What Did Goldman Know And When Did It Forget It?

By Simon Johnson

There is a live blog on the Goldman Sachs hearing now on the Lehrer NewsHour website, including comments by Paul Solman and me.  The interaction between Goldman and the Senators – Democratic and Republican – is fascinating.

The Goldman executives so far seem to be struggling to recall exactly what happened.  The Senators are pressing them hard.  This is much more than theater.  This is (some) people trying to figure out exactly who did what to whom.

53 responses to “What Did Goldman Know And When Did It Forget It?

  1. I love watching these Goldman guys. Every word, every gesture, just radiates arrogance.

    They can’t help themselves.

    I do wish McCaskill and Collins would yield all of their time to Kaufman, though.

  2. amen to that, Nemo.

  3. Because they know Obama is not gonna switch the jury, ala Costner in the Untouchables.

    By the way, wonder when the discussion will turn to, “Gee Mr. Goldman, why did you get a bank charter when the sh.. hit the fan?”… Could it be to cover your BETS?

  4. These hearings are such a value to the American people. However, The Derivative Project questions how involved the average Senator is understanding what must be in the financial reform bill to provide protection right now to the average American retirement investor.

    Effective derivative reform is tantamount, but ensuring that the Investment Advisors Act is a legal avenue for enforcing fiduciary breaches, effective immediately, is the bottom line for the average American retirement investor. Without that sentence in the financial reform bill, the retirement saver has no recourse against the fiduciary breaches of Wall Street from 2007-2009.

    http://www.thederivativeproject.com/Blog.html

  5. CBS from the West

    By the way, folks, there is a really nice piece by Bond Girl about the Goldman case on Nemo and Bond Girl’s blog, self-evident.org.

  6. EXHIBITS
    Hearing On
    WALL STREET AND THE FINANCIAL CRISIS:
    THE ROLE OF INVESTMENT BANKS

    http://online.wsj.com/public/resources/documents/goldmanexhibits0427.pdf

  7. “And you have no regrets, you should have plenty of regret.” Sen.Levin to Mr. Sparks

    Sen. Levin makes me smile.

  8. Emergency question to my friends. If the bank my money’s in goes belly up will my monthly check to mastercard cover it?

  9. THE GOLDMAN DEFENSE: All the counterparties in our CDO/CDS deals were savvy, informed participants who knew the risks involved.

    WRONG!: The American taxpayer who had to bail you out along with the entire banking system is the biggest counterparty to all these deals and the taxpayer had no idea of what was going on, much less the risks involved.

    FURTHERMORE: If all the counterparties, as you claim, knew the risks involved, that means you, Goldman Sachs, knew the risks involved and therefore should have recognized the possibility and consequences of AIG not being able to make good on their CDS obligations. Which means the one counterparty that wasn’t informed of the risks—the taxpayer—should not have been liable for the $13 billion in AIG counterparty bailout money you received and promptly distributed among yourselves as “profits”.

    FURTHER STILL: If, as you, Goldman Sachs, claim, that all counterparties were aware of the risks involved, then you, Goldman Sachs, should have been allowed to fail.

    THE GOLDMAN COUNTER DEFENSE: We were never at risk of going under.

    WRONG!: If that’s true, then you should repay the taxpayer—the only counterparty who wasn’t privy to the risks—the $13 billion in AIG counterparty money you distributed among yourselves as “profits”.

    CONCLUSION: Return the $13 billion you STOLE from the American taxpayer as penalty.

  10. “I think you’ve not answered the question the best you can, so let’s move on”

    Yeah, Levin is doing OK.

  11. Well stated. Goldman’s Monsiuer Tourre testified this morning that “these derivatives permit sophisticated institutions to better manage risks…the retail investor just doesn’t understand that…”

    We know that the “retail investor” understands very well that Goldman did not manage credit risk with their unlimited counterparty credit risk to AIG, as John Smith pointed out. If they are experts at managing credit risk with derivatives, was it then fraud by entering into excessive credit default swaps with AIG that Goldman clearly knew, AIG did not have the balance sheet to support these contracts?

