Another e-mail, sent by Jörg Zimmerman, a vice president at IKB, on March 12, 2007, to a Goldman banker in London who was working with Fabrice Tourre on ABACUS, revealed that IKB, too, had some say in what securities ABACUS referenced. “[D]id you hear something on my request to remove Fremont and New Cen[tury] serviced bonds?” Zimmerman asked, referring to two mortgage origination companies then having severe financial difficulties (and which would both later file for bankruptcy) and that Zimmerman wanted removed from the ABACUS portfolio. “I would like to try to [go to] the [IKB] advisory com[m]i[t]tee this week and would need consent on it.” The final ABACUS deal did not contain any mortgages originated by Fremont or New Century. (Zimmerman did not respond to an e-mail request for comment.) A former IKB credit officer, James Fairrie, told the Financial Times that the pressure from higher-ups to buy CDOs from Wall Street was intense. “If I delayed things more than 24 hours, someone else would have bought the deal,” he said. Another CDO investor told the paper, though, that IKB was known to be a patsy. “IKB had an army of PhD types to look at CDO deals and analy[z]e them,” he said. “But Wall Street knew that they didn’t get it. When you saw them turn up at conferences there was always a pack of bankers following them.”
The judge in SEC v. Goldman Sachs gave Goldman an extension until July 19 to file its response to the SEC complaint. On July 14, five days early, and as expected, Goldman settled the SEC’s case—without, of course, admitting or denying guilt—and agreed to pay a record fine of $550 million, representing a disgorgement of the $15 million fee it made on the ABACUS deal and a civil penalty of another $535 million. About as close as Goldman got to admitting any responsibility for its behavior was to state that it “acknowledges that the marketing materials for the ABACUS 2007-AC1 transaction contained incomplete information. In particular, it was a mistake for the Goldman marketing materials to state that the reference portfolio was ‘selected by’ ACA Management LLC without disclosing the role of Paulson & Co. Inc. in the portfolio selection process and that Paulson’s economic interests were adverse to CDO investors. Goldman regrets that the marketing materials did not contain that disclosure.” The firm also agreed to change a number of its regulatory, risk assessment, and legal procedures to make sure nothing like the disclosure snafus in the ABACUS deal happens again.
Despite the settlement of the SEC’s case against Goldman—its case against Tourre, the Goldman vice president, continues and, in January 2011, an ACA affiliate sued Goldman in a New York State court, accusing the firm of “egregious conduct” and seeking damages of a minimum of $120 million—some usually sober voices have raised questions about Goldman and its alleged behavior. The critics lament that the ABACUS deal represents the loss of the once quasi-sacred compact between a Wall Street firm and its clients. “The SEC’s complaint against Goldman raises serious issues about the level of integrity in our capital markets,” John C. Coffee Jr., the Adolf A. Berle Professor of Law at Columbia University Law School, testified before Congress on May 4, 2010. “The idea that an investment banking firm could allow one side in a transaction to design the transaction’s terms to favor it over other, less preferred clients of the investment bank (and without disclosure of this influence) disturbs many Americans.… Such conduct is not only unfair, it has an adverse impact on investor trust and confidence and thus on the health and efficiency of our capital markets.… Once, ‘placing the customer first’ was the clearly understood norm for investment banks, as they knew they could only sell securities to clients who placed their trust and confidence in them. That model was also efficient because it told the client that it could trust their broker and did not need to perform due diligence on, or look between the lines of, the broker’s advice. But, with the rise of derivatives and esoteric financial engineering, some firms may have strayed from their former business model.”
Michael Greenberger, a professor at the University of Maryland School of Law and a former director of trading and markets at the Commodity Futures Trading Commission, believes the day the SEC filed its suit against Goldman is akin to the U.S. victory in the Battle of Midway, in 1942. “What has been a great awakening is this idea that, ‘Look, we have loyalties to no one but ourselves. We can be advising both sides of the bet, that the bet is good and that’s perfectly within the mainstream of the way we do business,’ ” Greenberger explained. “That has … more than anything else, very badly hurt Goldman.” Goldman is not alone in creating these products, he said, “but the blatancy of it and refusal to acknowledge a problem with it has really been very, very sobering to a much broader audience than was there before the case.”
Added John Fullerton, the former banker at JP Morgan, in a blog post, “At its core, Wall Street’s failure, and Goldman’s, is a failure of moral leadership that no laws or regulations can ever fully address. Goldman v. United States is the tipping point that provides society with an opportunity to fundamentally rethink the purpose of finance.”
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THE SECOND BODY blow Goldman suffered began to be felt on April 24, 2010—a Saturday—when Senator Levin announced that on April 27 Goldman would be the subject of the fourth hearing of his Permanent Subcommittee on Investigations, which had been studying the causes of the financial crisis. That Levin’s subcommittee was looking into what role Goldman, specifically, had played in causing the financial crisis had been a closely guarded secret for months, and the news brought more unwanted attention to the firm. “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 Levin wrote in his April 24 press release. “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 had actually made the statement publicly at the end of the ratings agency hearing the day before, earning him a sharp rebuke within hours from a Goldman lawyer at O’Melveny & Myers.)
