[Senate Hearing 111-674, Volume 4]
[From the U.S. Government Publishing Office]
S. Hrg. 111-674
WALL STREET AND THE FINANCIAL CRISIS:
THE ROLE OF INVESTMENT BANKS
=======================================================================
HEARING
before the
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
of the
COMMITTEE ON
HOMELAND SECURITY AND
GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
----------
VOLUME 4 OF 5
----------
APRIL 27, 2010
----------
Available via http://www.gpoaccess.gov/congress/index.html
Printed for the use of the Committee on Homeland Security
and Governmental Affairs
WALL STREET AND THE FINANCIAL CRISIS: THE ROLE OF INVESTMENT BANKS
VOLUME 4 OF 5
S. Hrg. 111-674
WALL STREET AND THE FINANCIAL CRISIS:
THE ROLE OF INVESTMENT BANKS
=======================================================================
HEARING
before the
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
of the
COMMITTEE ON
HOMELAND SECURITY AND
GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
VOLUME 4 OF 5
__________
APRIL 27, 2010
__________
Available via http://www.gpoaccess.gov/congress/index.html
Printed for the use of the Committee on Homeland Security
and Governmental Affairs
U.S. GOVERNMENT PRINTING OFFICE
57-322 WASHINGTON : 2010
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing Office,
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Printing Office. Phone 202�09512�091800, or 866�09512�091800 (toll-free). E-mail, [email protected]
COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
JOSEPH I. LIEBERMAN, Connecticut, Chairman
CARL LEVIN, Michigan SUSAN M. COLLINS, Maine
DANIEL K. AKAKA, Hawaii TOM COBURN, Oklahoma
THOMAS R. CARPER, Delaware SCOTT P. BROWN, Massachusetts
MARK L. PRYOR, Arkansas JOHN McCAIN, Arizona
MARY L. LANDRIEU, Louisiana GEORGE V. VOINOVICH, Ohio
CLAIRE McCASKILL, Missouri JOHN ENSIGN, Nevada
JON TESTER, Montana LINDSEY GRAHAM, South Carolina
ROLAND W. BURRIS, Illinois
EDWARD E. KAUFMAN, Delaware
Michael L. Alexander, Staff Director
Brandon L. Milhorn, Minority Staff Director and Chief Counsel
Trina Driessnack Tyrer, Chief Clerk
Patricia R. Hogan, Publications Clerk and GPO Detailee
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
CARL LEVIN, Michigan, Chairman
THOMAS R. CARPER, Delaware TOM COBURN, Oklahoma
MARK L. PRYOR, Arkansas SUSAN M. COLLINS, Maine
CLAIRE McCASKILL, Missouri JOHN McCAIN, Arizona
JON TESTER, Montana JOHN ENSIGN, Nevada
EDWARD E. KAUFMAN, Delaware
Elise J. Bean, Staff Director and Chief Counsel
Robert L. Roach, Counsel and Chief Investigator
Ross K. Kirschner, Counsel
Daniel J. Goshorn, Counsel
Gary M. Brown, Consultant
Pauline E. Calande, SEC Detailee
Christopher J. Barkley, Minority Staff Director
Anthony G. Cotto, Counsel to the Minority
Keith B. Ashdown, Chief Investigator to the Minority
Justin J. Rodd, Senior Investigator to the Minority
Mary D. Robertson, Chief Clerk
C O N T E N T S
------
Opening statements:
Page
Senator Levin................................................ 1
Senator Collins.............................................. 8
Senator Kaufman.............................................. 10
Senator McCain............................................... 10
Senator McCaskill............................................ 10
Senator Pryor................................................ 11
Senator Coburn............................................... 38
Prepared statements:
Senator Levin................................................ 193
Senator Coburn............................................... 199
Senator Pryor................................................ 201
WITNESSES
Tuesday, April 27, 2010
Daniel L. Sparks, Former Partner, Head of Mortgage Department,
The Goldman Sachs Group, Inc., New Canaan, Connecticut......... 12
Joshua S. Birnbaum, Former Managing Director, Structured Products
Group Trading, The Goldman Sachs Group, Inc., New York, New
York........................................................... 14
Michael J. Swenson, Managing Director, Structured Products Group
Trading, The Goldman Sachs Group, Inc., New York, New York..... 15
Fabrice P. Tourre, Executive Director, Structured Products Group
Trading, The Goldman Sachs Group, Inc., London, England........ 17
David A. Viniar, Executive Vice President and Chief Financial
Officer, The Goldman Sachs Group, Inc., New York, New York..... 95
Craig W. Broderick, Chief Risk Officer, The Goldman Sachs Group,
Inc., New York, New York....................................... 96
Lloyd C. Blankfein, Chairman and Chief Executive Officer, The
Goldman Sachs Group, Inc., New York, New York.................. 130
Alphabetical List of Witnesses
Birnbaum, Joshua S.:
Testimony.................................................... 14
Prepared statement........................................... 205
Blankfein, Lloyd C.:
Testimony.................................................... 130
Prepared statement........................................... 225
Broderick, Craig W.:
Testimony.................................................... 96
Prepared statement........................................... 221
Sparks, Daniel L.:
Testimony.................................................... 12
Prepared statement........................................... 202
Swenson, Michael J.:
Testimony.................................................... 15
Prepared statement........................................... 208
Tourre, Fabrice P.:
Testimony.................................................... 17
Prepared statement........................................... 211
Viniar, David A.:
Testimony.................................................... 95
Prepared statement........................................... 216
EXHIBIT LIST
April 27, 2010
* Retained in the files of the Subcommittee
1.a. Memorandum from Permanent Subcommittee on Investigations
Chairman Carl Levin and Ranking Minority Member Tom Coburn to
the Members of the Subcommittee................................ 227
b. Excerpts from Documents Related to Goldman Sachs: Short
Positions and Profits, chart prepared by the Permanent
Subcommittee on Investigations................................. 240
c. Excerpts from Documents Related to Goldman Sachs: Profiting
at the Expense of Clients, chart prepared by the Permanent
Subcommittee on Investigations................................. 242
d. Excerpts from Documents Related to Goldman Sachs: Abacus
and Other Deals, chart prepared by the Permanent Subcommittee
on Investigations.............................................. 244
e. The Goldman Sachs Conveyor Belt, chart prepared by the
Permanent Subcommittee on Investigations....................... 246
f. Long Beach Mortgage Loan Trust 2006-A, chart prepared by
the Permanent Subcommittee on Investigations................... 247
Documents Related to Short Positions and Profits:
2. Goldman Sachs internal email, dated December 2006, re:
Subprime Mortgage Risk (. . . analysis of the major risks in
the Mortgage business.)........................................ 248
3. Goldman Sachs internal email, dated December 2006, re:
Subprime risk meeting with Viniar/McMahon Summary (. . . let's
be aggressive distributing things . . .)....................... 250
4. Goldman Sachs internal email, dated December 2006, re:
Single-A ABS CDOs (We have a big short on . . .)............... 251
5. Goldman Sachs internal email, dated December 2006, re: Are
you around? (On baa3, I'd say we definitely keep for ourselves.
On baa2, I'm open to some sharing to the extent that it keeps
these customers engaged with us.).............................. 253
6. Goldman Sachs internal email, dated January 2007, re: . . .
post (. . . pair the single-A ABS CDO risk we take back with
the big short position we have built in that space.)........... 254
7. Goldman Sachs internal email, dated February 2007, re: Post
(Subprime environment - bad and getting worse. . . . plan to
play from short side. . . . Credit issues are worsening on
deals and pain is broad . . .)................................. 255
8. Goldman Sachs internal email, dated February 2007, re: Post
(. . . our risk reduction program consisted of: (1) selling
index outright (2) buying single name protection (3) buying
protection on super-senior portions of the BBB/BBB- index . . .
*** That is good for us position-wise, bad for accounts who
wrote that protection . . . but could hurt our CDO pipeline
position as CDOs will be harder to do.)........................ 256
9. Goldman Sachs internal email, dated February 2007, re: Block
size tranche protection offers for . . . (We need to buy back
$1 billion single names and $2 billion of the stuff below -
today. I know that sounds huge, but you can do it - spend bid/
offer, pay through the market, whatever to get it done. ***
This is a time to just do it, show respect for risk, and show
the ability to listen and execute firm directives. You called
the trade right, now monetize a lot of it.).................... 257
10. Goldman Sachs internal email, dated February 2007, re:
Mortgages today (We are net short, but mostly in single name
CDS and some tranched index vs the some index longs.).......... 258
11. Goldman Sachs internal email, dated February 2007, re: Goals
(Reduce risk. . . . et super-seniors done on CDOs . . . cover
more single name shorts . . .)................................. 260
12. Goldman Sachs document, Mortgage VaR Change (Q1'07 vs.
Q4'06) (. . . desk increasing their net short risk in RMBS
subprime sector.).............................................. 261
13. Goldman Sachs internal memorandum, dated February 2006 [sic
- accurate year is 2007], re: February 28th FWR [Firm Wide
Risk] Minutes (Business working to reduce exposures; a lot of
shorts already covered.)....................................... 263
14. Goldman Sachs internal email, dated March 2007, re: call
(Trade everything from short to flat - Get out of everything.). 265
15. Goldman Sachs internal email, dated March 2007, re: +0.79%
NK225 +1.62% HANG-SENG (A big plus would hurt the Mortgage
business but Justin thinks he has a big trade lined up for the
morning to get us out of a bunch of our short risk)............ 266
16. Goldman Sachs internal email, dated March 2007, re: Mortgage
Talking Points for Earnings Call (The Mortgage business'
revenues were primarily driven by synthetic short positions
concentrated in BBB/BBB- sub prime exposure and single A CDO
exposure which benefited from spread widening.)................ 268
17. Goldman Sachs internal email, dated March 2007, re: Mortgage
presentation to the board (. . . ``in the synthetics space, the
desk started the quarter with long $6.0bn notional ABX BBB-
risk and shifted the position to net short $10bn notional by
reducing the longs in ABX BBB- and increasing shorts in single
name CDS'').................................................... 269
18. Goldman Sachs internal email, dated March 2007, re: Risk
changes over the quarter (In synthetic space, the desk started
the quarter with long $6.0bn not'l ABX ``BBB-'' risk and
shifted the position to net short $10bn not'l by reducing the
longs in ABX ``BBB-'' and increasing shorts in single name
CDS.).......................................................... 271
19. Goldman Sachs internal memorandum, dated March 2006 [sic -
accurate year is 2007], re: March 7th FWR [Firm Wide Risk]
Minutes (``Game Over''--accelerating meltdown for subprime
lenders such as Fremont and New Century.) (excerpt)............ 272
20. Goldman Sachs internal email, dated March 2007, re: Cactus
Delivers (Covered another 1.2 billion in shorts in mortgages--
almost flat--now need to reduce risk).......................... 273
21. Goldman Sachs internal email, dated March 2007, re: (Overall
as a business, we are selling our longs and covering our shorts
. . .)......................................................... 274
22. Goldman Sachs, Presentation to GS Board of Directors,
Subprime Mortgage Business, March 26, 2007..................... 276
23. Goldman Sachs internal email, dated April 2007, re: RMBS
Subprime Risk Report (. . . notionally we're net short. The
reason is that we are long the good stuff and short the bad
stuff . . .)................................................... 302
24. Goldman Sachs internal email, dated July 2007, re: FICC
Financial Package 07/20/07 (There is a net short).............. 303
25. Goldman Sachs internal email, dated July 2007, re: Daily
Estimate 07-24-08 - Net Revenues $74M (. . . especially short
mortgages saved the day.)...................................... 305
26. Goldman Sachs internal email, dated July 2007, re: FICC
Financial Package 07/25/07 (Tells you what might be happening
to people who don't have the big short.)....................... 306
27. Goldman Sachs internal email, dated July 2007, re:
Correlation information you asked for (Correlation P&L on the
week was $234mm, with CMBS, CDOs, and RMBS/ABX shorts all
contributing - Rest of department is net short RMBS and CDOs,
net long cmbs.)................................................ 308
28. Goldman Sachs internal email, dated August 2007, re: great
week (Mortgage Department short approx $4bb of AAA ABX)........ 309
29. Goldman Sachs internal email, dated August 2007, re:
MarketRisk: Market Risk Report (cob 08/08/2007) (we have waved
in [tilde] 120mm in bbb and bbb- protection the last 2 days.