  12. Let the free market work its magic. Goldman is innocent! Snark!!

  13. “Who did what to whom”, yes. That’s clear already, which is why these persons are incapable of anything but lame excuses and phony, truculent acquiescence when pressed about ethics or remorse, of neither of which do they have a shred.

    The only time they sound authentic are in their bursts of defiance.

    We’ll see how it goes with Viniar and the other guy, and then Blankfein.

    There should be a chanting mob outside, audible within the chamber, to go along with this. It would give it some zing.

  14. “Sen. Pryor probably asked the most thoughtful questions of the four witnesses and he got the answers that will likely make headlines. Goldman execs felt they did nothing wrong.

    Did nothing wrong. Now this is a surprise…. NOT! Hey these are traders and since when is it nit allowed to make money in the good ol US of A??

  15. Exactly, whats more, as a well-known blogger pointed out to me, Goldman knows the ratings on CDS products explicitly take into account TBTF guarantees and probable bailouts in the formation of a CDO credit rating…which means that Goldman knows the creation and rating of a CDO implicates the taxpayer as a counterparty.

    Hey, I just want these bums to return the $13 billion they took from us and distributed amongst themselves as profits. Nothing can justify that AIG counterparty payout.

    As far as these hearings are concerned, our senators sound like a bunch of fools who can’t nail the point…which is they didn’t inform the largest counterparty–the taxpayer–of the risk. Fine them $13 billion, institute the Brown-Kaufman refroms and be done with them.

    Then let’s turn our attention to the ratings agencies. Those guys are bigger bums than Goldman.

  16. I guess you need a pitchfork in hand to comment on this blog. Whatever the original purpose of these hearings, the sham political theater has drown out the important points. Levin comes across as an financially illiterate demagogue. And the senator from Missouri seems not to understand the purpose of a trading desk.

  17. just curious… what in your view, are the important points taht are being drowned out by the sham political theater?….

  18. Andrei Vyshinsky

    The slime that took Goldman Sachs campaign money parading about as representative of the peoples’ interests, as advocates of the injured parties? What opera buffa! Don’t be deceived. One day, both sides of this televised pseudo-drama will be interrogated by authorities with authentic links to the people. And they will be tried by prosecutors long familiar with such filth. Those will be the proceeding you won’t want to miss. They’ll mean something.

  19. Goldman’s Tourre Tells Panel: ‘I Did Not Mislead’ Investors

    Tuesday, 27 Apr 2010 | 11:29 AM ET – AP

    “Top Goldman Sachs officials defended their conduct in the financial crisis on Tuesday, flatly disputing the government’s fraud allegations against the giant financial house. “I did not mislead” investors, insisted a trading executive at the heart of the government’s case.”

    http://www.cnbc.com/id/36798862

    April 25 (Bloomberg) — “Fabrice Tourre, a Goldman Sachs Group Inc. executive director facing a fraud lawsuit in the sale of a mortgage-linked investment, said an index that facilitated derivatives trading in the market was “like Frankenstein.”

    The so-called ABX index is “the type of thing which you invent telling yourself: ‘Well, what if we created a ‘thing,’ which has no purpose, which is absolutely conceptual and highly theoretical and which nobody knows how to price?’” Tourre said in a Jan. 29, 2007, e-mail released yesterday by Goldman Sachs. Watching the index fall is “a little like Frankenstein turning against his own inventor.”

    http://www.bloomberg.com/apps/news?pid=20601103&sid=aDgzfxGflUMg

    http://www.cnbc.com/id/36798862

    EXCLUSIVE: Blankfein Says Trader ‘Fab’ is Immature, but Not a Crook

    April 26, 2010 – Fox Business – excerpt

    “Goldman Sachs CEO Lloyd Blankfein is prepared to say that the young trader charged with securities fraud for failing to disclose alleged conflicts of interest when he sold a portfolio of mortgage bonds to investors was “immature” and “showed poor judgment,” but also that the company didn’t fire him because he did nothing illegal, FOX Business has learned.