Levin also released a taste treat of sorts: a set of four internal Goldman e-mails—out of millions of documents the subcommittee had examined and out of the nine hundred or so pages of documents Levin planned to release at the hearing—that appeared to contradict the firm’s public statements that it did not make much money in 2007 betting against the housing market, when in fact the firm made around $4 billion on that bet.
One of those e-mails, sent on July 25, 2007, by Gary Cohn, Goldman’s co–chief operating officer at the time, to Blankfein and Viniar noted that the firm had made $373 million in profit that day betting against the mortgage market and then took a $322 million write-down of the firm’s existing mortgage-securities assets, netting a one-day profit of $51 million. This calculus—that Goldman was able to make millions even though it had to write down further the value of its mortgage portfolio—prompted Viniar to talk about “the big short” in his response. “Tells you what might be happening to people who don’t have the big short,” Viniar wrote. Another of the e-mails, from November 18, 2007, let Blankfein know that a front-page New York Times story would be coming the next day about how Goldman had “dodged the mortgage mess.” Blankfein, a careful reader of articles written about himself and the firm, was not above chastising journalists for them. “[O]f course we didn’t dodge the mortgage mess,” Blankfein replied a few hours later. “We lost money, then made more than we lost because of shorts”—the firm’s bet the mortgage market would collapse. “Also, it’s not over, so who knows how it will turn out ultimately.”
Unlike Goldman’s response after the filing of the SEC lawsuit, this time the firm seemed more prepared—even aggressive—in its response, releasing that same Saturday twenty-six documents designed to counter the tone and implication of Levin’s statements. Included in the Goldman cache were many e-mails and documents that Levin’s commit
tee did not intend to release. Among them were four highly personal e-mails that Fabrice Tourre, the Goldman vice president fingered by the SEC in its lawsuit, had written to his girlfriend in London, who also happened to be a Goldman employee in his group. Goldman also released personal e-mails Tourre wrote to another woman, a PhD student at Columbia, that seemed to suggest Tourre was cheating on his girlfriend in London. The juiciest parts of Tourre’s e-mails were written in French—Tourre and the two women are French—but for some reason Goldman’s attorneys at Sullivan & Cromwell provided the English translation of them to the news media. “Those are insane,” one of Tourre’s former colleagues said about the e-mails. “Goldman put those out, that’s the incredible thing.” Such a move seemed to violate Goldman’s self-proclaimed commandment promoting teamwork and team spirit.
That Goldman would go to such trouble to embarrass Tourre—whom the firm has placed on paid “administrative leave” from his position in London pending the resolution of the SEC lawsuit, while also paying for his attorneys—had many people puzzled and wondering about the ethics of the decision. Goldman’s ethics code states the firm expects “our people to maintain high ethical standards in everything they do” but also includes the following language: “From time to time, the firm may waive certain provisions of this Code.” (The firm denies issuing a waiver to its ethics code in deciding to release Tourre’s e-mails.)
At the April 27 hearing, Senator Tom Coburn, a physician and a Republican from Oklahoma, asked Tourre about the e-mails and how he felt upon learning that Goldman had released them. Tourre didn’t specifically address Senator Coburn’s question about Goldman’s behavior, preferring to focus on his own. “As I will repeat again, Dr. Coburn, I regret, you know, the e-mails,” he said. “They reflect very bad on the firm and on myself. And, you know, I think, you know, I wish, you know, I hadn’t sent those.” A few hours later, Senator Coburn asked Blankfein about Goldman’s decision to release Tourre’s personal e-mails. “Is it fair to your employee?” he wondered. “Why would you do that to one of your own employees?” After Blankfein fumbled his answer, Senator Coburn repeated, “If I worked for Goldman Sachs, I’d be real worried that somebody has made a decision he’s going to be a whipping boy, he’s the guy that’s getting hung out to dry, because nobody else had their personal e-mails released.” Blankfein answered anew: “I think what we wanted to do … was to just get it out so that we could deal with it, because at this point—and I think you are aware that the press was just very—and maybe even the press—I don’t know where they came from. But I don’t think we added, to the best of my knowledge—but I don’t know—I don’t think we added to the state of knowledge about those e-mails which our employee addressed, and I think needed to address.”
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AT SENATOR LEVIN’S hearing, which lasted eleven hours, a parade of seven current and former Goldman executives, including Blankfein and Viniar, as well as the three traders who created “the big short”—Sparks, Birnbaum, and Swenson—were alternately ridiculed and bludgeoned, and prevented from going to the bathroom. The ostensible reason for the hearing was to investigate the role investment banks played in causing the financial crisis. But very little of the actual hearing seemed to pertain to the role Goldman may or may not have played in exacerbating the financial crisis by aggressively lowering the marks on its mortgage-related securities—a topic rife with possibility—and instead focused on the type of synthetic CDO deals at the heart of the SEC’s lawsuit and the inherent conflict of interest that many senators believed such securities embody. (Senator Levin termed the timing of SEC’s lawsuit a “fortuitous coincidence” with his hearing but “it was a coincidence.” The SEC’s inspector general investigated the timing of the filing of the SEC’s lawsuit to see if there was a political element to it and concluded there was not.) For instance, no senator asked Craig Broderick, Goldman’s chief risk officer who was impaneled with Viniar, about his May 11, 2007, memo about Goldman’s fateful decision to lower its CDO marks, a missed opportunity for sure.
