter of a department store. It existed to help customers return stuff they did not want. But by 2007, that desk became a seat of action, because it helped manage Goldman’s position in the ABX – an index that represented subprime mortgage exposure.

That index, created in 2006, has been a point of focus among mortgage traders, because its price movements became a new factor in mortgage pricing in the last few years. Traders suddenly had something to benchmark their prices from aside from just mortgage cash flows and delinquency data.

Mr. Birnbaum says that in 2006, most customers wanted to sell positions in the ABX rather than buy them.

That, he says, pushed Goldman to have a long position in the ABX by the end of 2006 -– just as the crisis was brewing. He says that long position was created in the spirit of serving customers.

Mr. Birnbaum says Goldman management told him at times to “get closer to home” — meaning he should take on negative bets to balance the long bet in the ABX. He says in late 2006, he was told to counterbalance his long risk, the positive bet.

But by early 2007, Mr. Birnbaum says he had a negative view on the subprime market. “Not everyone in the mortgage department or firm for that matter agreed with my view at the time,” he says.

He says that no one from senior management told him to bet against subprime mortgages.

Mr. Birnbaum does not mention that by August 2007, he was pushing Goldman’s management to go long on mortgages, to the tune of $10 billion. This was reported in The New York Times a week ago and that came out in Senate emails in the last few days.

Mr. Birnbaum now runs his own hedge fund, called Tilden Park Capital Management. He left Goldman in 2008.

10:53 a.m. |The Witnesses Begin Testifying

Dan Sparks, the former head of Goldman’s mortgage trading unit, leads off the witnesses. He led the unit from 2006 to mid-2008, but he spent the bulk of his career at Goldman, joining in 1989.

Mr. Sparks is a Texan. He went to Texas A&M and has remained a devoted football fan, traveling back to his alma mater for games. When he won an alumni award there in early 2009, he said “There’s going to be great opportunity when we get through all of this [financial turmoil]…what a great time to learn.” See here for more.

Like so many bankers, Mr. Sparks said when he joined Goldman he thought he’d only stay two years.

He starts to tell the story that has now become epic: in late 2006, he says, he “had concerns about our exposures and senior management knew about those concerns.” He describes the meeting with David Viniar and says “I was not instructed to ‘go long’ or ‘go short.’ The focus was on risk and not direction.”

In fact, he says, knowing whether Goldman was actually long or short was “often difficult.” The Goldman workers could not figure out just what it was they held.

Mr. Spark’s departure from Goldman has remained a topic of intrigue for Goldman watchers. He left in the spring of 2008. He says it was to spend more time with his family and community and to “pursue other interests.”

He says he is proud of the work he did at Goldman but that he understands that “events in the nation’s mortgage market contributed to the financial crisis of 2008 and to the recession.”

10:51 a.m. |More Opening Remarks

Senators Ted Kaufman and John McCain, Republican of Arizona, make short remarks. Mr. McCain says, “I don’t know if Goldman has done anything illegal.”

But, he says, “There’s no doubt their behavior was unethical and the American people will render a judgment as well as the courts.”

Senator Claire McCaskill, a Democrat from Missouri, says: “It’s gambling, pure and simple, raw gambling..You are the bookie, you are the house.”

She continues: “You have less oversight than a pit boss in Las Vegas. It’s not just you. All of you were lemmings like you were chasing each other … You were chasing compensation, you were chasing your colleagues in other investment banks and you were trying to make a killing.”

Now, the four first witnesses stand and are sworn in. Goldman’s turn begins.

10:44 a.m. |Finding a Bad Smell

Ms. Collins echoes Mr. Levin’s remarks on the bad smell around Goldman’s deals, even if they are found to have been legal. She says that “even legal practices may raise ethical concerns.”

“There is something unseemly about Goldman betting against the housing market at the same time that it is selling to its clients mortgage-backed securities containing toxic loans. And it is unsettling to read emails of Goldman executives celebrating the collapse of the housing market when the reality for millions of Americans is lost homes and disappearing jobs.”

So far, no one has mentioned that in 2007, Goldman not only profited as a firm for its “big short.” The bank also was able to pay out huge bonuses to its workers and executives. The bank’s chief, Lloyd Blankfein, personally received nearly $70 million. A Wall Street record.