    Some of the most colorful of those emails came from Tourre, who joked about selling the toxic bonds to “widows and orphans,” compared his job to “masturbation,” while he described himself as the “Fabulous Fab.”

    http://tinyurl.com/276lzph

  20. John Smith wrote:

    “THE GOLDMAN DEFENSE: All the counterparties in our CDO/CDS deals were savvy, informed participants who knew the risks involved.”

    They forgot to mention one counterparty, the American taxpayers and their economy.

  21. In one of the e-mails, Fabrice Tourre wrote:

    “Anyway, not feeling too guilty about this, the real purpose of my job is to make capital markets more efficient and ultimately provide the U.S. consumer with more efficient ways to leverage and finance himself, so there is a humble, noble and ethical reason for my job amazing how good I am in convincing myself !!!”

    “The whole building is about to collapse anytime now, Only potential survivor, the fabulous Fab.”

    http://tinyurl.com/fabulous-Fab

  22. Can anyone explain to me why rating agencies would rate some of the bonds “AAA” while they were infact junks? Why none of those guys is in jail? Why would firms bring junk bonds for rating? Isn’t that fraud? Please explain to me, any financial analyst savy here?

  23. John wrote:

    “Can anyone explain to me why rating agencies would rate some of the bonds “AAA” while they were infact junks?”

    Greed

  24. Because the rating agencies were paid by the bond issuer.

    Cheers.

  25. Not a creature with a soul in the testamonial today! Oh, and by the way, Lloyd “I’m doing God’s work” Blankfein is destined to yes, GO TO HELL! -Kevo

  26. Andrei Vyshinsky

    “Can anyone explain to me why rating agencies would rate some of the bonds “AAA” while they were infact junks?”

    Its called avarice, John. You want deals so badly that you sell your professional opinion so as to get them.

    “Why none of those guys is in jail?”

    That’s called corruption, John. You pay off those responsible for oversight so they won’t act to enforce governing law and/or regulations. You don’t even need to pay the regulators, just their political sponsors.

    “Why would firms bring junk bonds for rating?

    That’s called deceit, John. Why would you want to package trash as trash when with a little pressure here and a little money there you can package it as investment grade?

    “Isn’t that fraud?”

    Yup, that’s fraud, John.

  27. Frauds are by their very nature conspiratorial in that they involve the suborning of regulators, ratings agencies, exchanges, the media, and legislators to ignore and facilitate misrepresentation that enable white collar crime.

    They are difficult to prosecute because by their nature they involve twisting the legal into the extra-legal on a broad basis to achieve a particular financial effect, while limiting many specific aspects to the letter of the law, or at least the gray areas.

    By and large Goldman Sachs and others operate in the shadows, hiding behind secrecy and a general mindset towards short term greed and lapses in ethics. Investigations following the Crash of 1929 and the S&L crisis demonstrated that the existence of such pervasive lapses in stewardship do exist.

    There have been and are just too many frauds to keep covered up as the lies make no common sense. The math has also turned against these frauds so the clock is now spinning faster and all it will take is perhaps just one more feather to break the camels back. These frauds are not separate nor exclusive, they are intertwined and have arisen because of and to protect the dollar.

    We all will know without having to ask once “game over” arrives because the Gold suppression scam will end with up limit days and more than likely no physical offered. The rats will (are) fighting amongst each other and some are already jumping ship, I can only see complete panic as a result. We did not see real fear nor a true panic in 2008-09, true fear in my opinion will be when investors who are even on the correct side of the markets start soiling their shorts because they realize that even if they win,…they lose!

    As a side note, how humorous is it that a committee is meeting today regarding lowering the debt and deficits while $44 Billion is being auctioned of the $128 Billion for the week. I could save them all a whole lot of time and brain cells by telling them to just go home. That’s right, just go home because we are already bankrupt, the debt can never be paid back and the dollar can never retain value. Period, it’s now all for show and posturing for blame, nothing more.

