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LIVE: Goldman Gets Grilled, First Up To Bat Is Fabulous Fab

Courtney Comstock
Business Insider
Tuesday, April 27, 2010

1:33: Ensign: Do you think that the pay incentives are the proper incentives to have folks engage in ethical behavior? Answer down the line. Do they incentives lead to ethical behavior?

Sparks: Well, I dont work there anymore so…

1:32: Ensign’s wrapping up, says there’s oen key question. Do you believe that GS improperly influenced the rating agencies?

Tourre and Birnham both say “No.”

1:27: Who pays the rating agencies?

Sparks: Typically they would be paid by people in the deal.

Ensign: So Goldman paid large amounts of money to those rating agencies. Doesn’t that appear like a conflict of interest?

Sparks: In appearances, yes.

1:25: Ensign: Do you think the rating agencies’ methodologies made sense?

Tourre: Yes, mathematically it made sense. It proved not to be correct.

1:23: Ensign asks the question again: How do you justify taking BBB rated products and getting the rating agencies to re-rate them as AAA?

Sparks takes over: The rationale was diversity improved ratings. “A deals performance had less correlation amongst themselves.”

1:22: Ensign: How do you justify taking BBB rated products and getting the rating agencies to re-rate them as AAA?

Tourre: We were not influencing them, we were just applying their modeling assumptions.

1:21: Ensign: I’m going to try to figure out if you guys are market manipulators, not just market makers.

1:20: Senator Ensign now. In his intro, he says, I think most people in Vegas would take offense to being compared to Wall Street. Because on Wall Street, they’re tweaking the odds in their favor the whole time. (He’s from Nevada)

1:19: Pryor: All of you have said throughout this, there aren’t clear ethical rules about what you can and can’t do. Some of the things that have been said throughout have been very troubling.

1:16: Tourre (3 minutes later…): I take responsibility for my actions.

1:15: Sparks: We were participant in an industry that got loose.

1:13: Pryor asks everyone, Do you think GS’s actions contributed to the financial crisis? (Turning to Swenson, I’m hoping to hear that you take responsibility for your actions, he says, which I haven’t gotten out of the first two.)

Birnham: Which actions are you saying that I’m not taking responsibility for?

Sparks jumps in: Yeah, I take responsibility for my actions.

1:12: Pryor: Do you think GS’s actions contributed to the financial crisis?

Sparks: “I don’t know. I’d have to think about that.”

1:09: Sparks: We had clients who lost money. That’s not good for us. I’s not good for our clients. But there were a lot of individuals out there harmed by the financial crisis. We have sympathy for them. I think you’re talking about regret.

I don’t have any regret.

We made mistakes in our business. We made poor business decisions in hindsight.

1:04: Pryor: Do the current disclosure rules work well?

Sparks: The outcome of a trade isn’t affected by our position on it.

1:01: Sparks: We could be long a deal and not like it that much, we could be short a deal and like it – our position doesn’t always reflect our opinion.

1:00: Pryor: Do you have a responsibility to tell your counterparties what your position is?

Sparks: No.

Pryor: Why not? Shouldn’t there be more transparency there?

Sparks: I think it would create a number of issues. I think functionally it’d be difficult and it could create problems. Let’s say you sold something to someone and you told them you’re long. And then you went short. Do you need to call them first? Can you just go short and then do you need to tell them after?

12:58: Pryor: Do you have a responsibility to disclose to a client that you have an adverse interest to the client?

Sparks: On our positioning, no. If we can do harm to them, yes.

12:57: She’s done. It’s Senator Pryor’s turn.

12:56: McCaskill: Tourre, do you typically let people like Paulson pick the assets that go into a security they’re betting against?

Tourre: In every synthetic buyer situation, the buyer has to be involved. There are always suggestions from the interested party.

12:53: McCaskill: What’s clear here (from all these emails) is that there wasn’t a great deal of confidence in this “Timberwolf” but the sales people were being pushed to move it.

12:51: McCaskill is reading from emails…

12:42: What’s Paulson doing in the room with the guy picking the assets? Was IKB there? Weren’t they going to be a better to?