almost all 2006 stuff (tier 1, 2, and 3).)..................... 311
30. Goldman Sachs internal email, dated August 2007, re: Post
(We've been covering, but we will likely come to you soon and
say we'd like to get long billions - and we'd stay short BBBish
part.)......................................................... 313
31. Goldman Sachs internal email, dated August 2007, re:
MarketRisk: End of Day Summary - cob 8/10/2007 (the most
obvious risks are the short in mortgages . . .)................ 314
32. Goldman Sachs internal email, dated August 2007, re: Post
(We're continuing to cover some shorts, and we may cover some
BBB with AAA, but I got the message clearly that we shouldn't
get long without Gary/Tom/Don all saying OK.).................. 316
33. Goldman Sachs internal email, dated August 2007, re:
Projected Corr Customers winners/losers from singled-name mark
changes (The aggregate P&L in the book is $405mm (ie net
markdown to customers), much of this is scattered across a
bunch of cashflow CDOs.)....................................... 318
34. Goldman Sachs internal email, dated August 2007, re:
Potential large subprime trade and impact on Firmwide VAR (We
would like to be opportunistic buyers of up to $10Bln subprime
AAAs . . .).................................................... 319
35. Market Risk Report, 8/14/07, Mortgage Portfolio Summary
(Percentage Contribution to Firmwide VaR - Mortgage Structured
Products--53.8%)............................................... 320
36. Goldman Sachs internal email, dated August 2007, re: Trading
VaR $144mm (we are covering a number of shorts in mortgages
today and tomorrow--probably 1.5 billion worth--will reduce
mortgages hopefully to below 80)............................... 321
37. Goldman Sachs internal email, dated August 2007, re:
(covered about 700 million in shorts in mtgs last night--500 in
single names - lots more to go--but they fortunately had bought
back 9 billion on AAA abx index over last two weeks)........... 322
38. Goldman Sachs internal email, dated August 2007, re: trades
(Here are the trades we have suggested since February. These
are all trades that we have shown to them and our desk has had
on in some form and profited from . . .)....................... 323
39. Goldman Sachs internal email, dated September 2007, re: ABS
Update (We are oprtunsitically [sic] covering risk - we are not
that short at this time)....................................... 325
40. Goldman Sachs internal email, dated September 2007, re:
Mortgage VaR Analysis (The major drivers of Mortgage VaR are
the net short mortgage exposure and the long cash vs. short
derivative basis risk.)........................................ 326
41. Goldman Sachs, Presentation to GS Board of Directors,
Residential Mortgage Business, September 17, 2007.............. 327
42. Goldman Sachs, Board of Directors Meeting, Financial
Summary, September 17-18, 2007, Quarter Ended August 31, 2007
(. . . we were overall net short the mortgage market and thus
had very strong results.) (excerpt)............................ 342
43. Goldman Sachs internal email, dated September 2007, re:
Mortgage P&L for the Week Ended 9/21 (This benefited multiple
trading desks that maintain a short synthetic positions
including SPG Trading (+$40M), CDO (+$22M) and Residential
Credit (+$12M).)............................................... 346
44. Goldman Sachs internal email, dated September 2007, re:
Mortgage commentary on Q3 earnings call (. . . you've heard me
express our generally negative views on the outlook for
mortgages since the beginning of the year . . .)............... 347
45. Goldman Sachs, 3rd Quarter 2007 Script (Let me also address
Mortgages specifically. The mortgage sector continues to be
challenged and there was a broad decline in the value of
mortgage inventory during the third quarter. As a result, we
took significant markdowns on our long inventory positions
during the quarter, as we had in the previous two quarters.
However, our risk bias in that market was to be short and that
net short position was profitable.)............................ 349
46. Goldman Sachs correspondence to the United States Securities
and Exchange Commission, dated October 4, 2007 (. . . during
most of 2007, we maintained a net short sub-prime position and
therefore stood to benefit from declining prices in the
mortgage market.) (excerpt).................................... 361
47. Goldman Sachs, Global Mortgages, Business Unit Townhall, Q3
2007 (The desk benefited from a proprietary short position in
CDO and RMBS single names)..................................... 365
48. Goldman Sachs, Tax Department Presentation, Oct 29, 2007 (.
. . starting early in '07 our mortgage trading desk started
putting on big short positions . . .).......................... 376
49. Goldman Sachs, CDO/CLO details.............................. 384
50. Goldman Sachs correspondence to the Securities and Exchange
Commission, dated November 7, 2007, re: The Goldman Sachs
Group, Inc., Form 10-K for the Fiscal Year Ended November 24,
2006 (During most of 2007, we maintained a net short subprime
position with the use of derivatives, including ABX index
contracts and single name CDS which hedged this long cash
exposure.)..................................................... 390
51. Goldman Sachs, How Did GS Avoid the Mortgage Crisis?
(excerpt)...................................................... 400
52. Goldman Sachs internal email, dated November 2007, re: NYT
(Of course we didn't dodge the mortgage mess. We lost money,
then made more than we lost because of shorts.)................ 403
53. Goldman Sachs internal email, dated December 2007, re:
Weekly Market Risk Summary as of 12/06/07 (Mortgage Trading
loss impact decreased from <$212mm> to <$132mm> largely due to
an increase in net short position in the residential sector.).. 404
54.a. Goldman Sachs, Quarterly Market Risk Review, Market Risk
Management & Analysis, September 2006. (excerpt)............... 405
b. Goldman Sachs, Quarterly Market Risk Review, Market Risk
Management & Analysis, December 2006. (excerpt)................ 410
c. Goldman Sachs, Quarterly Market Risk Review, Market Risk
Management & Analysis, March 2006 [sic - accurate year is
2007]. (excerpt)............................................... 415
d. Goldman Sachs, Quarterly Market Risk Review, Market Risk
Management & Analysis, June 2007. (excerpt).................... 420
e. Goldman Sachs, Quarterly Market Risk Review, Market Risk
Management & Analysis, September 2007. (excerpt)............... 425
f. Goldman Sachs, Quarterly Market Risk Review, Market Risk
Management & Analysis, December 2007. (excerpt)................ 430
55.a. Goldman Sachs 2007 Performance Review for Daniel L.
Sparks. (excerpt).............................................. 435
b. Goldman Sachs 2007 Performance Review for Michael J.
Swenson. (excerpt)............................................. 441
c. Goldman Sachs 2007 Performance Review for Joshua S.
Birnbaum. (excerpt)............................................ 447
d. Goldman Sachs 2007 Performance Review for Fabrice P.
Tourre. (excerpt).............................................. 453
56.a. Goldman Sachs internal document, RMBS Subprime Notional
History (Mtg Dept - ``Mtg NYC SPG Portfolio'')................. 455
b. Goldman Sachs internal email, dated August 2007, re: In
addition to ABS book, I need you to run that series on the
whole dept and correlation desk)............................... 456
57. Goldman Sachs 2009 Letter to Shareholders................... 458
Documents Related to Investment Priorities:
58. Goldman Sachs, Mortgages Compliance Training 2007 Trading
Desks, February 8 and 12, 2007 (Our first business principle
states that: Our Clients' Interest Always Comes First. However,
this is not always straight forward as we are a market maker to
multiple clients) (excerpt).................................... 466
59. Goldman Sachs internal email, dated October 2006, (. . .
upset that we are delaying their deal. They know that Hudson
Mezz (GS prop deal) is pushing their deal back.)............... 469
60. Goldman Sachs internal email, dated December 2006, re:
Update (. . . we've had good traction moving risk through our
franchise on a variety of fronts: ABX, single names, super-
senior, Hudson 2.)............................................. 470
61. Goldman Sachs internal email, dated December 2006, re: Last
call--any other comments on the proposed top 20 correlation
customer list? (. . . this list might be a little skewed
towards sophisticated hedge funds with which we should not
expect to make too much money since (a) most of the time they
will be on the same side of the trade as we will, and (b) they
know exactly how things work and will not let us work for too
much $$$, vs. buy-and-hold rating-based buyers who we should be
focused on a lot more to make incremental $$$ next year . . .). 471
62. Goldman Sachs internal email, dated January 2007, re: ft--
friday (. . . not feeling too guilty about this, the real
purpose of my job is to make capital markets more efficient and
ultimately provide the US 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 !!!)......................................... 475
63. Goldman Sachs internal email, dated March 2007, re: Audit
Committee Package--Feb 21--Draft--Mortgage--Page.ppt (. . . my
understanding is that desk is no longer buying subprime. (We
are low balling on bids.))..................................... 477
64. Goldman Sachs internal email, dated March 2007, re: Abacus
AC1 (Given risk priorities, subprime news and market
conditions, we need to discuss side-lining this deal in favor
of prioritizing Anderson in the short term.)................... 478
65. Goldman Sachs internal email, dated May 2007, re: LBML 06A
(bad news . . . wipes out the m6s and makes a wipeout on the m5
imminent . . . costs us about 2.5mm . . . ood news . . . we
own 10mm protection on the m6 marked at $50 . . . we make $5mm) 479
66. Goldman Sachs internal email, dated May 2007, re: Priority
Axes (Not experts in this space at all but made them a lot of
money in correlation dislocation and will do as I suggest.).... 481
67. Goldman Sachs internal email, dated July 2007, re: 7/23 CDO/
RMBS requests from Taiwan (. . . bank just bought the altius
deal from gs 5 weeks ago and the mtm dropped over 50%. ***
Unless the principal is at risk now, the mtm is not supposed to
drop so quickly during such short period of time.)............. 483
68. Goldman Sachs internal email, dated October 2007, re: P and
L (Dept +90mm today *** 65mm from yesterday's downgrades which
lead to the selloff in aa through bbbs today. *** Great day!).. 485
69. Goldman Sachs internal email, dated October 2007, re: Early
post on P and L (Sounds like we will make some serious money
*** Yes we are well positioned)................................ 486
70. Goldman Sachs internal email, dated October 2007, re: US ABS
SS Intermediation Trades (Real bad feeling across European
sales about some of the trades we did with clients. The damage
this has done to our franchise is very significant. Aggregate
loss of our clients on just these 5 trades alone is 1bln+.).... 487
71. Goldman Sachs internal email, dated February 2007, re:
Questions you had asked (. . . deals to worry about.).......... 489
Documents Related to CDO Offerings:
72. Goldman Sachs internal email, dated December 2006, re:
Retained bonds (. . . pls refocus on retained new issue bond
positions and move them out.).................................. 491
73. Goldman Sachs internal email, dated February 2007, re: GS
Syndicate RMBS Axes (INTERNAL) (. . . we need to continue to
push credit positions across subprime and second liens.)....... 492
74. Goldman Sachs internal email, dated February 2007, re:
Mortgage Risk - Credit residential (Goal is to have good
turnover in the loan book (securitize quickly) and manufacture
attractive equity (primarily in Option Arms, not hybrids, since
option arm structures are similar to Alt-A/subprime
structures).).................................................. 495
75. Goldman Sachs internal email, dated March 2007, re: Mortgage
risk (Therefore, we are trying to close everything down, but
stay on the short side.)....................................... 499
76. Goldman Sachs internal email, dated March 2007, re: help
(The key to success in the correlation melt-down 2 years ago
was getting new clients/capital into the opportunity quickly.). 501
77. Goldman Sachs internal email, dated March 2007, re: New
Century EPDs (I recommend putting back 26% of the pool . . . if
possible.)..................................................... 504
78. Goldman Sachs internal email, dated March 2007, re: Non-
traditional Buyer Base for CDO AXES (We have pushed credit
sales to identify accounts in the credit space that would
follow yield into the ABS CDO market, and tried to uncover some
non-traditional buyers.)....................................... 506
79. Goldman Sachs internal Memorandum, dated March 23, 2007, re:
Agenda for Monday, March 26, 2007 (The following is a list of
transactions scheduled for review . . . SAMP 2007-HE2 . . .