    Given human nature, the outcome of these hearings were already a given. Hear no evil, see no evil, speak no evil. Sadly this Congressional body asking the questions revealed its lack of understanding in these issues when one senator asked Mr. Viniar how to fix the problem while admitting that Congress was ill prepared to deal with these issues. After this admission I simply sat back thinking, ” we’re screwed”.

  28. Doesn’t it bother anyone else that every single one of these senators is financially illiterate? We have one hundred of these self important boobs, elected essentially for life. Their ineptititude and petty greed made the whole crisis possible, indeed inevitable. They ignored the risk of CDS, they fanned the flames in the mortgage market, they still do not understand what synthetic CDOs are, what it means to be short, what role Goldman plays as a market maker. I think each of them actually thinks Goldman’s mortgage sales desk acts as an advisor to the buy side dweebs lining up to take the long side on these steaming piles of subprime drek.

    How many have figured out yet that what sunk the markets was the leverage created by the CDS market itself? The idea that you could buy insurance without having anything to insure. The CDS market was the equivalent of allowing the entire population of a small town to buy life insurance on a target individual, and then giving all the buyers a right to hunt him down in the street.

    The Senate has carefully preserved the idiocy of this market in its 1456 page reform bill, which may be just as big a joke as these hearings for those with the stomach to read through it.

  29. It bothers me that Sen. Levin does not seem to understand the first thing about agency or principal transactions in the securities markets.

  30. My favorite moment so far is Viniar repeatedly saying “I regret that someone described our crimes in an e-mail” and “I regret that they used vulgarities”.

    He’s desperately groping to say, “I regret that someone had such an unprofessional, unethical attitude about our duties to our clients, which does not reflect the Goldman ethos” or something like that, but he just can’t find the words.

    That’s the quintessence of the psychopathic blackness we’re dealing with where it comes to these criminals.

    (After the break he tried again, and again could only say, “I regret the vulgarity”. This is maybe the most clueless person I’ve seen in a long time, which is saying a lot.)

  31. For those of us that don’t believe in all the myth of religion, Hell in the next life isn’t any consolation. He needs to be punished in THIS life by MEN for his actions against MEN. Not by non-existent invisible men from fairy tales in a really old book.

  32. What I wouldn’t pay to hear an uncensored senator say “F— the vulgarity. What do you remember about the f—ing fraud, sir?”

  33. Nice to see that genius piece of work that Goldman had a hand in (“serving” the people of Greece) crashing down on the market today. I can see where we should totally respect these guys as genius advisors of the financial world. All these deals they were involved in that are suddenly exploding couldn’t possibly be their own fault. Pure coincidence.

  34. Tourre is a more interesting character than the media has played him – at least two things differentiate him from his bosses:

    1) He was new enough to “investment” banking (what an Orwellian phrase!) that the fraud being openly conducted actually seemed abnormal, rather than commonplace and entirely ordinary. This trait is mildly endearing – in a sad sort of way.

    2) He was young (27) and stupid enough to write about it in an email.

    One can only imagine the intensive “coaching” he’s been given in the past few days.

    To all those who think Goldman is arrogantly holding to its old ways – I assure you that you are quite wrong. Even now, Goldman is intensively reviewing its IT policies and training procedures to make sure that no one ever writes an email like Fab’s again.

  35. Great googly moogly, what a stupendous idiot. I really can’t believe somebody was dumb enough to leave a trail like that. Wow.

  36. Andrei Vyshinsky

    One suspects that all of this grousing about “myths”, “fairy tails” and “old books” has more to do with convincing yourself of these things than anyone else, eh, 3-D? If you can repeat it enough – and in writing – perhaps you’ll quell those persistent doubts? Could that be what’s happening? :-)

  37. No, I just don’t want mystical thinking taking over in any way form or fashion. “Oh well, they’ll suffer in the next life for it!” had better not be all that comes of these proceedings.