Tourre: At what time?

McCaskill: At the time Paulson and ACA met.

Tourre: No, we didn’t know they would be a part of the deal then.

McCaskill: Well, why wouldn’t you tell IKB that Paulson, who they were betting against, was in the room when the deal was being created? That just seems weird to me.

12:42: What about ABACUS?

Tourre: Goldman and Paulson selected ACA.

12:39: McCaskill is now talking about the CDO managers. She says they are “important” because they decide what goes into the CDOs. So, who decides who the CDO manager is? She asks.

Who decided who was the asset manager on Timberwolf?

Sparks: Greywolf was the manager. We decided they would be because we wanted to do the deal with them.

12:38: Sparks doesn’t want to use the analogy.

12:36: Now Senator McCaskill is trying to make an analogy between Goldman and her betting on her school. She asks Sparks, what’s the “big?”

12:34: Coburn confirms Tourre’s lawyers are paid for by Goldman. Eeek

12:33: Coburn? How did that make you feel?

Tourre: I don’t know.

Coburn is trying to get Tourre to say something bad about Goldman!

12:33: How do you feel about Goldman revealing your personal emails? Do you have any thought on the motivation on why they were released?

I don’t know.

12:31: Coburn seems to recognize that. He says, I know there was nothing wrong with you hedging your bets… I’m not saying that.

12:31: Swenson looks sorry he ever made this trade. And after he was so proud in his performance review. It’s sad.

12:28: Coburn: You all packaged and sold MBS from Longbeach that were AAA-rated that the majority were stated-income loans. They were made up well over 50% of stated-income loans. The ratings agencies rated these AAA in spite of the fact on their due diligence they should have known the majority were stated-income loans.

Sparks: Yes.

12:26: Coburn: Did you share your feeling, that you put in your own self-assessment (that he was right about the subprime market going to shit) with other members at the firm?

Swenson: Yes, but there were constant debate.

12:23: Birnham says, Swenson was the superior, so …

12:22: Coburn’s trying to start a fight! He’s saying, you two, Senson and Birnbuam- you both took credit for the same thing in your performance review. Who was the leader?

12:20: Kaufman: Is it accurate to say, you went short and made a lot of money?

Swenson: We did a number of trades that made us put our desk short, or flat, at different times. And over the course of that quarter we added a lot of net-long positions in the 3rd quarter of 2007.

12:19: Senator Coburn will ask the questions now. He turns to Swenson’s performance review. In it, Swenson says he identified opportunities to make tremendous profits.

12:15: Kaufman’s done.

12:14: Kaufman: Tourre, did you barbell or use thin-files?

Tourre: I don’t know what “thin files” are.

12:13: Kaufman: Were ratings agencies under pressure to rate products AAA?

Sparks: I think they were honestly trying to do their job.

12:11: Kaufman: Did you guys game the ratings agencies?

Birnham: No. There was just constant dialogue about the best way to rate the products.

12:10: Vocab Lesson! Kaufman: You ever heard about “bar-belling?”

Birnham: I’ll go with it

Sparks: No

Swenson: Never heard of it

12:09: Did Goldman ever use the “thin-file” approach?

Birnham: No.

Sparks: I don’t know what that is.

12:08: Ok now Kaufman’s asking Sparks, basically, did you know that this was fraud and sell it anyways?

12:03: Ah ok, here is Kaufman’s point. He’s saying that the people didn’t know what they were long. They didn’t know how bad the loans were that they were long.

Kaufman’s saying: I don’t think anyone actually wants to buy these kinds of loans.

So it’s Goldman’s fault for not saying, Hey guys, you sure you want to go long on this? It’s really shitty.

Give me a break!

12:02: This is annoying. What does whether or not people knew the loans were bad have to do with anything?

Sparks: The people liked that risk. EXACTLY, Sparks!

Kaufman is getting huffy again.

12:00: Weren’t you concerned about how many loans were being securitized?

Sparks: Yes.

11:58: He’s reminding Sparks how shitty these loans were. 50%, 90% were stated income loans.