Of course, Mr. Blankfein took no bonus in 2008, when Goldman lost some money in mortgages. And he took all stock in 2009. But that 2007 figure pops out in just about any conversation you have on Wall Street pay. Mr. Blankfein will testify later today.

10:30 a.m. |Recalling the Great Depression

As he concludes his remarks, Mr. Levin turns to remarks that he attributes to senators during the 1930s, as they investigated the causes of the Great Depression.

He reads: ““[Investors] must believe that their investment banker would not offer them the bonds unless the banker believed them to be safe. This throws a heavy responsibility upon the banker. He may and does make mistakes. There is no way that he can avoid making mistakes because he is human and because in this world, things are only relatively secure. There is no such thing as absolute security. But while the banker may make mistakes, he must never make the mistake of offering investments to his clients which he does not believe to be good.”

Mr. Levin wraps up with a strong push for support for financial regulatory reform. “This market of ours isn’t free of self-dealing or conflict of interest. It is not free of gambling debts that taxpayers end up paying.”

He says, “I hope this Congress will follow the example of another Congress, eight decades ago, and enact the reforms that will put a cop back on the Wall Street beat.”

Mr. Levin thanks the ranking Republican member, Senator Tom Coburn of Oklahoma. He says Mr. Coburn is involved with some work at the White House and will be here later. Senator Susan Collins, Republican of Maine, begins to speak.

10:23 a.m. |More From Levin

Mr. Levin has put up a large display showing Goldman’s position in subprime mortgage assets from November 2006 until August 2007. Three lines fall across the page — a green one for investments in subprime mortgage loans, a blue one for subprime mortgage backed securities and a red one for the total of the other two.

Mr. Levin asserts: “Goldman says these bets were just a reasonable hedge. But internal documents show it was more than a reasonable hedge — it was what one top executive described as ‘the big short.’” (That top executive was David A. Viniar, who coined the phrase “the big short” long before Michael Lewis’s new book with that title came out.)

Mr. Levin refers to the S.E.C. complaint against Goldman. He says the S.E.C. and courts can figure out whether Goldman broke the law. What he is interested in is a question of “ethics and policy: Were Goldman’s actions in 2007 appropriate, and if not, should we act to bar similar actions in the future?”

An audience member at this moment mutters: “Hell yes.”

Mr. Levin goes on to refer to other deals like Anderson Mezzanine, and he points out that Goldman did not support one of its old mortgage programs, called GSAMP.

He reads from the performance review of Michael Swenson, a mortgage trader who will soon testify. Mr. Swenson wrote in late 2007: “I said ‘no’ to clients who demanded that GS should ’support the GSAMP’ program.”

10:12 a.m. |Carl Levin’s Opening Statement

Thirty or more photographers swoon around four Goldman workers as they file in. The first panel.

Senator Carl Levin of Michigan, the Democratic chairman of the subcommittee, is giving his opening statement. Mr. Levin says, “Goldman’s actions demonstrate that it often saw its clients not as valuable customers but as objects for its own profit. This matters.”

Mr. Levin questions what Goldman and Wall Street have become by profiting when their clients get hurt.

Sitting alongside Mr. Levin are several other lawmakers, including Senator Ted Kaufman, Democrat of Delaware.

Mr. Levin has many areas of focus, including: Goldman’s role in building the mortgage machinery that got out of hand, Goldman’s short position in 2007 and Goldman’s use of investment vehicles it sold to clients in 2007 to go short. These vehicles are known as synthetic collateralized debt obligations. One Goldman C.D.O. called Abacus is at the heart of the S.E.C. complaint against Goldman.

“Increasingly, synthetics became bets made by people who had no interest in the refenced assets. Synthetics became the chips in a giant casino, one that created no economic growth even when it thrived, and then helped throttle the economy when the casino collapsed.”

Goldman, for its part, has created a new Web site to tell its side of the story.

10:05 a.m. |A Look at Greg Palm

You may remember Greg Palm from Goldman’s conference call last week. Mr. Palm pointed to Goldman’s loss on the Abacus deal in the S.E.C. case and said that was evidence that Goldman had “skin in the game.” I wrote the next day about how Goldman actually wanted to sell that part of the Abacus deal. See article here.