  38. Andrei Vyshinsky

    You miss my point, son. Its not that you seek to limit the reach of what you regard as “mystical thinking” that I had in mind. Its rather that in your use of the terms, “myths” and “fairy tales” you would seem to be trying to convince yourself that they are, in fact, myths and fairy tales. I’d be willing to bet that deep down you really don’t believe that they are myths and fairy tales. What say?

  39. Todays long drawn out theatrical haranque was so onerously noxious;..dressed up only in a cladly worn skirted democractic facade;..impotent too viscerally unravel this opaque tapestry from the portal of Babel!Shameful,period! Blankfein or however you spell his name swam through the barage of blanks like a duck in a spring pond,amazing! Yea,Levin is a shoo-in in a state with the highest unemployment,and on the precipice of financial collaspe through his thwenty-four years as a senator, Unbelievable?

  40. kevo wrote”

    “Not a creature with a soul in the testamonial today!”

    No soul to condemn nor body to imprison.

  41. hermanas wrote:

    ” If the bank my money’s in goes belly up will my monthly check to mastercard cover it?”

    My wife went to her bank this week. The computer system was “down” (many branches were involved). All she could withdraw was $200. She had to show proof of identity, driver’s I.D. etc. Bank staff did not offer a clue of what was going on. Today back to normal.

    When things go F.U.B.A.R., I don’t expect Mastercard to behave any differently then any other financial institution.

  42. Lawmaker says Goldman made Tourre “whipping boy”

    Tue Apr 27, 2010 8:30pm EDT – excerpt

    (Reuters) – “A top Republican lawmaker on Tuesday accused Goldman Sachs of making bond trader Fabrice Tourre “a whipping boy” as the firm defends itself in a high-profile civil fraud case.

    Senator Tom Coburn, the top Republican on a Senate panel investigating Goldman Sachs, questioned the firm’s motivation for releasing last weekend personal emails, written in 2007, between Tourre and his girlfriend.

    “The tone set by that, 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.

    Nobody else had their personal emails released,” Coburn said to Goldman Sachs Chief Executive Lloyd Blankfein.

    Blankfein stammered through his response, saying first that, “I wasn’t close to the decision.”

    http://www.reuters.com/article/idUSTRE63Q5YL20100428

  43. I’ve read much on this financial mess over the last 18 months. This blog is certainly the most informative. However I have to say that the Op-Ed by Bethany McLean in the NYT (http://www.nytimes.com/2010/04/27/opinion/27mclean.html) is the most complete and factual statement of what has occurred. It is also the shortest statement that paints the most accurate picture. McLean makes a very cogent point when she states: “None of this excuses Goldman … [but] … shouldn’t Congress have its turn on the hot seat as well? Seeing Goldman executives get their comeuppance may make us all feel better in the short term. But today’s spectacle shouldn’t provide our government with a convenient way to deflect the blame it so richly deserves.”

  44. I really cannot beleive what happend today!

    Does Goldman really think the Taxpayers of the USA are really that stupid?

    Why can’t the Senators ask questions that make sense?

  45. Brilliant!

  46. lapsedlawyer

    Nope, just telling it like it is.

  47. sophia wrote:

    “Does Goldman really think the Taxpayers of the USA are really that stupid?”

    Yes. Force of habit.

    SAN FRANCISCO (MarketWatch) — “Goldman Sachs Chief Executive Lloyd Blankfein told legislators Tuesday that when clients approach the investment bank as a market maker to buy or sell securities, they don’t care what the firm thinks of the securities or whether it’s betting against them.

    Sen. Carl Levin, chairman of the Permanent Subcommittee on Investigations, lashed out at Blankfein, claiming that Goldman creates conflicts of interest when it underwrites securities while betting against them.

    Levin cited examples where Goldman employees described collateralized debt obligations the firm was selling, or assets backing those deals, as “shi**y,” “crap,” “junk” and “lemons.”

    http://tinyurl.com/27fvjvn

  48. I agree. I think Congress ought to deputize these kinds of highly technical hearings. Bring in some experts to grill them. No one, not even the best lawyers, go to court all by themselves.