11:56: The Goldman bankers just know more about this. Kaufman just took over and he’s talking to Sparks and he doesn’t seem to know the difference between originating a loan and securitizing a loan. He’s asking Goldman if they securitized loans and if they originated loans.

Sparks: We were not a big player in that.

Kaufman: But you securitized them?

Sparks: Uh, Yeah.

11:52: Chairman takes over and says, your strategy is not going to work. We’re going to stay here as long as it takes.

11:50: Birnham wants to comment on the chart. He says it’s misleading. It’s an amalgam of positions that are apples and oranges being added together that don’t reflect the firm’s P&L. It’s like if you were to trade, say you were long 100 shares of Johnson and Johnson and also long 100 shares of Google. But I think anyone would agree that the Google position is actually much more sensitive.

11:48: Collins: Why are GS execs still repeating that Goldman never had an overall strategy? We have emails saying you had the “big short.” How do you account for all of those emails?

11:47: Oh wait, that was her bad, not his. She messed up the # of the emails.

11:46: She brings up the email “tells you what happens to people who don’t have the big short.” AGAIN, he can’t find it.

11:46: Collins turns to Birnbaum.

11:45: The lady behind Collins is biting her nails.

11:44: Tourre says no, hedge funds are just tougher negotiators. Other clients argue less than hedge fund and more sophisticated clients.

11:43: Collins: It sounds like you had a deliberate strategy to sell to less sophisticated investors so that you could make more money.

11:43: HAHA: “I cannot help but get the feeling that the strategy of the witnesses is to burn through the time of the questions.” – Senator Collins

11:41: Tourre’s like, where is that email? I can’t find it.

11:40: Now she’s referencing an email saying, essentially, we can make more money off of dumb “less sophisticated” clients. Would you like to comment on it, Tourre?

11:38: Birnbaum says yes, we do have a responsibility to act in the best interest of clients.

11:37: She asks the same thing of Tourre. I understand that you’re “serving” (she used the quotation marks) your clients, but…

Tourre calls Senator Collins by her first name! Sandra! Disrespectful?

He basically says the same thing as Sparks.

11:36: Collins: Did you have an responsibility to act in the best interest of your clients? Yes or No?

Sparks: We had a responsibility to serve our clients well.

OOoooOOooOOOs go through the crowd.

11:35: She asks, Don’t you have a responsibility to act in the best interest of your clients? I understand you didn’t have a legal obligation to, but did your firm want you to act in the best interest of your clients?

11:34: Levin is fed up with Sparks. He passes the pic to Senator Collins.

11:33: New rule in the Goldman hearing drinking game. Drink every time Levin says “Shitty”.

11:33: So your top priority to sell was a SHITTY DEAL.

(He’s said shitty about 50 times now.)

Should GS be TRYING to sell a shitty deal?!

11:29: Levin is treating Sparks like an unruly son and it’s spanking time. He says, Do you see this here- your people said, “Boy, that Timberwolf sure was a shitty deal.

Then Sparks says: All I remember is those clients being interested in buying Timberwolf at a specific price.

11:27: IN SUM: Levin keeps wanting to get Sparks to say they went short on specific bonds and tell him how much money they made on the shorts. Sparks just keeps saying, we lost money on the longs.

11:25: Goldman took a short position on Timberwolf. Do you remember that? Do you see that?

Oh he’s (trying to be?) funny now!

11:24: It appears… Sparks is freaking out. He wants to take up time read the email now. “I don’t want to slow you down, I just haven’t read the emails…”

11:23: Levin: How much money did you make on those Anderson shorts?

Sparks says he’ll have to work with the people at GS to get the numbers of how much money they made.

11:21: They thought you were an equity investor – you see that here in this email?

Sparks: Yes, I see that in this email, it looks like that.

11:21: Levin doesn’t think he wants to answer so he’s moving on. Sparks tries to stop him but Levin won’t have it.

11:19: Levin: I’m going to ask you for the last time – did you not have an ethical responsibility to say, when a client asks, how are you getting comfortable with this? To say, how you’re getting comfortable is by going short it.

Sparks says he hasn’t gone through all the emails. Ok. HOW CAN THIS BE TRUE?

