Goldman Sachs executives admit no wrong doing at colorful hearings; McKaskill lobs an apt metaphor


They tried hard, but the members of the Senate Permanent Subcommittee on Investigations could not get the executives from Goldman Sachs (NYSE: GS) to admit any wrong doing. The executives were well-schooled by their attorneys on this matter. The most anyone would admit to was this: "We made a number of poor decisions in hindsight but there were people then who wanted to be long in that risk." That's former Goldman Sachs executive Dan Sparks speaking about the use of stated-income loans as the basis for some Goldman Sachs products. 

The polished responses of the executives led to barely contained senatorial anger. Sen. Carl Levin was animated all day--and it was a long day--as he repeated uttered "s---" when reading emails from Goldman Sachs executives, as he hotly contested CEO Lloyd Blankfein (Lloyd Blankfein news), as he heaped shame upon the entire lot of executives. 

"You got no regrets?" Levin said. "You ought to have plenty of regrets...That's why we gotta do some regulation, some re-regulation." This according to the Washington Post's live blog

But perhaps the most apt barb was issued by Sen. Claire McKaskill. She called synthetic CDOs (CDO news) the "la-la land of ledger entries. Not investment in business that has a good idea. It's gambling." Her point: "You are the bookie. You are the house. You had less oversight than a pit boss in Las Vegas." At one point, she asked, "What's the vig?"

This charge in some ways rings true. And a lot of traders in unguarded moments will admit as much. While Goldman Sachs was providing an income-bearing, bond-like product to IKB and others, its main goal was to arrange some massive side bets for a client. In the process, it took on some risk. Like any good bookie, it tried to lay off its unguarded exposure. In this case, they couldn't do it and ended up swallowing a $100 million or so loss on the CDO in question. Goldman Sachs executives claim overall they were merely "getting close to home," meaning keeping their long and short risk in balance. That may well be true. 

No bookie is ever completely flat, they're often stuck with a few bets with no offsetting position. Some clients may call in a late bet for example. A good bookie strives to keep them happy. Goldman Sachs' big-betting client, John Paulson, was no doubt happy. He ought to be. He paid vigorish of $15 million to win hundreds of millions. 

In public, Goldman Sachs could never admit it, but at the level of derivatives on other derivatives, the bookie metaphor is right on. That's not being judgmental. It's just is. That said, there's a lot of activity apart from the arranging bets on derivatives created for other derivatives that does add value to the economy and society. 

So the challenge for regulators and executives alike is figuring out how to expand the activity that adds value and pare back the raw gambling. 

But back to the hearings. There was some great guerilla theater to get things started. About a half dozen protesters dressed in prison stripes with names on signs around their necks of Tourre and Goldman CEO Lloyd Blankfein, according to the Washington Post. They hissed at times and chanted before the speaking started. 

It was a long, wacky day for all. (Here are the exhibits). The first panel went on for five hours. CEO Lloyd Blankfein didn't get sworn in until past 7 o'clock. When it was finally his turn at bat, he and Levin offered a fitting exchange. 

As the Post put it: "Levin was speaking a political language; Blankfein, a financial one. For what seemed like 20 solid minutes, Levin probably repeated the phrase 'you sold an investment to someone and bet against it' two dozen times. Levin was trying to get at the central element of the SEC's fraud charge against Goldman: That it assembled a portfolio of investments without fully informing all sides--to the SEC's satisfaction--that Goldman took a short position against the portfolio. 

"Blankfein tried a half-dozen times to explain to Levin: That's. Just. What. Investment. Banks. Do. He even resorted to something that sounded like a lesson out of Investment Banking 101: 'The act of selling something gives us the opposite position of the client.'"

Neither side budged, and that right there is the problem. - Jim