In a frenzy to protect its interests at the start of the credit crisis, Goldman Sachs Group Inc sold mortgage-linked derivatives to clients at inflated prices and misrepresented the nature of the deals, according to documents released by a Senate subcommittee.
Carl Levin, the Michigan Democrat who heads the Senate Permanent Subcommittee on Investigations, told a press briefing on Wednesday that Goldman had "exploited" clients and that top executives had lied to Congress during testimony in 2010.
"They gained at the expense of their clients and they used abusive practices to do it," said Levin, adding there was still time for regulatory agencies to take action against Wall Street.
The company said that while it disagreed with many of the conclusions, it took seriously the issues explored by the subcommittee.
The bipartisan subcommittee issued a report Wednesday on Wall Street's role in the 2007-2009 financial crisis, and used Goldman Sachs as one of its case studies.
As the market for related credit derivatives ground to a halt in 2007, Goldman management became increasingly concerned about the company's exposure.
Top executives held a meeting on May 11, 2007, to develop a "Gameplan" to value those assets. A few days later, Dan Sparks, who headed Goldman's mortgage division, estimated the company might have to take a $382 million write-down on its portfolio.
"I think we should take the write-down, but market at much higher levels," Sparks told Thomas Montag, then the head of sales and trading, in an email message, according to the subcommittee report.
Another executive, Harvey Schwartz, expressed concern about that tactic, saying, "don't think we can trade this with our clients andf then mark them down dramatically the next day."
Nonetheless, Goldman's collateralized debt obligation sales team actively targeted clients who would be most receptive to buying related CDOs, in hopes of getting additional sales commissions, according to the subcommittee.
FURTHER CHARGES?
Levin and his panel's report stopped short of accusing Goldman of illegal behavior, but Levin said regulators at the Securities and Exchange Commission or the Department of Justice could take the probe further.
The SEC filed civil fraud charges against Goldman last year related to a CDO deal known as Abacus, which the subcommittee also examined in its report. Goldman paid $550 million to settle the claims without admitting or denying wrongdoing.
A source familiar with regulatory investigations into Goldman said all the transactions detailed in the committee's report "have already been subject to review by the SEC staff." The source would not comment on whether the SEC's probes are over or whether it plans to pursue additional charges.
A year ago, Levin's subcommittee held a public hearing into Goldman's practices at which top executives were hammered for selling clients securities that Goldman was betting against.
Since then, Goldman has taken steps to address its perceived conflicts of interest and transparency issues. In January, the company unveiled a new reporting process after a months-long review by a Business Standards Committee.
Goldman spokesman Michael DuVally said the changes "will strengthen relationships with clients, improve transparency and disclosure and enhance standards for the review, approval and suitability of complex instruments."
Levin said he plans to refer certain issues from the report to the Justice Department and SEC, though he would not be more specific about the referrals.
Sources familiar with the panel's investigation cautioned against relating the referrals to Goldman specifically. No referrals have been decided on yet, and Senator Tom Coburn, the ranking Republican on the bipartisan committee, would have to agree.
The subcommittee's report said Goldman management provided the sales team with "talking points" to reassure clients who were wary about the deals. The sales team also advocated for pushing the products onto clients abroad who might be less familiar with the deterioration of the U.S. housing market.
COLORFUL LANGUAGE
Goldman executives and traders used colorful and aggressive language in early 2007 as they strove to extract as much profit from clients as possible.
At one point, Goldman tried to engineer a short-squeeze in the collateralized debt obligation market to drive up prices and maximize its own gains, according to emails and other documents released by the subcommittee.
Michael Swenson, who was then head of Goldman's structured products group and is now a managing director, said traders ought to "cause maximum pain" and "start killing" short investors, with the hopes of leaving "people totally demoralized."
Though the plan ultimately failed, Deeb Salem, a trader involved in the short-squeeze maneuvering, called the idea "brilliant" in a self-evaluation.
There were also interesting tidbits from a Morgan Stanley employee who became increasingly frustrated by Goldman's behavior related to the a CDO deal known as Hudson.
As mortgages went bad and ratings agencies downgraded related bonds, Morgan Stanley advocated for a rapid liquidation of the Hudson CDO. That process took more than a year to perform.
"I broke my phone," a Morgan Stanley trader told a colleague in an email message, after a frustrating conversation with his Goldman counterpart.
Morgan Stanley ultimately lost more than $930 million on the Hudson deal, while Goldman ultimately earned almost $1.7 billion by shorting related securities.