You might also remember that Mr. Palm was one of the two Goldman executives who personally had financial troubles during the financial crisis and received a personal bailout from Goldman. See here for more.

9:57 a.m. |Hearing Is Beginning

The audience is filing in and four people from Code Pink ( are dressed in mock jail suits. They yell out “We want these guys in jail” and “We want our jobs back.” They say the Goldman workers are “bank-sters.” Cameras gather around them. A policeman walks up to them. One woman yells out that they’re being threatened with arrest right now. She yells out “These guys are the real crooks.” The Code Pink people sit down and the audience applauds.

Meantime, Goldman’s lawyers and lobbyists are filing in. Greg Palm, the general counsel of Goldman, plows through the Senate exhibits, which were passed out in a fat book.

A Preview of the Hearing

Goldman Sachs was accused of securities fraud less than two weeks ago by the Securities and Exchange Commission. But Lloyd C. Blankfein, Goldman’s chief executive, and six other current and former executives of the firm are already scheduled to take the stand on Tuesday. They include Fabrice P. Tourre, who was also accused of fraud. They will testify about the firm’s activities in the mortgage securities market.

The mortgage investment that was the focus of the S.E.C. case, called Abacus 2007-AC1, is bound to come up. But the Senate Permanent Subcommittee on Investigations is also expected to ask about scores of other mortgage securities that Goldman created in 2006 and 2007, like Hudson Mezzanine and Timberwolf.

The Senate subcommittee will also probably question Goldman’s short position, or bet, against the housing market. The subcommittee contends that the firm began to aggressively short mortgage-backed securities in 2007; Goldman says it did not have a consistent, substantial short bet.

This is the subcommittee’s fourth hearing on the financial crisis. But perhaps because of Goldman’s vaunted status, it is the most anticipated. The length and tenor is likely to depend in large part on the senators’ questions.

The executive ranks of Goldman’s representatives will increase in seniority as the day proceeds. First, four people from the mortgage and structured products business will testify. Two of them have left Goldman — Daniel L. Sparks and Joshua S. Birnbaum. One is still working there full time — Michael J. Swenson — and the other is Mr. Tourre, who has been on paid leave since last week.

The second panel will include David A. Viniar, the chief financial officer, and Craig W. Broderick, the chief risk officer. The day will conclude with Mr. Blankfein, who appears unlikely to cross Mr. Tourre’s path. Goldman released Mr. Blankfein’s prepared testimony on Monday afternoon.

The Senate hearing is scheduled to begin at 10 a.m. Eastern time.

– Louise Story

Go to Live Video from MSNBC »
Go to Article from The New York Times »
Go to Prepared Remarks of Fabrice Tourre and Others from Goldmanl »
Go to Prepared Testimony from Lloyd C. Blankfein »
Go to Opening Statement from Senator Carl Levin »
Go to Exhibits from the Senate Permanent Subcommittee on Investigations »
Go to Related Article from The New York Times »
Go to Hearing Schedule from the Senate Permanent Subcommittee on Investigations »
Go to Related Item from DealBook »
Go to Related Post from White Collar Watch »
Go to DealBook’s Full Coverage of the Goldman Sachs Fraud Case »

Financial Services, Investment Banking, The Goldman Fraud Case, Top Headline, Wall Street Bailout, Abacus, Carl Levin, Collateralized Debt Obligations (Des);, Craig Broderick, Dan Sparks, Daniel Sparks, David A. Viniar, David Viniar, Fabrice P. Tourre, Fabrice Tourre, Financial Regulatory Reform, Goldman Sachs, Joshua A. Birnbaum, Lloyd C. Blankfein, Michael J. Swenson, Mortgage-Backed Securities, Senate Permanent Subcommittee on Investigations, Subprime Mortgage Crisis

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Mark K.

Los Angeles

April 28th, 2010

12:13 am

This is a defining moment in the financial history of our nation, much like the passage of the securities acts of 1934 were a reaction to the fraud and other trading excesses of the late 1920s.