11:18: Levin: Sorry Chairman, the question that investors ask is just, do you have this product at this price? And that’s all they should ask.

11:17: But did you have a RESPONSIBILITY to say, we’re going short? When investors ask.

11:17: Levin: “I’m trying to understand what the question is. If you were buying 50%. If you were buying that short, for your account. How can you be selling this security – was there an obligation to answer that question, and say, hey we’re going short and we’re staying short.”

Sparks says: they should have done their research. It’s out there.

11:15: Oh boy! Levin is yelling at him! Sparks is trying to outsmart him. It’s working.

11:14: Oh they found it. “I believe this shows the counter-party, it doesn’t show whether or not we were short. There were other trades.” – Sparks

11:13: Levin maybe referenced a non-existent email? Sparks asks him to find it.

11:12: Q: Why did you not inform your clients that Goldman was short nearly 50% of the Anderson CDO when selling Anderson CDOs to them?

11:10: Question: what did you guys do to “get comfortable” with all the new century collateral? How can you get comfortable with the collateral of a company well-known for being crappy? He answers himself: You go short! Then you say to one of your guys, try to sell this!

11:09: Back to the chairman. No one went rogue. Everyone stuck to their prepared testimonies. Damn.

11:08: In the past few weeks, I have been the victim of unfounded attacks on my character.

11:07: When Goldman said that the products were selected by ACA, this was true.

11:06: ACA had sole authority to decide what securities went into the deal. They don’t deny this.

11:06: Goldman had no incentive to design ABACUS to fail.

11:04: If ACA was confused, they had every opportunity to confirm Paulson’s role. Quite frankly, I’m surprised that ACA believe that Paulson was an equity investor.

11:03: ACA and IKB were sophisticated investors. I never told ACA that Paulson would be an equity investor or would take any long position in the deal. I recall telling ACA that Paulson was going to take insurance on the deal. None of the documents I provided said he was.

11:03: He’s worked at Goldman since 2001. From 2006-2007 his job was to “make-markets” for clients. Meaning that they had to allow clients to take bets based on what clients wanted to do – go long or short on a particular product.

11:02: Tourre’s turn! Read his testimony.

10:58: In order to hedge long positions, we began to increase our short position in single names (CDS).

David Viniar called a meeting in Dec 2006. During the meeting we discussed the ABS positions. We were instructed to reduce the positions and get “closer to home.” We were not told to take one direction.

They’re all making this point. Must be important.

10:57: Now it’s Michael Swenson. He’s still at Goldman. Been there since 2000.

10:55: I wanted to go shorter, but the firm insisted that we stay hedged.

No one from senior management told me to take a directional bet against the market. (1 shot!)

10:55: In late 2006, 2007, I developed a negative view of the subprime mortgage department. It’s normal for traders to take a view. Not everyone agreed with me in my department or in the entire firm. It was a big debate.

10:53: Whenever we got significantly long or short, management told us to get “closer to home,” to offset our risks.

10:53: We often had to participate on the other side of bets for clients. We then had a decision to make. Keep it on our book, or offset that risk with another client.

10:52: My job was to make markets for Goldman clients. (1 Shot!)

10:51: Mic goes to Josh Birnbaum. He also started working at Goldman straight out of college, Wharton. He worked for Goldman for almost 15 years. He’s also gone now, he started his own firm in 2008.

10:49: Knowing whether we were long or short was difficult.

He left Goldman in 2008. He says when he left he was proud of what the mortgage desk accomplished and he still is.

10:48: I was instructed – I was NOT instructed to go long or short.

Yikes! What a time to stumble your speech!

10:47: Near the end of 2006, Goldman was “generally long.” I had concerns about our exposures and Goldman senior management knew about these concerns.

10:46: Dan Sparks is speaking. The three men with me all reported to me. He joined Goldman as an analyst. He meant to stay for 2 years. He ended up staying for 19.

10:45: It’s back to the Chairman. He’s swearing them all in!

10:44: Another Senator. He says he understands that people aren’t here to listen to him speak, so he’s moving it back to the Chairman, Carl Levin. Great guy!