    We can’t–and don’t– expect political representatives to be experts in everything impacting the country. We can and do expect them to avail themselves of the best minds the country has to offer in ensuring our collective common good.

    However, I did especially like it when Coburn (I think it was) asked Blankfein if he talked to anyone in the Administration about the financial reform bill. And Blanky hemmed and hawed and didn’t want to say that YES HE DID! talk to “somebody” in Treasury.

    We can’t get somebody other than Goldman Sachs to write financial legislation for these Congress-critters?

    Impossible!

  49. The mob will not be satisfied with Fabulous Fab. The mob wants Blankfein, Hank Paulson, and Rubin.

  50. Goldman Sachs adds to its ranks of lobbyists

    Thursday, April 29, 2010 – Washington Post – excerpts

    “Until a few years ago, Goldman Sachs operated a sleepy lobby shop in the nation’s capital.

    But now, faced with fraud charges, investigations, a firestorm of criticism and a regulatory overhaul bill that could seriously damage its profitability, the venerable Wall Street firm is assembling a team of veteran lobbyists, well-connected former Hill staffers and top public relations strategists to confront what is arguably the most traumatic moment in its 140-year history…

    Over the past two years, as it emerged from the financial crisis with a reinforced image as Wall Street’s top bank but also the No. 1 target of public ire, Goldman has built up a 12-person government affairs office in Washington to help the firm get its message to legislators and regulators.

    As head of its government affairs office in Washington, Goldman has installed Michael Paese, a former top aide on the House Financial Services Committee to Chairman Barney Frank (D-Mass.) and more recently an industry lobbyist. (Frank has barred Paese from lobbying his panel for two years, longer than what ethics rules require.)

    Paese reports to Faryar Shirzad, a top adviser to President George W. Bush on economic affairs. On their team are Eric Edwards, a former staff director of a House Financial Services subcommittee; Joyce Brayboy, a former chief of staff for Rep. Melvin Watt (D-N.C.); Joe Wall, aide to former vice president Dick Cheney on legislative matters; Kenneth Connolly, formerly with the Senate’s environment and public works committee; and Michael Thompson, who worked for Sen. Mike Enzi (R-Wyo.).

    The bank also has in place an external roster of high-powered lobbyists, including Richard Gephardt, the former Democratic House majority leader; his former aide Stephen Elmendorf, now of Elmendorf Strategies; Kenneth Duberstein, who served as Ronald Reagan’s chief of staff; Harold Ford Sr., a former representative from Tennessee; and Richard Roberts, a former SEC commissioner who has also served as the top aide to Richard Shelby, the ranking Republican on the Senate banking committee.

    Perhaps more telling of the urgency of Goldman’s efforts are recent additions who technically aren’t lobbyists but have deep ties to Washington. This month, the firm hired high-powered public relations professional Mark Fabiani, whose clients are often large corporations in crisis mode. Dubbed the “Master of Disaster” for his handling of the Whitewater scandal during the Clinton administration, Fabiani is advising Goldman on a number of fronts, including public image strategy. Stephen Labaton, a veteran former regulatory reporter for the New York Times, has also been brought on as full-time consultant.

    Rounding out the team is Gregory Craig, President Obama’s former White House counsel and now a partner in the Washington office of the law firm Skadden Arps, who will be working on litigation advice and related matters.”

    http://tinyurl.com/2bb3e3k

  51. Re: @ Anonymous_____Thanks! Really good stuff. :^)

  52. But that would deny the senators their chance to look like righteous defenders of the public good, the man in the street, mom, and apple pie.

    The senators want their face time and face time they shall get, even if it makes them look dumb.

    It is a wonder of arrogance that the arrogant don’t realize how pompous and foolish they appear.

  53. Re: @ WPD_____Yep,play right into the naysayers hands! Before the criminals are even behind bars your already saying they was framed! Ya know what justice works today? “Shoot em First ,then Ask Questions” ;^) PS. Don’t kick a gift horse in the mouth.