New Century (71.91%) . . .).................................... 507
80. Goldman Sachs internal email, dated March 2007, re: ABACUS
07-AC1 status (Plan would still be to ask sales people to focus
on Anderson mezz, Point Pleasant and Timberwolfe, but if
accounts pass on these trades, steer them towards available
tranches in ABACUS 07-AC1 since we make $$$ proportionately
with the notional amount of these tranches sold.).............. 508
81. Goldman Sachs email, dated April 2007, re: Brad - please
take a look at this (These are all dirty '06 originations that
we are going to trade as a block.)............................. 509
82. Goldman Sachs internal email, dated April 2007, re: ABACUS
07-AC1 (. . . seems we might have to book these pigs.)......... 511
83. Goldman Sachs internal email, dated April 2007, re: GS
Syndicate RMBS Axes (Great job . . . moving us out of 6mm of
our BBB-, Fremont, subprime risk.)............................. 512
84. Goldman Sachs internal email, dated May 2007, re: CDO's -
Mortgages (Sparks and the Mtg group are in the process of
considering making significant downward adjustments to the
marks on their mortgage portfolio esp CDOs and CDO squared.)... 514
85. Goldman Sachs, ABACUS 2006-11, LTD, Offering Circular dated
September 19, 2006. (excerpt).................................. 515
86. Goldman Sachs internal email, dated September 2006, re:
Hudson Mezz - new (. . . asked to do a CDO of $2bln for the ABS
desk.)......................................................... 550
87. Hudson Mezzanine Funding 2006-1, LTD., A $2.0 Billion Static
Mezzanine Structured Product CDO, Goldman, Sachs & Co. -
Liquidation, Structuring, and Placement Agent, October 2006.... 551
88. Goldman Sachs internal email, dated October 2006, re: Risk
Issue (. . . was wondering if the whole of the $2b assets in
Hudson Mezz should be accounted as part of our risk calc since
many of the assets (1.2B) were sources from another desk . . .) 585
89. Goldman Sachs internal email, dated October 2006, re:
MarketRisk: Mortgage Risk Report (cob 10/25/2006) (. . . we
sold $1bn of ABX BBB- and bought $1bn protection on single name
BBB- CDS.)..................................................... 586
90. Goldman Sachs internal email, dated October 2006, re: Great
Job on Hudson Mezz (Goldman was the sole buyer of protection on
the entire $2.0 billion of assets.)............................ 588
91. Goldman Sachs internal email, dated January 2007, re:
MTModel (They structured like mad and travelled the world, and
worked their tails off to make some lemonade from some big old
lemons.)....................................................... 589
92. Goldman Sachs internal email, dated February 2007, re:
Second lien deal performance and write-down (The put backs will
be a battle.).................................................. 591
93. Goldman Sachs internal email, dated February 2007, re:
Anderson (Dan asked me to send out to the group names we're
paired off with the ABS desk for the deal.).................... 592
94. Goldman Sachs internal email and attachment, dated February
2007, re: Current Anderson Positions (. . . $140mm out of
$305mm total are trades between the CDO warehouse and ABS
trading.)...................................................... 593
95. Goldman Sachs internal email, dated February 2007, re: Puts
at 50 (We should see what liabilities gsc can take into its
other vehicles . . .).......................................... 596
96. Goldman Sachs internal email and attachment, dated March
2007, re: Anderson Mezzanine Portfolio - New Century (Attached
please find the Anderson Mezz portfolio, with the bonds for
which New Century is the largest originator . . .)............. 599
97. Goldman Sachs internal email, dated March 2007, re: Other
thought on Anderson . . . (All trades should be internal.)..... 602
98. Goldman Sachs internal Memorandum, dated November 10, 2006,
re: Timbe[r]wolf CDO - Single-A structured produce CDO with
Greywolf Capital (We expect approximately 25-40% of the
portfolio upon closing will have been sourced through our
various structured product trading desks in both cash and
synthetic form.)............................................... 603
99.a. Timberwolf I, Ltd., $1.0 Billion Single-A Structured
Product CDO, February 2007..................................... 614
b. Timberwolf I, Ltd. - Closing Porfolio..................... 663
100. Goldman Sachs internal email, dated March 2007, re: GS
Syndicate Structured Product CDO Axes (GREAT JOB . . . TRADING
US OUT OF OUR ENTIRE TIMBERWOLF SINGLE-A POSITION . . . PLEASE
STAY FOCUSED ON TRADING THESE AXES.)........................... 665
101. Goldman Sachs internal email, dated April 2007, re: GS
Syndicate Structured Product CDO Axes (Your focus on this ax
would be very helpful - we are trying to clean up deals and
this is our priority.)......................................... 667
102. Goldman Sachs internal email, dated April 2007, re:
*UPDATE* GS Syndicate Structured Product CDO Axes (Why don't we
go one at a time with some ginormous credits - for example,
let's double the current offering of credits for timberwolf)... 669
103. Goldman Sachs internal email, dated May 2007, re: Lester
Called (. . . harvey is concerned about the representations we
may be making to clients . . .)................................ 671
104. Goldman Sachs internal email, dated June 2007, re: TWOLF /
Korea (internal only) (. . . push for . . . to increase their
size . . .).................................................... 673
105. Goldman Sachs internal email, dated June 2007, re: Few
trade posts (boy that timberwo[l]f was one shi**y deal)........ 674
106. Goldman Sachs internal email, dated September 2007, re:
Timberwolf (. . . a day that will live in infamy.)............. 675
Documents Related to Abacus 2007-AC1:
107. Goldman Sachs internal email, dated December 2006, re:
Paulson (Let's brainstorm so that we can identify a couple of
managers that: . . . will be flexible w.r.t. portfolio
selection (i.e. ideally we will send them a list of 200 Baa2-
rated 2006-vintage RMBS bonds that fit certain criteria, and
the portfolio selection agent will select 100 out of the 200
bonds))........................................................ 677
108. Goldman Sachs/ACA email, dated January 2007, re:
Transaction Summary (. . . we wanted to summarize ACA's
proposed role as ``Portfolio Selection Agent'' for the
transaction that would be sponsored by Paulson . . .).......... 680
109. Goldman Sachs/ACA email, dated January 2007, re: Call with
Fabrice on Friday (I can understand Paulson's equity
perspective but for us to put our name on something, we have to
be sure it enhances our reputation.)........................... 682
110. Goldman Sachs/ACA email, dated January 2007, re: proposed
Paulson Portfolio (Of the 123 names that were originally
submitted to us for review, we have included only 55.)......... 683
111. Goldman Sachs internal email, dated January 2007, re:
ABACUS - Initial Draft Engagement Letter for ACA (What time
works on the 5th to have a paulson discussion . . .)........... 684
112. Goldman Sachs internal email, dated January 2007, re: GSC
post (. . . SC had declined given their negative views on most
of the credits that Paulson had selected.)..................... 687
113. Goldman Sachs internal email, dated January 2007, re:
ABACUS Transaction - update (. . . Paulson has suggested we
substitute GSAMP 06-HE4 M8 and GSAMP 06-HE5 M8.)............... 689
114. Goldman Sachs internal email, dated February 2007, re: ACA/
Paulson (. . . help Paulson short senior tranches . . . ***
Still reputational risk, . . .)................................ 690
115. Goldman Sachs internal email, dated February 2007, re: ACA/
Paulson post (My idea to broker the short. Paulson's idea to
work with a manager. My idea to discuss this with ACA who could
do supersenior at the same time . . .)......................... 691
116. Goldman Sachs internal email, dated February 2007, re:
ABACUS 2007 AC1--Marketing Points.............................. 694
117. Draft 2/5/2007 Goldman Sachs Letter Agreement to Paulson
Credit Opportunities Master Ltd................................ 696
118. Goldman Sachs internal Memorandum to Mortgage Capital
Committee, dated March 12, 2007, re: ABACUS Transaction
sponsored by ACA............................................... 713
119. Goldman Sachs internal email, dated March 2007, re: ABACUS
ACA (Paulson will likely not agree to this unless we tell them
that nobody will buy these bonds if we don't make that change.) 721
120. Goldman Sachs, ABACUS 2007-AC1, $2 Billion Synthetic CDO,
Referencing a static RMBS Portfolio, Selected by ACA
Management, LLC, March 23, 2007................................ 723
121. Goldman Sachs, ABACUS 2007-AC1, LTD, Offering Circular
dated April 26, 2007. (excerpt)................................ 789
122. Goldman Sachs internal email, dated April 2007, re: Paulson
(We need to be sensitive of the profitability of these trades
vs. profitability of abacus - we should prioritize the higher
profit margin businesses with Paulson.)........................ 842
123. Goldman Sachs internal email, dated May 2007, re: Post on
Paulson and ABACUS 07-AC1 (100% Baa2 RMBS selected by ACA/
Paulson)....................................................... 843
124. Goldman Sachs internal email, dated May 2007, re: ACA - We
are done ! (Thank you for your tireless work and perseverance
on this trade !! Great job.)................................... 845
125. Goldman Sachs internal email, dated May 2007, re: Paulson
update (. . . $91mm of 45-50 tranche risk that we would work on
over the next few weeks - we are showing this tranche to a few
accounts @ 80bps.)............................................. 846
126. Goldman Sachs internal email, dated June 2007, re: ABACUS
2007-AC1 Portfolio and OC for BSAM (We can offer approximately
$91mm Class Junior SS Notes . . .)............................. 847
127. Goldman Sachs internal email, dated November 2007, re: ACA
(. . . some of these trades have been outright short trades for
us, and some of them have been crosses for Paulson.)........... 848
128. Goldman Sachs internal email, dated April 2008, re: (. . .
our infamous ABAC 07-AC1), *** . . . he may think these hedges
are worth a lot more than they actually are . . .)............. 849
129. Goldman Sachs Press Release: Goldman Sachs Makes Further
Comments on SEC Complaint, April 16, 2010...................... 851
Other Documents:
130. Goldman Sachs internal email, dated February 2007, re:
Mortgage Risk - Credit residential (. . . you refer to losses
stemming from residual positions in old deals. Could/should we
have cleaned up these books before and are we are doing enough
right now to sell off cats and dogs in other books throughout
the division.)................................................. 853
131. Goldman Sachs internal email, dated March 2007, re: Daily
Estimate 03-20-07 - Net Revenues $111.0 M (Anything noteworthy
about the losses in mortgages? *** No market rallied a bit
still short)................................................... 857
132. Goldman Sachs internal email, dated July 2007, re: Mortgage
Estimate (Much of the shorts are hedges for loans and some
senior AAA CDOs (basis risk), but there is also a large net
short that we are chipping away to cover - it will take time as
liquidity is tough.)........................................... 858
133. Goldman Sachs internal email, dated July 2007, re: (If the
shorts went up today, shouldn't the longs have dropped . . .).. 861
134. Goldman Sachs internal email, dated July 2007, (Still have
loads of index shorts vs cash or single name risk in mtg and
credit which will bite us sometime.)........................... 862
135. Goldman Sachs internal email, dated September 2007, re:
Fortune: How Goldman Sachs defies gravity (. . . the short
position wasn't a bet. It was a hedge.)........................ 863
136. Goldman Sachs internal email, dated October 2007, re: (How
did the review of the mortgage and cdo books go?).............. 866
137. Goldman Sachs Press Release: To avoid crises, we need more
transparency, Op-Ed, The Financial Times by Lloyd Blankfein,
October 13, 2009............................................... 867
138.a. Goldman Sachs Business Principles (Our clients' interests
always come first.)............................................ 869
b. Goldman Sachs Code of Business Conduct and Ethics........ 870
139. Goldman Sachs internal email, dated June 2006, re: . . .
proposal (. . . we can over-issue that specific tranche if it
is perceived to be a good short.).............................. 874
140. Goldman Sachs internal email, dated September 2006, re: MCC
Posting - ABACUS 2006-14 (Like ABACUS 06-11 we expect to hedge
by crossing the tranched shorts . . . *** so we do not expect
to retain any correlation risk.)............................... 876
141. Goldman Sachs internal Memorandum to Mortgage Capital
Committee, dated July 31, 2006, re: ABACUS 11 Structured
Product Synthetic CDO (We expect to place $68.75 million of
credit-linked notes from ABACUS 11 with Aladdin for inclusion
in their high-grade Altius III and mezzanine-grade Fortius II
CDO transactions, both of which are currently being arranged by
Goldman.)...................................................... 877
142. Goldman Sachs internal email, dated December 2006, re:
Opportunities/Challenges (Opportunities: . . . ABACUS-rental
strategies, according to which we ``rent'' our ABACUS platform
to counterparties focused on putting on macro short in the
sector)........................................................ 886
143. Goldman Sachs internal email, dated March 2007, re: dinner
(In last 2 years - derivatives market created that allowed a
very physical unique CUSIP market became a market where people
could get dramatically more exposure on the long side, and now
people could play it from the short side. . . . Most of the
synthetic flows were hedge funds getting short and CDO vehicles
getting long.)................................................. 887
144. Goldman Sachs internal email, dated March 2007, re: Here is
the list of questions. For the most of the questions, each of
you should be ready to have input.............................. 889
145. Goldman Sachs, CDO Platform Overview, June 2007 (excerpt).. 892
146. Goldman Sachs internal email, dated July 2007, re: * ABX
Markets 07-1, 06-2, 06-1: 12:00pm (He's definitely the man in
this space, up 2-3 bil on this trade. We were giving him a run
for his money for a while but now are a definitive #2.)........ 895
147. Goldman Sachs, Structured Credit Opportunity Fund, August
2007 (Almost 100% of mezzanine risk sold through CDOs)......... 897
148. Goldman Sachs correspondence to Financial Crisis Inquiry
Commission, dated March 1, 2010, (. . . the firm did not
generate enormous net revenues or profits by betting against
residential mortgage-related products, . . .).................. 911
149.a. Goldman Sachs, Global Markets Institute, Effective
Regulation: Part 1, Avoiding Another Meltdown, March 2009...... 920
b. Goldman Sachs, Global Markets Institute, Effective
Regulation: Part 3, Helping Restore Transparency, June 2009.... 943
150. Goldman Sachs Memorandum to the Mortgage Capital Committee,
dated March 12, 2007, re: ABACUS Transaction to be Lightly-
Managed by . . . Capital (The desk has an axe to short
structured product CDOs in bulk. The ABACUS transactions are
currently one of the unique formats available to source
efficient spread and credit protection in large size on this
type of structured product risk.).............................. 954
151. Goldman Sachs internal email, dated December 2006, re: Mezz
Risk (We have been thinking collectively as a group about how
to help move some of the risk.)................................ 961
152. Goldman Sachs internal email, dated January 2007, re: Post
on Paulson (. . . could get comfortable with a sufficient
number of obligations that Paulson is looking to buy protection
on in ABACUS format, . . .).................................... 963
153. Goldman Sachs internal email, dated July 2007, re: Seeking
Approval: Equities trading in SPG (. . . we are looking for
approval to opportunistically buy puts on certain mortgage
originators, insurers, mortgage REITs, broker-dealers, and
other related names exposed to RMBS, CMBS.).................... 965
154. Goldman Sachs, Form 8-K, dated September 20, 2007
(Significant losses on non-prime loans and securities were more
than offset by gains on short mortgage positions.) (excerpt)... 966
155. Goldman Sachs, SP CDO Trades.xls, dated May 2007........... 971
156. Goldman Sachs internal email, dated March 2007, re: Full
Risk for Mtg NYC ABS Equities Portfolio on 27Mar07............. 972
157. Goldman Sachs internal email, dated July 2007, re: Full
Risk for Mtg NYC ABS Equities Portfolio on 27Jul07............. 975
158. Thomson StreetEvents Final Transcript, dated December 2007,
re: GS - Q4 2007 Goldman Sachs Earnings Conference Call (Our
mortgage business was profitable over the year.) (excerpt)..... 978
159. Goldman Sachs, 4Q07 Fact Sheet (Mortgages: . . . FY07 P&L:
loans/securities -$4.8B; derivatives +$5.9B)................... 981
160. Goldman Sachs, Securities Division Summary Highlights -
Week Ending November 30th, 2007 (YTD Performance of SPG -
$3,742.3 mm) (excerpt)......................................... 983
161. Goldman Sachs: Risk Management and the Residential Mortgage
Market, April 2010............................................. 985
162. Goldman Sachs Mortgage Department Total Net Short Position,
February - December 2007 in $ Billions (charts prepared by
Permanent Subcommittee on Investigations)...................... 997
163. Goldman Sachs Long Cash Subprime Mortgage Exposure,
Investments in Subprime Mortgage Loans, and Investments in
Subprime Mortgage Backed Securities, November 24, 2006 vs.
August 31, 2007 - in $ Billions (chart prepared by Permanent
Subcommittee on Investigations)................................ 1009
164. Goldman Sachs Mortgage Department Value at Risk (VaR),
December 2006 - December 2007 (in $ Millions) (chart prepared
by Permanent Subcommittee on Investigations)................... 1010
165. Goldman Sachs internal email, dated October 2006, re: BBB
RMBS (do we have anything talking about how great the BBB
sector of RMBS is at this point in time . . . a common response
I am hearing on both Hudson and HGS1 is a concern about the
housing market and BBB in particular?)......................... 1011
166. Goldman Sachs internal emails, dated June-August 2007, re:
Timberwolf sales efforts....................................... 1012
167.a. Washington Mutual, Inc., Follow Up - Subprime Mortgage
Market, January 2004........................................... 1022
b. Goldman Sachs internal email, dated March 2005, re:
Presentation in St. Petersburg, FL (. . . '98-'01 vintage
originations have underperformed the market (they've had a
number of deals downgraded, etc.).)............................ 1025
c. Goldman Sachs internal email, dated November 2006, re:
Cohen (Cohen Recap . . . They have been getting negative
feedback from CDO investors on 2nd liens in general and are
looking to unwind some of their underlying exposure)........... 1027
d. Goldman Sachs internal email, dated February 2007, re:
2006 Subprime 2nds Deals Continue to Underperform (Collateral
from all Subprime originators, large and small, has exhibited a
notable increase in delinquencies and defaults, however, deals
backed by Fremont and Long Beach collateral have generally
underperformed the most.)...................................... 1029
e. Moody's Investors Service, Structure Finance, Special
Report, August 30, 2007, Moody's Update on 2006 Closed-End
Second Lien RMBS: Performance and Ratings Activity to Date (As
clearly seen in the table above, a few originators stand out as
the worst performers on a loss-to-liquidation basis. Fremont,
Long Beach, Countrywide, New Century, and First Franklin appear
in 11 of the 12 worst deals by this metric.)................... 1033
f. Standard and Poor's, Credit Ratings: Long Beach Mortgage
Loan Trust 2006-A.............................................. 1042
168.a. Goldman Sachs, Presentation to: Washington Mutual
Regarding: Management of Purchased Sub-Prime Portfolio, August
2005........................................................... 1045
b. Goldman Sachs, Presentation to: Long Beach Mortgage
Speciality Home Loans Regarding: Plan for 2006, January 2006... 1052
169. Goldman Sachs internal email, dated January 2007, re: Sub-
Prime--Presentation to Viniar.................................. 1061
170.a. Hudson High Grade Funding 2006-1, LTD, Offering Circular
dated October 30, 2006......................................... 1081
b. Hudson Mezz 1 Trade Portfolio 11/16/2006................. 1083
c. Goldman Sachs internal email, dated October 2006, re:
Hudson Mezz (. . . ``AIB are too smart to buy this kind of
junk'' . . .).................................................. 1085
d. Goldman Sachs internal email, dated October 2006, re:
Structured Product New Issue Pipeline (. . . uessing sales
people view the syndicate ``axe'' email we have used in the
past as a way to distribute junk that nobody was dumb enough to
take first time around.)....................................... 1086
171.a. Standard & Poor's internal email, dated May 2006, re:
Broadwick Funding (It was a known flaw not only in that
particular ABACUS trade, but in pretty much all ABACUS trades .
. .)........................................................... 1089
b. Standard & Poor's internal email, dated April 2006, re:
ABACUS 2006-12 - Writedowns immediately prior to Stated
Maturity (Don't even get me started on the language he cites .
. . which is one of the reasons I said the counterparty
criteria is totally messed up.)................................ 1093
c. Goldman Sachs internal email, dated March 2007, re:
Structured Note Methodology (By the way, moodys should not know
our price. Tell them its par and we will charge a higher fee if
necessary.).................................................... 1097
172. Goldman Sachs internal emails, dated March 2007, re: Sale
of Anderson CDO................................................ 1101
173. Goldman Sachs internal emails, dated November 2006, re: ACA
and Freemont [sic] deal (. . . fremont refused to make any
forward looking statements so we really got nothing from them
on the crap pools that are out there now.)..................... 1109
174. ACA Capital emails, dated January-April 2007, re: 2007
Abacus AC1 transaction......................................... 1110
175. Goldman Sachs internal email, dated November 2007, re: FICC
2008 business plan presentation to Firm........................ 1119
176. SEALED EXHIBIT: Deposition of Lloyd C. Blankfein, December
15, 2009, before the Senate Permanent Subcommittee on
Investigation.................................................. *
Note: Responses to Supplemental Questions for the April 27
hearing will be reprinted in Volume 5 of the Wall Street and
the Financial Crisis hearing record.
WALL STREET AND THE FINANCIAL CRISIS: THE ROLE OF INVESTMENT BANKS
----------
TUESDAY, APRIL 27, 2010
U.S. Senate,
Permanent Subcommittee on Investigations,
of the Committee on Homeland Security
and Governmental Affairs,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:01 a.m., in
room SD-106, Dirksen Senate Office Building, Hon. Carl Levin,
Chairman of the Subcommittee, presiding.
Present: Senators Levin, Carper, Pryor, McCaskill, Tester,
Kaufman, Coburn, Collins, McCain, and Ensign.
Staff Present: Elise J. Bean, Staff Director and Chief
Counsel; Mary D. Robertson, Chief Clerk; Robert L. Roach,
Counsel and Chief Investigator; Ross K. Kirschner, Counsel;
Daniel J. oshorn, Counsel; David H. Katz, Counsel; Laura E.
Stuber, Counsel; Zachary I. Schram, Counsel; Allison F. Murphy,
Counsel; Gary M. Brown, Consultant; Pauline E. Calande,
Detailee (SEC); Adam Henderson, Professional Staff Member; Tom
Caballero, Senate Legal Counsel; Jason E. Medica, Detailee
(ICE); Nina E. Horowitz, Detailee (GAO); Jennifer Auchterlonie,
Detailee (DOJ); Robert Kaplan, Intern; Jeff Kruszewski, Law
Clerk; Ryan McCord, Law Clerk; Andrew Tyler, Law Clerk;
Christopher Barkley, Staff Director to the Minority; Anthony G.
Cotto, Counsel to the Minority; Keith B. Ashdown, Chief
Investigator to the Minority; Justin J. Rood, Senior
Investigator to the Minority; Tyler Gallasch (Senator Levin);
Clark Porter (Senator McCaskill); Ted Schroeder and Nhan Nguyen
(Senator Kaufman); Amy Overton and Emily Spain (Senator
Carper); Donnie Williams and Stephen Lehrman (Senator Pryor);
Brandon Milhorn, Mary Beth Carozza, and Ivy Johnson (HSGAC/
Minority/Senator Collins); John Lawrence (Senator Ensign);
Daniel Stein (Senator Tester); Alice Joe (Senator McCain); Neil
Cutter (Senator Collins); and Jim Hughes (Senator Collins).