The question is can the democrats craft a bill that regulates derivatives while not wiping out the ability and motivation of financial institutions and individuals to work in creative and productive ways.

The other question is whether the republicans can set aside partisanship and do, for once since this president was elected, the right thing.

Maybe on the first question. Impossible on the second.




April 28th, 2010

12:13 am

Think about all of the causes of the crisis that we are ignoring by just focusing on the bankers. Consumers purchased homes that they couldn't afford, but were able to obtain loans because credit standards were lax. Mortgage brokers sold mortgages that consumers couldn't afford or didn't understand. Those mortgages were packaged into debt securities to be sold to investors and given AAA ratings by ratings agencies that either didn't understand what they were reviewing or gave the securities high ratings because they were being pressured by the banks who were packaging the loans who could make the ratings agencies compete for business.

Congress was encouraging homeownership by asking Fannie Mae and Freddie Mac to issue riskier loans from consumers who probably had no business being homeowners.

Banks took on too much debt, and didn't have enough margin for error when things went bad. They also risked the survival of their firms to generate high short term profits and pay large bonuses.

The regulators chose to loosely regulate.

AIG insured debt using credit default swaps, but didn't hold enough reserves in case they actually needed to pay claims.

And everyone assumed that housing prices would never go down, and that fact would solve all of the potential problems listed above.

Recommend Recommended by 0 Readers



Palo Alto

April 28th, 2010

12:13 am

The first group of Goldman executives were floundering a bit. Except for the constant smirk, on CEO Lloyd Blankfein's face, he did pretty well. He honestly believes his firm did nothing wrong, which simply illustrates how corrupt the whole system is. When firms can create 'toxic assets' label them 'investment grade', sell them to investors, and hold huge short positions without full disclosure they are engaging in blatantly dishonest behavior. What's worse is Blankfein, and his firm, see absolutely NOTHING wrong with this. Of course the central questions remains; if these guys are so smart why did the taxpayers have to bail them out?

Recommend Recommended by 7 Readers




April 28th, 2010

12:13 am

Incredibly sad describes my emotional state. If money cannot be applied effectively to further core values for humanity at large, what good is it?

Recommend Recommended by 7 Readers



Davis, CA

April 28th, 2010

12:13 am

I watched the Senate hearing on C-SPAN and had a good time watching GS counsel squirm. I thought the hearings provided a pretty good view of the GS's disconnect.

I support a Consumer Financial Protection Agency. Supporting a laissez-faire-Entropy environment is in no one’s interest as we all go into deep waters...

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Washington, DC area

April 28th, 2010

12:13 am

I do not necessarily think that Goldman Sachs broke the law, but I do think that the securities laws are broken. Wall Street has been reduced to the status of a poorly-regulated casino. I don't necessarily blame Goldman for making money off the situation, but I do hope that Congress will use this debacle to tighten the rules. For starters: ban naked credit default swaps and synthetic CDOs, increase capital requirements for financial institutions (including investment banks), and move the bulk of permitted derivative trading to an exchange. Subject the rating agencies to annual audits by the U.S. government, and dramatically increase the enforcement budgets of the SEC and the CFTC. It's time to return the capital markets to their original purpose: investing in real economic activity and allocating capital.

Recommend Recommended by 2 Readers


Scottsdale Jack

Scottsdale, AZ

April 28th, 2010

12:13 am

If Obama really was a radical instead of a cautious centrist, the first thing he would have done was to have said "time out" when the Bush/Paulson bailout plan was handed to him to finish. If he would have put a stop to that nonsense, maybe let the big banks and investment houses crumble and then nationalize the entire lot, all of these "masters of the universe" might have honest jobs doing something useful for society now instead of still trying to sell us all on what great work they do swindling people.