In his opening remarks, Senator Levin excoriated Goldman. While noting that “when acting properly,” investment banks have an “important role to play” in channeling “the nation’s wealth into productive activities that create jobs and make economic growth possible,” he then proceeded to lay out his case against the firm. “The evidence shows that Goldman repeatedly put its own interests and profits ahead of the interests of its clients and our communities,” Senator Levin said. “Its misuse of exotic and complex financial structures helped spread toxic mortgages throughout the financial system. And when the system finally collapsed under the weight of those toxic mortgages, Goldman profited in the collapse.” He then wondered why Goldman’s executives continued to deny that it had profited when the “firm’s own documents show that while it was marketing risky mortgage-related securities, it was placing large bets against the U.S. mortgage market. The firm has repeatedly denied making those large bets, despite overwhelming evidence that [it] did so.”
“Why does that matter?” Senator Levin wondered. “Surely, there’s no law, ethical guideline or moral injunction against profit. But Goldman Sachs—it didn’t just make money, it profited by taking advantage of its clients’ reasonable expectation[s] that it would not sell products that it did not want to succeed and that there was no conflict of economic interest between the firm and the customers that it had pledged to serve. Those were reasonable expectations of its customers, but Goldman’s actions demonstrate that it often saw its clients not as valuable customers, but as objects for its own profit. This matters, because instead of doing well when its clients did well, Goldman Sachs did well when its clients lost money.” He said Goldman’s “conduct brings into question the whole function of Wall Street, which traditionally has been seen as an engine of growth, betting on America’s successes, and not its failures.”
Senator Levin was particularly exercised about one e-mail—he brandished it like a stiletto throughout the day—because it crystallized for him how rife with conflicts of interest Goldman seemed to be. It was written by Thomas Montag, then a Goldman partner, to Dan Sparks about another Goldman synthetic CDO named Timberwolf—a $1 billion deal put together in March 2007 by Goldman and Greywolf Capital, a group of former Goldman partners—that lost most of its value soon after it was issued. “[B]oy that [T]imberwo[l]f was one shitty deal,” Montag wrote to Sparks in June 2007. The two Bear Stearns hedge funds bought $400 million of Timberwolf in March before being liquidated in July. A hedge fund in Australia—Basis Yield Alpha Fund—bought $100 million face value of Timberwolf for $80 million, promptly lost $50 million of it, was soon insolvent, and has since sued Goldman for “making materially misleading statements” about the deal. A Goldman trader later referred to March 27—the day Timberwolf was sold into the market—as “a day that will live in infamy.”
Relatively early in the hearing, Senator Levin asked Sparks about Montag’s e-mail. (Montag, meanwhile, now a senior executive at Bank of America, was never asked to appear before Senator Levin’s committee.) When Sparks tried to explain that “the head of the division”—Montag—had written the e-mail and not “the sales force,” Senator Levin seemed uninterested and reiterated that the e-mail was sent from one Goldman executive to another and the sentiment was readily apparent. When Sparks tried to provide “context,” Senator Levin cut him off. “Context, let me tell you, the context is mighty clear,” Senator Levin said. “June 22 is the date of this e-mail. ‘Boy, that Timberwolf was one shitty deal.’ How much of that ‘shitty deal’ did you sell to your clients after June 22, 2007?” Sparks said he did not know but that the price at which the securities traded would have reflected both the buyers’ and sellers’ viewpoints. “But …,” Senator Levin replied, “you didn’t tell them you thought it was a shitty deal.” Observed one Goldman partner: “Having the senior person at Goldman Sachs calling the deal ‘shitty,’ when so many people lost money, it’s not great.” According to someone f
amiliar with his thinking, Montag has said he was “joking around” with Sparks but in retrospect wished he hadn’t used the word “shitty.” “Does he wish he would have said that was one bad deal?” this person said. “Yeah, just so that wouldn’t have happened, but other than that, he’s not, like, ‘Oh, God, I wish I’d never said it was a bad deal.’ Of course it was a bad deal. It was a bad deal because it performed poorly and, by the way, [the politicians] didn’t care what the answer was, they just wanted to make hay out of it.”
The legal claim made by Basis Yield Alpha Fund in its complaint against Goldman was that had Goldman informed the fund that it thought Timberwolf was “one shitty deal,” the fund would never have bought the securities in the first place, even at the discounted price. “Goldman deliberately failed to disclose this remarkably negative internal view about Timberwolf,” the complaint stated. “Instead, Goldman falsely represented to [the hedge fund] that Timberwolf was designed for ‘positive performance.’ ” (Goldman called the lawsuit “a misguided attempt by Basis … to shift its investment losses to Goldman Sachs.”)
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