OPENING STATEMENT OF SENATOR LEVIN
Senator Levin. Good morning, everybody. Today the
Subcommittee holds the fourth in our series of hearings to
explore some of the causes and consequences of the financial
crisis. These hearings are the culmination of nearly a year and
a half of investigation.
The freezing of financial markets and collapse of financial
institutions that sparked our investigation are not just a
matter of numbers on a balance sheet. Millions of Americans
have lost their jobs, their homes, and their businesses in the
recession that the crisis sparked, the worst economic decline
since the Great Depression. Behind every number we cite are
American families who are still suffering the effects of a man-
made economic collapse.
Our Subcommittee's goal is to construct a record of the
facts in order to deepen public understanding of what went
wrong, to inform the ongoing legislative debate about the need
for financial reform, and to provide a foundation for building
better defenses to protect Main Street from the excesses of
Wall Street.
Our first hearing dealt with the impact of high-risk
mortgage lending and focused on a case study of Washington
Mutual Bank, known as WaMu, a thrift whose leaders embarked on
a reckless strategy to pursue higher profits by emphasizing
high-risk exotic loans. WaMu did not just make loans that were
likely to fail, creating hardship for borrowers and risk for
the bank. It also built a conveyor belt that fed those toxic
loans and mortgages into the financial system like a polluter
dumping poison into a river. The poison came packaged in
mortgage-backed securities that WaMu sold to get the enormous
risk of those loans and their growing default rates off of its
own books, dumping that risk into the financial system.
Our second hearing examined how Federal regulators saw what
was going on but failed to rein in WaMu's reckless behavior.
Regulation by the Office of Thrift Supervision (OTS) that
should have been conducted at arm's length was instead done
arm-in-arm with WaMu. OTS failed to act on major shortcomings
it observed, and it thwarted other agencies from stepping in.
Our third hearing dealt with credit rating agencies,
specifically case studies of Standard & Poor's and Moody's, the
Nation's two largest credit raters. While WaMu and other
lenders dumped their bad loans into the river of commerce and
regulators failed to stop their behavior, the credit rating
agencies assured everyone that the poisoned water was safe to
drink, slapping AAA ratings on bottles of high-risk financial
products.
The credit rating agencies operate with an inherent
conflict of interest. Their revenue comes from the same firms
whose products they are supposed to critically and objectively
analyze, and those firms, the firms whose products the credit
rating agencies are analyzing, exert pressure on the rating
agencies who too often put market share ahead of analytical
rigor.
Today we will explore the role of investment banks in the
development of the crisis. We focus on the activities during
2007 of Goldman Sachs, one of the oldest and most successful
firms on Wall Street. Those activities contributed to the
economic collapse that came full-blown the following year.
Goldman Sachs and other investment banks, when acting
properly, play an important role in our economy. They help
channel the Nation's wealth into productive activities that
create jobs and make economic growth possible, bringing
together investors and businesses and helping Americans save
for retirement or a child's education. That is when investment
banks act properly.
But in looking at this crisis, it is not hard to echo the
conclusion of another congressional committee which found,
``The results of the unregulated activities of the investment
bankers were disastrous.'' That conclusion came in 1934 as the
Senate looked into the reasons for the Great Depression, and
the parallels are unmistakable to today's events.
Goldman Sachs proclaims ``a responsibility to our clients,
our shareholders, our employees, and our communities to support
and fund ideas and facilitate growth.'' Yet the evidence shows
that Goldman repeatedly put its own interests and profits ahead
of the interests of its clients and our communities. 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 from the collapse.
The evidence also shows that repeated public statements by
the firm and its executives provide an inaccurate portrayal of
Goldman's actions during 2007, the critical year when the
housing bubble burst and the financial crisis took hold. 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 they did
so.
Now, why does that matter? Surely there is no law, ethical
guideline, or moral injunction against profit. But Goldman
Sachs did not just make money. It profited by taking advantage
of its clients' reasonable expectation 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. Its 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.
To understand how the change in investment banks helped
bring on the financial crisis, we need to understand first how
Wall Street turned bad mortgage loans into economy-wrecking
financial instruments. Our previous hearings have covered some
of this ground. The story begins with mortgage lenders such as
WaMu, Washington Mutual Bank, out there in the State of
Washington, which loaned money to homebuyers and then sought to
move those loans off of its own books. That activity spawned an
ever more complex market in mortgage-backed securities, a
market that for a while worked pretty well.
But then things turned upside down. The fees that banks and
Wall Street firms made from their securitization activities
were so large that they ceased to be a means to keep capital
flowing to housing markets and became ends in themselves.
Mortgages and mortgage-backed securities began to be produced
for Wall Street instead of Main Street. Wall Street bond
traders sought more and more mortgages from lenders in order to
create new securities that generated fees for their firms and
large bonuses for themselves.
Demand for securities prompted lenders to make more and
more riskier mortgage loans. Making and packaging new loans
became so profitable that credit standards plummeted, and
mortgage lenders began making risky, exotic loans to people
with little chance of making the payments owing on those loans
and mortgages. Wall Street designed increasingly complex
financial products that produced AAA ratings for high-risk
products that flooded the financial system. As long as home
prices kept rising, the high-risk mortgages posed few problems.
Those who could not pay off their loans could refinance or sell
their homes, and the market for mortgage-related financial
products flourished.
But the party could not last, and we all know what
happened. Housing prices stopped rising, and the bubble burst.
Investors started having second thoughts about the mortgage-
backed securities that Wall Street was churning out. In July
2007, two Bear Stearns offshore hedge funds specializing in
mortgage-related securities suddenly collapsed. That same
month, the credit rating agencies downgraded hundreds of
subprime mortgage-backed securities, and the subprime market
went cold. Banks, security firms, hedge funds, mutual funds,
and other investors were left holding suddenly unmarketable
mortgage-backed securities whose values were plummeting.
America began feeling the consequences of the economic assault.
Goldman Sachs was an active player in building this
mortgage machinery. During the period leading up to 2008,
Goldman made a lot of money packaging mortgages, getting AAA
ratings, and selling securities backed by loans from
notoriously poor-quality lenders such as WaMu, Fremont, and New
Century. Of special concern was Goldman's marketing of what are
known as ``synthetic'' financial instruments.
Ordinarily, the financial risk in a market--and, hence, the
risk to the economy at large--is limited because the assets
traded are finite. There are only so many houses, mortgages,
shares of stock, bushels of corn, or barrels of oil in which to
invest. But a synthetic instrument has no real assets. It is
simply a bet on the performance of the assets that it
references. That means the number of synthetic instruments is
limitless, and so is the risk that they present to the economy.
Synthetic structures referencing high-risk mortgages
garnered hefty fees for Goldman Sachs and other investment
banks. They assumed an ever larger share of the financial
markets and contributed greatly to the severity of the crisis
by magnifying the amount of risk in the system.
Increasingly, synthetics became bets made by people who had
no interest in the referenced assets. Synthetics became the
chips in a giant casino, one that created no economic growth,
even when it thrived, and then helped throttle the economy when
the casino collapsed.
But Goldman Sachs did more than earn fees from the
synthetic instruments that it created. Goldman also bet against
the mortgage market and earned billions when that market
crashed.
In December 2006, Goldman decided to move away from its
long positions in the mortgage market in what began as a
prudent hedging against the firm's large exposure to that
market--exposure that sparked concern on the part of the firm's
senior executives. The edict from top management after a
December 14, 2006, meeting was, ``Get closer to home,'' meaning
get to a more neutral risk position. But by early 2007, the
company blew right past a neutral position on the mortgage
market and began betting heavily on its decline, often using
complex financial instruments, including synthetic
collateralized debt obligations (CDOs). Goldman took large net
short positions throughout 2007.
Now, a chart which we are going to put up there is based on
data supplied to the Subcommittee by Goldman Sachs.\1\ It
tracks the firm's ongoing huge short positions throughout the
year. Those short positions at one point represented
approximately 53 percent of the firm's risk as measured by the
most relied upon risk measure called value at risk (VaR). The
black line in the middle of that chart represents a neutral
line, balance. The brown numbers and lines below that median
black line represent the net short of Goldman during the entire
year, and you can see it was net short during that entire year
of 2007.
---------------------------------------------------------------------------
\1\ See Exhibit No. 162, which appears in the Appendix on page 997.
---------------------------------------------------------------------------
Those short positions did more than just avoid big losses
for Goldman. They generated a large profit for the firm in
2007. Goldman says these bets were just a reasonable hedge, but
internal documents show that it was more than a reasonable
hedge. It was what one top Goldman executive described as the
``big short.''
Listen to a top Goldman mortgage trader, Michael Swenson,
who touted his success in 2007, what he called his ``proudest
year,'' because of what he called ``extraordinary profits''--$3
billion as of September 2007 that came from bets that he
recommended the firm take against the housing market. Mr.
Swenson told his superiors, ``I was able to identify key market
dislocations that led to tremendous profits.''
Another Goldman mortgage trader, Joshua Birnbaum--and both
will be with us this morning--wrote in his performance
evaluation about the billions of dollars in profits earned in
2007 betting against the mortgage market. ``The prevailing
opinion within the department was that we should just get close
to home and pare down our long,'' Mr. Birnbaum wrote. He then
touted the fact that he urged Goldman Sachs ``not only to get
flat, but get VERY''--emphasized by him--``short.''
He wrote that after convincing his superiors to do just
that: ``We implemented the plan by hitting on almost every
single name CDO protection buying opportunity in a 2-month
period.'' He wrote, ``Much of the plan began working by
February as the market dropped 25 points, and our very
profitable year was underway.'' When the mortgage market
collapsed in July, he said, ``We had a blow-out profit and loss
month, making over $1 billion that month.''
Those facts should end the pretense that Goldman's actions
were part of its efforts to operate as a mere ``market maker,''
bringing buyers and sellers together. Those short positions did
not represent customer service or necessary hedges against
risks that Goldman incurred as it made a market for customers.
Those short positions represented major bets that the mortgage
securities market, a market that Goldman helped create, was in
for a major decline.
Goldman continues to deny that it shorted the mortgage
market for profit, despite the evidence. Why the denial? Why
the denial? My best estimate is that it is because the firm,
Goldman Sachs, cannot successfully continue to portray itself
as working on behalf of its clients if it was selling mortgage-
related products to those clients while it was betting its own
money against those same products that it was selling to its
client or betting against the mortgage market as a whole.
The scope of this conflict is reflected in a company email
sent on May 17, 2007, discussing the collapse of two mortgage-
related instruments tied to WaMu-issued mortgages that Goldman
had helped assemble and sell. The ``bad news,'' a Goldman
employee says, is that the firm lost $2.5 million on the
collapse. But the ``good news,'' he reports, is that the
company had bet that the securities would collapse, and they
made $5 million on that bet. So they lost money on the
mortgage-related products that they still held, and, of course,
the clients they sold those products to lost big time. But
Goldman Sachs made out big time, because it bet against its own
products and its own clients.
Goldman's Chief Executive Officer, Lloyd Blankfein, summed
it up this way: ``Of course we didn't dodge the mortgage mess.
We lost money then we made more than we lost because of
shorts.'' The conflict of interest that lies behind that
statement is striking.
The Securities and Exchange Commission (SEC) has filed a
civil complaint alleging that in another transaction involving
a product called Abacus 07 AC-1, Goldman violated security laws
by misleading investors about a mortgage-related instrument.
The SEC's complaint alleges that Goldman Sachs, in effect,
helped stack the deck against the buyers of the instrument that
it sold. The hedge fund that bought the short position in the
transaction--in other words, that bet that the product would
not perform well--helped select the mortgages that were to be
referenced in the product that Goldman sold to its investors.
The SEC alleges that Goldman Sachs knew of the hedge fund's
selection role and failed to disclose it to the other Abacus
investors, who thought the package had been designed to
succeed, not fail.
We learned in last week's hearing that Goldman also failed
to disclose the hedge fund's role to the credit rating agency
that rated the Abacus deal. Eric Kolchinsky, who oversaw the
ratings process at Moody's, testified before this Subcommittee,
``It just changes the whole dynamic of the structure where the
person who is putting it together, choosing it, wants it to
blow up.''