Recommend Recommended by 6 Readers




April 28th, 2010

12:13 am

To quote the last line from Dim's post on the comments section of Brooks Column today -

"And trust me, they are not so smart as nuclear physicists are smart. They are smart as John Gotti is smart."
Dim from Texas

Recommend Recommended by 7 Readers



Washington, DC area

April 28th, 2010

12:13 am

How sad that Goldman Sachs, the once-revered investment advisor, is no more. In its trading unit of 2010, Goldman seems more akin to a shady racetrack tout. If nothing else, Congress should ban naked credit default swaps and synthetic CDOs (collateralized debt obligations), which are nothing but elaborate bets on economic activity taking place elsewhere. If American consumers are now wondering why financial institutions have nothing to lend small and large businesses, homebuyers and ordinary families, it is largely because the credit markets are tapped out as a result of gambling with borrowed money. The gaming industry created by synthetic CDOs and naked CDS made the financial crisis worse than it otherwise would have been by creating a betting parlor for dubious deals. I'm ready to see the capital markets get back to the business of raising money for real economic activity that would create products, services nd jobs. I hope that Congress sees it the same way and bans naked CDS and synthetic CDOs, while increasing capital reserve requirements.

As for Goldman's dual roles as an advisor and a market maker: this is standard operating procedure, but another possibility is separating these functions into separate entities and regulating both activities more stringently. It is a sad thing that gaming commissions frequently regulate casinos more stringently than federal and state authorities regulate the securities industry.

Recommend Recommended by 4 Readers



san luis obispo, CA

April 28th, 2010

12:13 am

To those who suggest that it is only the American people who are responsible for this debacle, and the folks at Goldman are being unfairly scapegoated, I would like to point out the following:

1) Although many Americans took out bad mortgages, the majority, in fact, did not. Furthermore, many have now lost their homes not through foolish speculation, but through job loss resulting from the recession. Now the majority who did not engage in foolish and speculative behavior have been forced to save the country from financial ruin via our taxes.

2) Bankers and investment advisors should be held to a higher standard of behavior than the average citizen because they are expert and have a greater understanding than the average person. Also, because of their more entitled status in society, they should be held to a higher than average standard of ethics because they have the means, resources, education and intelligence to be able to understand and act on an ethical system.

3) When individuals took out faulty mortgages, their debts were never leveraged more than 1:1. When investment bankers traded in CDO's, they were leveraged as much as 50:1. This would be equivalent to me borrowing $50 million (from China) against my $1 million dollar house, going to Vegas, losing, then being bailed out by my town government because I was "too big too fail." I would then take my bailout money and use it to buy up all my neighbor's houses, because some of them had defaulted on bad mortgages, or their banks had jacked interest rates on what had been fairly reasonable mortgages to pay for some of the 1:1 defaults, but even more, to pay for my toxic 50:1 debt.

And some of you are shocked, shocked!, that people are so angry at the investment bankers. If you're an investment banker, and your friends are investment bankers, and your friend's friends are investment bankers, I suggest you may have a skewed perspective.

Recommend Recommended by 14 Readers




April 28th, 2010

12:13 am

Not impressed by any of the Goldman Sachs peeps..they are just low life common casino criminals.

Recommend Recommended by 5 Readers




April 28th, 2010

12:13 am

"He means that customers do not think Goldman would sell something it thinks is junk, or the more vulgar word that the senator used. (Forgive him, though, he was citing Goldman employees in e-mails.)"

Give me a break - use the word that the Senator from Michigan used in an important hearing. This isn't a children's book.

Recommend Recommended by 0 Readers



New York

April 27th, 2010

11:31 pm

Where were the senators when their constituents were treating there homes like an atm.

Recommend Recommended by 1 Readers


concerned citizen


April 27th, 2010

11:31 pm

this will soon fade away with none of our taxpayer money returned - they'll keep their bonuses, they won't go to jail, and a watered down "bill" will do nothing to stop this excess in the future.

Recommend Recommended by 5 Readers




April 27th, 2010

11:31 pm

The usual empty posturing by politicians. Watch what happens, even with regard to something as simple and basic as encouraging the SEC actually enforce the laws that are already on the books, after the TV crews go home. Prediction? Nada.

Recommend Recommended by 2 Readers




April 27th, 2010

11:31 pm

I saw a lot of the testimony. I'm no fan of Goldman, but I found the senators' grandstanding rather annoying. For one thing, they didn't really seem to understand the deal(s) in question. In general, they seemed to be going for sound bites of them scolding rich bankers. Well, I don't find that reassuring. I don't think that advances the interests of the American people. What are their solutions?