10:42: Another Senator speaks. Senator McAskill. She says synthetic products are investments created so that people can bet on them.” It’s gambling. Pure and simple. Raw gamble. They’re called “synthetic” because there’s nothing there!

Wow she’s angry!

“All of you are lemming-like. What you worried about most was a bad article in the WSJ.”

You think you’re so smart? Any street gambler would NEVER place a bet with a bookie or a house with the record like this (Goldman’s).

10:41: McCain speaks! “From the reading of these emails, there’s no doubt Goldman’s behavior was unethical.”

10:40: Now another Senator, Senator Kaufman, is taking. Get to the good stuff already!

10:36: She’s now talking about ABACUS… certainly seemed ethically questionable… Rooted in the fact that broker-dealers don’t have a fiduciary duty to help their clients.

10:34: Those lending had no stake in how well the loans fared after they got them off their books, so they didn’t care.

10:33: Her voice…. She’s talking about predatory lending. “With the advent of securitization, lenders have been able to distance themselves from toxic loans. Banks then bundled these loans into MBS and CDOs.

10:30: Now Senator Collins is talking.

10:28: Wall Street is on the wrong side of this fight. This market isn’t yet free of gambling debts that taxpayers end up paying.

10:26: In 2007, Goldman was betting heavily against the market while it was selling products to clients.

Transactions created a conflict of interest between Goldman’s bottom line and clients’ interests.

10:24: The firm took an “unpopular stance” against clients because it “saved the firm hundreds of millions of dollars.”

10:24: Goldman wanted the short bet so badly that in one instance, it kept the bet for itself rather than let an interested client have it.

10:23: The question for us is of ethics and policy. Should Goldman’s actions be prohibited in the future?

10:21: Now he’s talking about ABACUS and how Goldman failed to disclose John Paulson’s role to ACA or the ratings agency that rated ABACUS.

10:19: “Get very short,” a top manager said. So why the denial? My guess is it’s because Goldman cannot portray itself as working against its clients. Or that it was betting against the market as a whole.

10:17: Goldman says these bets were just a reasonable hedge. Internal emails say differently. A top manager called it, “the big short.”

LIVE: Goldman Gets Grilled, First Up To Bat Is Fabulous Fab goldman chart not neutral

He pulls evidence: this chart –> shows Goldman’s non-neutral stance. (The black line is neutral.)

10:15: The edict from a top manager in December 2006 was, “get closer to home,” meaning get to a more neutral position. But soon the firm moved past a neutral position. The company took large net short positions throughout 2007.

10:13: Goldman Sachs was an active player in building the mortgage products. The number of synthetic products is limitless, and so is the risk to the economy. Goldman contributed greatly to the risk in the system by marketing these products.

10:11: Wall Street designed increasingly complicated products that got AAA ratings. But the party couldn’t last and we all know what happened. All of a sudden home prices dropped and the bubble burst.

10:07: Carl Levin: The evidence shows that Goldman repeatedly put its own profits and interests ahead of those of its clients. The firm repeatedly denies that it took large bets against its clients. But the overwhelming evidence shows that it did.

10:05: Carl Levin: We focus on the activities in 2007 of Goldman Sachs. Those activities contributed the to economic collapse that came full circle the following year.

10:02: Intro. Carl Levin: “We’re here to… protect main street from the excesses of Wall Street.”


Get ready for eight hours of non-stop action today.

We’ll be liveblogging the action right here. Just keep refreshing.

The action starts at 10:00.

In the first part of the hearing, we’ll hear from

  • Daniel Sparks (Former Partner, Head of Mortgages Department)
  • Joshua Birnbaum (Former Managing Director, Structured Products Group Trading)
  • Michael Swenson (Managing Director, Structured Products Group Trading
  • Fabrice Tourre (Executive Director, Structured Products Group Trading)

Of course they’re saving the best for last. Lloyd Blankfein doesn’t speak until the third and final panel. But we already know what both Fabulous Fab and Blankfein will say in their testimonies, so that’s fair.

Stay tuned!

If you’d like to follow along with our Goldman hearing drinking game (highly recommended) click here.

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