The SEC and the courts will resolve the legal question of
whether Goldman's actions broke the law. The question for us is
one of ethics and policy. Were Goldman's actions in 2007
appropriate? And if not, should we act to bar similar actions
in the future?
Abacus may be the best-known example of conflicts of
interest revealed in the Goldman documents, but it is far from
the only example. Anderson Mezzanine Funding 2007-1 was a
synthetic product assembled by Goldman. According to company
documents, a Goldman client had expressed interest in taking a
short position in the transaction, but an executive noted that
Dan Sparks, the head of Goldman's Mortgage Department, might
``want to preserve that ability for Goldman.''
What that suggests is that not only was Goldman going to
bet against the instrument that it was selling, but it wanted
to make that bet badly enough that it took the bet for itself
instead of letting an interested client have it. It then sold
Anderson securities to its clients without disclosing that it
would profit if those securities suffered losses.
Client loyalty fell so far that one Goldman employee cited
his refusal to assist Goldman clients facing losses from a
Goldman financial product as a performance that he felt should
be rewarded. Mr. Swenson wrote to his superiors in his
performance review, ``I said `no' to clients who demanded that
Goldman should support the GSAMP program,'' Goldman Sachs'
Subprime Mortgage-Backed Security Program. Mr. Swenson wrote
that saying ``no'' to clients who asked Goldman to support a
security that it had sold them were ``unpopular positions, but
they saved the firm hundreds of millions of dollars.'' Most
investors make the assumption that people selling them
securities want those securities to succeed. That is how our
markets ought to work, but they do not always work that way.
The Senators who in the 1930s investigated the causes of
the Great Depression stated the principle clearly: ``Investors
must believe that their investment banker would not offer them
the bonds unless the banker believed them to be safe. This
throws,'' they said, ``a heavy responsibility on the banker. He
may and does make mistakes. There is no way that he can avoid
making mistakes because he is human and because in this world
things are only relatively secure. There is no such thing,''
they wrote, ``as an absolute certainty. But,'' those Senators
said, looking at the Great Depression a few years afterwards,
``while the banker may make mistakes, he must never make the
mistake of offering investments to his clients which he does
not believe to be good.''
Goldman documents make clear that in 2007, it was betting
heavily against the housing market while it was selling
investments in that market to its clients. It sold those
clients high-risk mortgage-backed securities and CDOs that it
wanted to get off its books in transactions that created a
conflict of interest between Goldman's bottom line and its
clients' interests.
These findings are deeply troubling. They show a Wall
Street culture that, while it may once have focused on serving
clients and promoting commerce, is now all too often simply
self-serving.
The ultimate harm here is not just to clients poorly served
by their investment bank. It is to all of us. The toxic
mortgages and related instruments that these firms injected
into our financial system have done incalculable harm to people
who had never heard of a mortgage-backed security or a CDO and
who have no defenses against the harm such exotic Wall Street
creations can cause.
Running through our findings in these hearings is a thread
that connects the reckless actions of mortgage brokers at
Washington Mutual with market-driven credit rating agencies and
with the Wall Street executives designing the next synthetic.
That thread is unbridled greed and the absence of a cop on the
beat to control it.
As we speak, lobbyists fill the halls of Congress hoping to
weaken or kill legislation aimed at reforming these abuses.
Wall Street is on the wrong side of this fight. It insists that
reining in those excesses would unduly restrict the free market
that is the engine of American progress. But this market of
ours is not free of self-dealing nor conflicts of interest. It
is not free of gambling debts that taxpayers end up paying.
I hope the executives before us today, and their colleagues
on Wall Street, will recognize the harm that their actions have
caused to so many of their fellow citizens. But whether or not
they take responsibility for their role, I hope that this
Congress will follow the example of another Congress eight
decades ago and enact the reforms that will put a cop back on
the Wall Street beat.
I want to thank again my Ranking Member, Senator Coburn,
who this morning is carrying out a very important
responsibility at the White House and who will join us later,
for his support and that of his staff. And I recognize now the
Acting Ranking Member, Senator Collins. We welcome her
participation in this Committee always, and we welcome her
remarks.
OPENING STATEMENT OF SENATOR COLLINS
Senator Collins. Thank you. Mr. Chairman, thank you for
leading this investigation into the root causes of the great
recession of 2008. You and the Ranking Member, Senator Coburn,
have cast a bright light into the dark corners of financial
institutions that helped to inflate the housing bubble and then
reaped billions of dollars when it burst, leaving millions of
Americans in debt and jobless, with destroyed dreams and
financial insecurity.
This investigation raises two overarching issues. First, we
must recognize that the dynamic innovation of our capital
markets can have a downside. It can produce pain rather than
prosperity. Financial markets, therefore, require updated and
effective regulation to help prevent excesses that can inflict
great harm on wholly innocent Americans, be they workers,
retirees, or small business owners.
The lack of regulation of the trillions of dollars in
credit default swaps is a prime example, and that is why it is
so critical that financial regulatory reform legislation
include a council of regulators whose job it will be to assess
systemic risk and to identify regulatory gaps.
I recognize that even measured regulation may limit the
potential benefits that unfettered markets can produce. The
question, however, is whether those benefits are outweighed by
the terrible harm such unfettered markets can cause. Recent
history certainly suggests that is the case, that the
combination of lax or absent regulation plus unbridled greed
can produce devastating results.
The second issue is even legal practices may raise ethical
concerns. Assuming Goldman's role as a market maker and its
desire to hedge its risk provided legal justification for some
of its practices--a question that must ultimately be decided by
the courts--there is something unseemly about Goldman betting
against the housing market at the same time that it is selling
to its clients mortgage-backed securities containing toxic
loans. And it is unsettling to read emails of Goldman
executives celebrating the collapse of the housing market when
the reality for millions of Americans is lost homes and
disappearing jobs. That is especially the case in light of
Goldman's decision to opt for status as a bank holding company
to secure benefits effectively underwritten, at least in part,
by those same Americans.
During its previous hearings on the financial crisis, this
Subcommittee revealed the reckless and at times predatory
lending behavior of some mortgage brokers and banks like
Washington Mutual. These banks discarded decades of reliable
and pragmatic lending practices. Instead they opted to offer
high-risk loans to borrowers whom they knew could not afford to
repay them.
Traditionally, such behavior would have exposed the
originating banks to high levels of unacceptable risk. In other
words, the offending banks would have paid dearly for their own
underwriting errors. But with the advent of securitization
during the past decade, lenders have been able to insulate
themselves by selling off toxic loans, pitching them as assets
to investment banks. Those investment banks in turn bundled the
toxic loans inside mortgage-backed securities which were then
bought and sold by investors.
The cash that flowed back to the banks from investors
buying these securities only made matters worse. The cash was
akin to throwing fuel on the hot fire of greed and
recklessness. The inflow of dollars encouraged loan originators
to put that money to work again and again and again, turning
over loan applications as quickly as possible, applying little
scrutiny, because ultimately they had no stake in the outcome
of the loan.
This cycle was based on a dangerous and false assumption
that the housing market would always move upward. It was based
on the fantasy, the myth, that what goes up stays up and never
would come crashing down. When it all collapsed like a house of
cards, we realized too late how incredibly fragile and
tragically interconnected the system had become. The fallout
was not limited. The debris field was not contained. The damage
was widespread, profound, and nearly catastrophic.
The architects of this scheme entangled neighborhood banks
and large brokerage firms across America. Their toxic linkages
ensnared borrowers and investors from Main Street to Wall
Street. They deluded themselves into believing that the basic
principles could be defied and ignored. And when that delusion
met reality, the bubble burst.
Today we will look at the top tier of the system, a major
investment bank, and examine how its trading practices
amplified the rise and fall of the housing market. Today's
witnesses are all from Goldman Sachs, which was one of the few
Wall Street firms to actually profit from the financial crisis.
This hearing is not to celebrate that ignoble feat; rather, it
is to examine how the trading practices of Goldman during that
time made such profits possible. It is to examine how Goldman
sold financial products that were tied to the health of the
housing market, even while Goldman itself was betting that the
housing market would collapse.
The Securities and Exchange Commission accuses Goldman
Sachs of marketing a complex product to its clients while
allegedly failing to disclose that the same company that hand-
selected the components, the hedge fund Paulson & Company, also
planned to bet on its failure. Goldman sold the product to
long-time trusting clients allegedly without disclosing this
fact. The bet that Paulson made earned him $1 billion while at
least one of Goldman's clients, a German bank, went bankrupt.
Although Goldman lost money on that particular deal, it
reaped billions of dollars in the mortgage-backed securities
market as a whole. While the market was on the verge of
collapse, Goldman decided to go short and earned billions from
that strategy. Some have alleged that Goldman did so while
continuing to sell clients long investments in the mortgage
markets. While such conflicts of interest may not be illegal,
they certainly seemed ethically questionable, and these
conflicts of interest appeared to be rooted in the fact that
broker-dealers do not have a fiduciary obligation to their
clients. That is an issue we will be considering.
Clearly, this system must be reformed so that Wall Street
banks are not seen and do not act as unscrupulous operators who
seek to profit from the public's misfortune, even as they are
pitching toxic investments and even as hard-working, struggling
taxpayers are left to pick up the tab.
Thank you, Mr. Chairman, and, again, I congratulate you for
this in-depth investigation.
Senator Levin. Thank you so much, Senator Collins. Senator
Kaufman was next in line.
OPENING STATEMENT OF SENATOR KAUFMAN
Senator Kaufman. Thank you, Mr. Chairman.
Senator Levin. Senator Kaufman, I want to thank you for all
your work on these hearings. You have been very significant and
important to us.
Senator Kaufman. Thank you, and I want to thank you and
Ranking Member Coburn for having these hearings, 3 days of
hearings. I think we looked at Washington Mutual, then we
looked at the regulators, and then we looked at the rating
agencies. It was a pretty ugly picture, repeated conflicts of
interest and in some cases outright fraud.
All of the figures from those 3 days of hearings points to
Wall Street which created and sold these toxic investments to
their clients. Today I am looking forward to talking about the
behavior of Goldman Sachs during this period.
Thank you, Mr. Chairman.
Senator Levin. Thank you very much, Senator Kaufman.
Senator McCain.
OPENING STATEMENT OF SENATOR MCCAIN
Senator McCain. Well, thank you, Mr. Chairman, and I thank
the witnesses for being here today.
Mr. Chairman, I do not know if Goldman Sachs has done
anything illegal. Charges have been brought, and it is going to
be the subject of a lot of our discussion today. But from the
reading of these emails and the information that this
Subcommittee has uncovered, there is no doubt their behavior
was unethical, and the American people will render a judgment,
as well as the courts.
Senator Levin. Thank you very much, Senator McCain. Senator
McCaskill.
OPENING STATEMENT OF SENATOR MCCASKILL
Senator McCaskill. Thank you, Mr. Chairman. In the good old
days of investment banking, they were considered very honorable
and proud institutions, our investment bankers of Wall Street.
They provided financial services, investment of capital in good
businesses, helping government with assistance to issue bonds
to build the great infrastructure of our Nation.
Then you fast-forward through the public offering of all
these companies where the date that the risk of these companies
shifted from the named partners to nameless, faceless
shareholders. And you fast-forward a little bit further, and
you land right at the feet of synthetic CDOs.
Now, I have got to be honest. I think that if we had to put
the odds on this hearing today, you guys would probably have
odds in your favor because the jargon is complicated, the
transactions are complicated. You have relied on that
complicated situation to avoid a lot of scrutiny.
We have spent a lot of time going through all these
documents, and let me just explain in very simple terms what
synthetic CDOs are. They are instruments that are created so
that people can bet on them. It is the La-La Land of ledger
entries. It is not investment in a business that has a good
idea. It is not assisting local governments in building
infrastructure. It is gambling--pure and simple raw gambling.