Recommend Recommended by 4 Readers



La Grange, TX

April 27th, 2010

11:31 pm

Thought these men made Levin look like a frustrated, petty old man...

Recommend Recommended by 2 Readers



Paris, France

April 27th, 2010

11:31 pm

What I'm coming away with is that although Goldman may have astutely reduced its exposure and bet against the market in 2007 based on "dislocations" it detected at the time, it continued to feed the financial system with toxic securities to grow its short positions. So when markets turned, they must have gloried in the collective punishment of fools. But since the fools were other financial institutions, they also helped to scuttle the ship that carried them all. Polish jokes come to mind...

Recommend Recommended by 3 Readers



Seattle, WA

April 27th, 2010

11:31 pm

I find it interesting that all of the Republican party member moral indignation (with very few exceptions) lasts until the television cameras are turned off or until a sealed envelope gets stuffed into one of their pockets. After that, its business as usual.

Recommend Recommended by 7 Readers




April 27th, 2010

11:31 pm

The outstanding impression of today's hearing: A bunch of young, arrogant men whose only measure of conduct was "Does it make me money?" And their clients, their fellow man, the economy of their country? Shrug, irrelevant.
They should be made to perform public service by helping the thousands upon thousands of people whose lives they ruined.

Recommend Recommended by 8 Readers




April 27th, 2010

11:31 pm

@ American Expat (#105) - Many of the top people working at Goldman did not go to school as business majors- they were math majors, econ majors, even physics majors. It is not the accounting that makes these people insanely smart and successful- accounting is something easy you learn at grad school- it is the incredible amount of math that these people are able to do. I know someone working at Goldman very well- and he tells me stories of the people working around him with PhDs in math and physics, and how crazy smart they are.

On another topic- wow did every Senator on the panel look incredible dumb. Especially Levin. Blankfein honestly looked blown away by the sheer stupidity of the questions they were asking him. They have no idea how the market works!

Recommend Recommended by 3 Readers



New York

April 27th, 2010

11:31 pm

As a French citizen, I demand that Fabrice Tourre pays back the French state for the free education he got at the following institutions: Henri IV, Louis le Grand, and Ecole Centrale. Ecole Centrale used to form engineers, scientists and innovators; unfortunately, many of its recent alumni now work on trading floors...

Recommend Recommended by 4 Readers



West Windsor, NJ

April 27th, 2010

11:31 pm

Is liveblogging supposed to be journalism or opinion? I can't figure it out.

Why did Goldman release M. Tourre's personal emails? Anyone who bothered to read the Senate report would know. Because they were the same emails that the Senate report took out-of-context quotes from! Obviously, Goldman released the full emails to show people that the quotes were indeed taken out of context.

Tell me, if Goldman had released those emails with the pillow talk blacked-out, would you have taken them at their word or would you have thought it a conspiracy theory?

Blankfein didn't know because he's the CEO and hasn't read the emails. You're covering the story for a newspaper, trying to explain it to readers who probably didn't have the time to read them. You should've brushed up on the facts before showing up in that committee room. Took me all of thirty minutes, and I'm not being paid to do it.

Recommend Recommended by 3 Readers




April 27th, 2010

11:31 pm

This isn't about a loss of money, it's about the loss of virtue. I think these GS guys care ever so much about how they are perceived, especially the Swenson (sp?) guy, who seems especially irked that he has to sit in front of these dullards who know a quarter of what he does about finance (notice the eye rolls?). He strikes me, along with the other GS guys, as having decided a while ago to live a certain kind of life that forbids authentic philosophical reflection on that form of life, a life that yearns for wealth and social standing. I'd be willing to bet (or should I say, "manage risk") that none of these men have children who attend public school, and all belong to a private club that costs six figures to join or maintain membership. Something's rotten...

Recommend Recommended by 4 Readers



New York, NY

April 27th, 2010

11:31 pm

This blog is among the most misleading and biased reporting I've ever seen.

If I believed that our senators really don't understand the difference between a market maker and a fiduciary I'd be downright scared. Of course they do, but they're playing it for the Sarah Palin crowd. It's all a bunch of useless time-wasting grandstanding, as usual.



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