They are called synthetics because there is nothing there
but the gamble, the bet. You are the bookie. You are the house.
You have less oversight and less regulation, as you began this
Wild, Wild West of tranches, waterfalls, equity tranches, and
residual warehousing. As you began all that, you had less
oversight than a pit boss in Las Vegas.
And I got to tell you--and it is not just you. All of you
were lemming-like. You were chasing each other. What you
worried about most was a bad article in the Wall Street
Journal, not a regulator. You were chasing compensation. You
were chasing your colleagues and other investment banks. And
you were trying to make a killing.
But let me just tell you, you think it is so complicated
and you think you are so smart? Any street gambler would never
place a bet with a bookie or a house with the record that is
revealed in the documents that this Subcommittee has gathered.
Thank you, Mr. Chairman.
Senator Levin. Thank you very much, Senator McCaskill.
Senator Pryor.
OPENING STATEMENT OF SENATOR PRYOR
Senator Pryor. Thank you, Mr. Chairman, and I want to thank
you for having this hearing this morning. And, Mr. Chairman, I
know that you did not just open up the paper last week and say,
``Hey, let us have a hearing on Goldman Sachs.'' I know that
you have been working on this for a year and a half, and
through your dogged determination, you have uncovered a lot of
emails, a lot of documentation that raise a lot of very serious
questions. And so, Mr. Chairman, I know the Nation appreciates
your determination and your commitment to provide the oversight
that Congress should be providing.
So I want to thank you for that, and I may not understand
everything about everything on Wall Street, but I do understand
that people are not here to listen to me, they are here to
listen to the witnesses. So I want to thank you very much for
having this hearing today, and I look forward to this hearing.
Thank you.
Senator Levin. Thank you so much, Senator Pryor.
Let me start out by saying we are going to have three
panels today, and each of these panels are going to take some
time because this is a subject which needs some real
exploration and detail to cut through all of those technical
words and concepts that Senator McCaskill just made reference
to.
So let me now welcome our first panel of witnesses for this
morning's hearing: Daniel Sparks, a former partner and head of
the Mortgage Department at Goldman Sachs; Joshua Birnbaum, a
former Managing Director of the Structured Products Group
Trading Desk at Goldman Sachs; Michael Swenson, a Managing
Director on the Structured Products Group Trading Desk at
Goldman Sachs; and Fabrice Tourre, an Executive Director in
Structured Products Group Trading at Goldman Sachs
International.
We appreciate all of you being with us this morning. We
have a rule on this Subcommittee, Rule VI, that all witnesses
who testify before the Subcommittee are required to be sworn,
and so at this time I would ask all of you to please stand and
raise your right hand.
Do you swear that the testimony you are about to give will
be the truth, the whole truth, and nothing but the truth, so
help you, God?
Mr. Sparks. I do.
Mr. Birnbaum. I do.
Mr. Swenson. I do.
Mr. Tourre. I do.
Senator Levin. We will use a timing system today. We would
ask that you try to limit your oral testimony to no more than 5
minutes. About a minute before that red light comes on, you
will be given a yellow light so you can have that kind of
assistance.
Mr. Sparks, we are going to have you go first, followed by
Mr. Birnbaum, then Mr. Swenson, then finishing up with Mr.
Tourre, and then we will turn to our questions. So, Mr. Sparks,
please proceed.
TESTIMONY OF DANIEL L. SPARKS,\1\ FORMER PARTNER, HEAD OF
MORTGAGE DEPARTMENT, THE GOLDMAN SACHS GROUP, INC., NEW CANAAN,
CONNECTICUT
Mr. Sparks. Chairman Levin, Dr. Coburn, and Members of the
Subcommittee, my name is Dan Sparks, and from late 2006 until
mid-2008, I was the head of the Mortgage Department at Goldman
Sachs. The three men who are with me today--Fabrice Tourre,
Josh Birnbaum, and Mike Swenson--all reported up to me during
that period.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Sparks appears in the Appendix on
page 202.
---------------------------------------------------------------------------
I joined Goldman Sachs in 1989 as an analyst after
graduating from college. My intention was to stay for 2 years,
and I ended up staying for 19. I would not have stayed if the
people I worked with did not have high ethical standards. The
culture at Goldman Sachs was one in which excellence and
integrity were expected.
The business of Goldman's Mortgage Department involved
structuring, underwriting, distributing, and trading mortgage
and asset-backed products, including loans, securities, and
derivatives. All these activities involved clients, and all
involved risk. The business was competitive, and Goldman
participated without a significant residential mortgage
origination platform.
I know that the Subcommittee is focusing on the events of
late 2006 and 2007, so I will as well. Near the end of 2006,
Goldman was generally long in its exposure to residential
mortgages. I had concerns about our exposures, and senior
management knew about these concerns. The markets showed signs
of stress, and our department was experiencing losses. In mid-
December, David Viniar, Goldman's Chief Financial Officer
(CFO), called a meeting and asked me to comprehensively review
our positions and business risks. The ``take-away'' from the
meeting was to reduce risk in the short term. I was not
instructed to ``go long'' or to ``go short.'' The focus was on
risk and not direction.
Risk management during this period was very challenging. In
a volatile and illiquid market, we had to change business
approaches constantly. We were diligent in marking our
positions daily, as painful as that was on many days. That
discipline gave us real-time feedback and helped us make
important risk decisions. These included reducing our loan
purchases, buying jump-risk protection, shutting down our CDO
warehouse activities at significant losses, and covering our
shorts.
Knowing whether we were long or short was often difficult,
as our positions were complex and the market moved erratically.
There were times when our analytical risk measures told us one
thing, and my experience and knowledge of our positions told me
something else. Some days, we took actions to reduce risk only
to see the firm's value at risk (VaR), increase.
During this time, there were differing views within the
Mortgage Department, and around the firm, as to the direction
of the residential mortgage markets. But the constant theme
from senior management was to reduce risk. Throughout 2007, the
Mortgage Department reacted to market events, worked with our
clients, and managed our risk. I left Goldman Sachs in mid-2008
to spend more time with my family and in my community and to
pursue other interests. When I left, I was proud of what the
people in the Mortgage Department had accomplished during a
difficult period, and I remain so today. At the same time, I
understand that events in the Nation's mortgage market
contributed to the financial crisis of 2008 and to the
recession. I also understand that Congress has a duty to
explore the causes of that crisis and to adopt sound reforms.
To that end, I look forward to being helpful to you this
morning.
Senator Levin. Thank you so much, Mr. Sparks. Mr. Birnbaum.
TESTIMONY OF JOSHUA S. BIRNBAUM,\1\ FORMER MANAGING DIRECTOR,
STRUCTURED PRODUCTS GROUP TRADING, THE GOLDMAN SACHS GROUP,
INC., NEW YORK, NEW YORK
Mr. Birnbaum. Good morning, Mr. Chairman, Members of the
Subcommittee, my name is Josh Birnbaum. Thank you for offering
me this opportunity to discuss my work in the Mortgage
Department at Goldman Sachs in 2006 and 2007, when I was a
Managing Director in the Structured Products Group. I began
working at Goldman shortly after my graduation from the Wharton
School at the University of Pennsylvania in 1993. I worked at
Goldman until March 2008, when I left to start my own advisory
firm, Tilden Park Capital Management. I take great pride from
having worked for Goldman Sachs for almost 15 years and greatly
admire the firm's integrity, commitment to client service, and
ethics.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Birnbaum appears in the Appendix
on page 205.
---------------------------------------------------------------------------
During 2006 and 2007, I worked on the Asset-Backed
Securities (ABS), Desk in the Structured Products Group. My job
was to make markets for Goldman clients who sought long or
short exposure to the market for residential housing asset-
backed securities and to assist in hedging investments made by
other parts of the Mortgage Department.
The primary products I traded and risk-managed were the
then newly created Asset-Backed Securities Index (ABX), and
credit default swaps (CDS) in individual securitizations, also
known as single-name CDS. As a market maker, we were
continuously asked to provide liquidity for customers, which
frequently required the firm to participate on the other side
of transactions on a ``principal'' basis. For example, when a
client wanted to buy protection on a particular securitization,
we would offer a price to sell that protection. If the client
chose to execute the transaction at that price, we would take
the other side of the trade. We would then have a decision to
make whether to offset that risk through a transaction with
another client who wanted to sell that protection to us or keep
it on our book for some period of time as part of our
inventory.
From time to time, as a result of client-driven trades, our
team's book accumulated long and short positions. For example,
from the inception of the ABX Index in January 2006 through
November 2006, customers interested in selling the ABX Index
outnumbered buyers. The trades we made to meet client demands
during that period naturally caused the book to develop a long
position in the ABX Index and a smaller short position in the
single-name CDS.
As part of our management of our own inventory, we had the
discretion to hedge positions through trades with other clients
or keep them on our book in accordance with the limits set by
the risk management department. Whenever our inventory got
significantly long or short, risk management directed us to cut
our risk and ``get closer to home,'' or to ``flatten the
book.'' For example, when our net position became long in late
2006, we were told to offset our risks, which we did through a
combination of selling off some of the long ABX position and
buying more single-name CDS protection. And when our inventory
expressed a short bias at times in 2007, we were directed to
cover our short positions to reduce risk, and we did so.
In late 2006 and into early 2007, I developed a negative
view on the likely direction of the subprime market. Traders on
desks like ours often develop a short or long bias based on
their personal views of the market. Not everyone in the
Mortgage Department--or the firm, for that matter--agreed with
my view at the time. In fact, there was a vigorous debate as to
the future direction of the market.
In line with my view, our desk began to accumulate short
positions, purchasing protection on individual securities
through credit default swaps, largely from external CDO
managers who asked us to bid for these positions. There was, of
course, risk involved in accumulating short positions, as no
one could be certain which direction the market would go.
These positions became profitable as the market
deteriorated. When those short positions bumped up against the
risk parameters for our book during the spring and summer of
2007, my group was instructed to cover them. On both occasions,
I expressed my belief that the market would continue to
deteriorate and that the better, more profitable trade was to
maintain the short position on our book, but the firm insisted
that we reduce our position, and we did so.
No one from senior management told me to make a directional
bet against the subprime market. Rather, during 2006 to 2007,
regardless of whether our books were long or short, the
consistent theme from management was get smaller, reduce risks,
and get closer to home.
I am very proud of the accomplishments of the ABS Group
during my tenure there. We provided significant liquidity to
our clients in a difficult and challenging market while also
managing to post a profit during this period.
Thank you for inviting me to testify here. I am happy to
answer any questions Subcommittee members may have.
Senator Levin. Thank you very much, Mr. Birnbaum. Mr.
Swenson.
TESTIMONY OF MICHAEL J. SWENSON,\1\ MANAGING DIRECTOR,
STRUCTURED PRODUCTS GROUP TRADING, THE GOLDMAN SACHS GROUP,
INC., NEW YORK, NEW YORK
Mr. Swenson. Good morning, Mr. Chairman, Ranking Member
Coburn, Members of the Subcommittee. My name is Michael
Swenson. I am a Managing Director in the Mortgage Department at
Goldman Sachs, where I have worked since 2000.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Swenson appears in the Appendix
on page 208.
---------------------------------------------------------------------------
Let me begin by discussing my role with the firm in 2006
and 2007 and then give you a general timeline of the activities
of the ABS Desk through this period. I was a Managing Director
in Structured Products Group (SPG) Trading and co-managed the
group. I was primarily responsible for the Asset-Backed
Securities (ABS) desk, which was responsible for making markets
in ABS securities and derivatives for our customer franchise.
The ABS Desk traded consumer ABS, subprime cash, single-name
ABS credit default swaps--which I will refer to as ``single
names''--and the ABX indices, which are a family of synthetic
indices that reference a standard basket of 20 subprime deals.
Throughout 2006, numerous clients wanted to sell the ABX in
order to express a negative view on the U.S. residential
housing market. As a result of these trades, we took on long
positions as principal. In order to hedge those positions, we
began to increase our short position in single names. By
November 2006, the volatility in the ABX increased, pushing
prices down. Because our positions in single names did not
match identically the basket of securities that comprised the
ABX, the positions moved at different rates and even different
directions, resulting in losses for the ABS Desk.
On December 14, 2006, David Viniar, the firm's CFO, called
a meeting to go over the firm's Mortgage Department's positions
and risk. I attended a portion of that meeting, during which we
discussed the ABS positions and the need to reduce the basis
risk in the book. We were instructed to reduce risk and get the
position ``closer to home''; we were not told what direction to
take--just to get there.
In the first quarter of 2007, we sold ABX, where possible,
and increased our single-name positions. However, the ABS Desk
continued to lose money because the market value of our long
ABX positions was declining faster than our offsetting hedges.
The relatively rapid decline in the index brought in a wave
of short-covering and some new long interest. As a result, the
ABS Desk further reduced its long ABX position and purchased
additional single names, or went long on $2.8 billion in single
names, thus reducing our short position.
In the second quarter of 2007, the ABS Desk covered several
billion notional in single names and purchased hundreds of
millions of ABX long positions as the ABX index recovered.
These transactions reduced the desk's short position, in effect
bringing the desk to a more balanced position.
Later in the quarter, the ABS Desk increased its short
position after it took on the CDO warehouse inventory from the
CDO origination group. The inventory added several billions in
long residential mortgage-backed securities (RMBS) exposure to
the ABS Desk at a time when the market was deteriorating. In
order to manage this newly assumed risk, the ABS Desk increased
our position in single names.
At the end of the third quarter, the ABS Desk engaged in
large block trades purchasing several billion notional of ABX
risk while concurrently selling down a portion of our single-
name positions--again, bringing the desk closer to home.
Throughout the period from late 2006 through much of 2007,
the ABS Desk executed its market-making functions as principal,
and our trades also reflected the views we had of the market.
The ABS Desk did not only take short positions and, indeed,
took many positions that ultimately reduced profits that the
Mortgage Department otherwise might have realized. By reducing
short positions, we left money on the table. But that is the
nature of reducing risk while continuing to perform our duties
as a market maker.
Thank you for your consideration. I am happy to answer any
questions Members of the Subcommittee may have.
Senator Levin. Thank you very much, Mr. Swenson. Mr.
Tourre, am I pronouncing your name correctly?
Mr. Tourre. Yes, you are, Mr. Chairman.
Senator Levin. Thank you.
TESTIMONY OF FABRICE P. TOURRE,\1\ EXECUTIVE DIRECTOR,
STRUCTURED PRODUCTS GROUP TRADING, THE GOLDMAN SACHS GROUP,
INC., LONDON, ENGLAND
Mr. Tourre. Mr. Chairman, Members of the Subcommittee, good
morning. My name is Fabrice Tourre, and I work at Goldman Sachs
International in London. Thank you for the opportunity to
appear today in front of the Subcommittee.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Tourre appears in the Appendix on
page 211.
---------------------------------------------------------------------------
I have worked at Goldman Sachs since 2001. Between 2004 and
2007, my job was primarily to make markets for clients. I made
markets by connecting clients who wished to take a long
exposure to an asset--meaning they anticipated the value of the
asset would rise--with clients who wished to take a short
exposure to an asset--meaning they anticipated the value of the
asset would fall. I was an intermediary between highly
sophisticated professional investors--all of which were
institutions. None of my clients were individual, retail
investors.
The structured products on which I worked fill an important
need for these sophisticated financial institutions. To the
average person, the utility of these products may not be
obvious. But they permit sophisticated institutions to
customize the exposures they wish to take in order to better
manage the credit and market risks of their investment
holdings.
Mr. Chairman, as you know, the Securities and Exchange
Commission recently filed a civil suit alleging that I failed
to disclose to investors certain material information regarding
a transaction that I helped to structure named Abacus 07 AC-1.
I deny categorically the SEC's allegations, and I will defend
myself in court against this false claim.
Since the suit was filed, there have been many questions
raised about the AC-1 transaction and my role in it. I
appreciate the opportunity to answer those questions, and I
want to make a few points absolutely clear.
First, the only two investors in the transaction, ACA and
IKB, were institutions with significant resources and extensive
experience in the CDO market.
Second, I never told ACA, the portfolio selection agent,
that Paulson & Company would be an equity investor in the AC-1
transaction or would take any long position in the deal.
Although I don't recall the exact words that I used, I recall
informing ACA that Paulson's fund was expected to buy credit
protection on some of the senior tranches in this deal. This
necessarily meant that Paulson was expected to take some short
position in the transaction. Moreover, from the early stages of
the transaction in January 2007 to its completion several
months later, none of the offering documents provided to ACA
indicated that Paulson's fund would be an equity investor.
If ACA was confused about Paulson's role in the
transaction, it had every opportunity to clarify the issue.
Representatives of Paulson's fund participated directly in all
of my meetings with ACA regarding the transaction. I do not
ever recall ACA asking me or Paulson's representatives if
Paulson's fund would be an equity investor. Indeed, ACA and
Paulson had several discussions about the transaction and at
least one meeting without Goldman Sachs representatives
present. Quite frankly, I am surprised that ACA could have
believed that the Paulson fund was an equity or long investor
in this deal.
Third, the AC-1 transaction was not designed to fail. ACA
and IKB were two of the most important clients to my desk.
Moreover, the securities referenced in the transaction did not
underperform the other securities of that ratings class and
vintage. In fact, all those securities performed poorly because
the subprime mortgage market suffered a broad collapse. Goldman
Sachs also had no economic motive to design the AC-1
transaction to fail. Quite the contrary, we held long exposure
in the transaction just like ACA and just like IKB. When the
securities referenced in AC-1 declined in value, we lost money,
too, including around $83 million with respect to the retained
long position.
Finally, ACA selected the portfolio of securities
referenced in the transaction--not Paulson. ACA had sole
authority to decide what securities would be referenced in the
transaction, and it does not dispute that fact. Neither the
Paulson fund nor Goldman Sachs could dictate to ACA the
securities referenced in the deal. Paulson's fund made
suggestions to ACA, as did IKB and as did Goldman Sachs. And
the SEC complaint concedes that ACA rejected most of Paulson's
suggestions while accepting others. So, while Paulson, Goldman
Sachs, and IKB all had inputs in the reference portfolio for
AC-1, ACA ultimately analyzed and approved each security in the
transaction. Thus, when Goldman Sachs represented to investors
that ACA selected the referenced portfolio, that statement was
absolutely correct.
Mr. Chairman, the last week has been challenging for me and
my family, as I have been the target of unfounded attacks on my
character and motives. I appreciate the opportunity to appear
before the Subcommittee to answer these false charges. I wish
to repeat: I did not mislead IKB or ACA, two of the most
sophisticated institutional investors in these products
anywhere in the world.
I will be pleased to answer any questions that the
Subcommittee may have.
Senator Levin. Thank you very much, Mr. Tourre.
What we will do is what we have done in previous hearings.
Our rounds--at least the first round--will be 20 minutes for
each of us, and then there will be subsequent rounds with these
panels as well.
Mr. Sparks, would you turn to Exhibit 172,\1\ please?
---------------------------------------------------------------------------
\1\ See Exhibit No. 172, which appears in the Appendix on page
1101.
---------------------------------------------------------------------------
[Pause.]
Senator Levin. All set?
Mr. Sparks. Yes, Mr. Chairman.
Senator Levin. Now, this is a series of emails that
concerns a deal called Anderson that Goldman put together in
March 2007. Anderson was a $300 million synthetic CDO, so what
it did was reference certain other securities. This referenced
subprime RMBSs, or residential mortgage-backed securities.
Many of those securities were originated by New Century,
which was a subprime lender notorious for poor-quality loans.
Goldman participated as one of the short investors, as you can
see from that exhibit. They bought loss protection or bought
the short side for $100 million, about 50 percent of the short
side and 50 percent of the referenced assets.
So from the beginning of the deal, right from the
beginning, Goldman is selling Anderson securities to clients,
but it is betting against that CDO. It got, in the words there,
protection that pays off if the CDO assets, the referenced
assets, start losing money.
So, first, if you will take a look at the following email.
Goldman's clients reject the deal, first of all, because it has
so much poor-quality New Century mortgages. For example, look
at page 3 of the exhibit. A client asks how Goldman got
``comfortable'' with all the New Century collateral, and
particularly the New Century serviced deals.
Now, take a look at the internal response at the top of the
page. What it is is to get Goldman's salespeople on the phone
to allay the client's concerns about New Century collateral,
but that does not work.
The next three emails tell the same story. Three more
clients--Rabobank, Smith Breeden, and Terwin--reject the deal.
Internally, the drive to sell Anderson continues--keep pushing
the clients to buy. Look at the top of page 6. ``Anything more
from these guys - or are they officially dead now?''
Now, Goldman is asked a question by a potential customer.
What did you guys do to get comfortable with all the New
Century collateral? How can you get comfortable with that
collateral? That is a well-known company that has a very bad
record. And what is your response? Is your response, ``Hey, we
are going short. We got half the short side?'' We are betting
against this deal? You are asked a specific question. How do
you guys get comfortable with this? Instead of saying, ``Hey,
we are betting against it, we are taking half the short side,''
what you do is you tell your salespeople try to sell this deal.
You do not answer the question. You do not respond to a direct
question.
So you continue to push hard, and finally there is a sale
that unloads $20 million in Anderson notes. Page 7 of that same
exhibit, a Goldman supervisor responds with a single word after
you unloaded $20 million in Anderson notes: ``Profit!''
Exclamation point. Eureka. ``Eureka'' is my word. He later
congratulates the team: ``Excellent job pushing to closure
these deals in a period of extreme difficulty.''
Now, your clients did not want to buy Anderson CDOs with
that exposure to the New Century mortgages, but you still
pushed hard. Why didn't you inform your clients that Goldman
was short on nearly 50 percent of the Anderson CDO when selling
Anderson securities to them? Why didn't you tell them you were
going short?
Mr. Sparks. Mr. Chairman, there are about eight emails in
here. I did not see the email that suggested that we were
short, and I was trying to find that.
Senator Levin. All right. Take a look at Exhibit 93.\1\
---------------------------------------------------------------------------
\1\ See Exhibit No. 93, which appears in the Appendix on page 592.
---------------------------------------------------------------------------
Mr. Sparks. Within this exhibit?
Senator Levin. No. Exhibit 93.
Mr. Sparks. OK.
Senator Levin. And Exhibit 94,\2\ together, showing the
shorts.
---------------------------------------------------------------------------
\2\ See Exhibit No. 94, which appears in the Appendix on page 593
---------------------------------------------------------------------------
See where it shows the counterparty, the short side of the
deal? Goldman Sachs, Goldman Sachs, Goldman Sachs, Goldman
Sachs. See all that?
Mr. Sparks. Yes, Mr. Chairman.
Senator Levin. OK. Now, answer my question.
Mr. Sparks. I believe this shows the counterparties,
which----
Senator Levin. Yes, Goldman Sachs.
Mr. Sparks [continuing]. Oftentimes is Goldman Sachs. That
does not mean that Goldman Sachs was not doing that trade with
another client, so it is very difficult for me to say from
looking at this whether we were short or not. We might have
been facilitating trades for clients.
Senator Levin. Assuming you were going short and staying
short. Let me ask the question. Should you have told that
client--when they asked how are you getting comfortable with
this, should you have told them you were going short if you
were?
Mr. Sparks. Mr. Chairman, so not particular to this,
because, again, I do not recall if----
Senator Levin. No, in this case. I am asking in this case.
You were asked a question. How do you guys get comfortable with
these kind of mortgages, with this kind of a mortgage broker?
Mr. Sparks. Well, again, I do not know if we were short on
that deal----
Senator Levin. I know you do not know. Assuming you went
short and intended to stay short on that deal, should you have
then told the customer asking you the direct question, how can
you get comfortable with this, that it was your intention to go
short on 50 percent of the short side and stay that way, if
that was the fact?
Mr. Sparks. Again----
Senator Levin. No. Answer my question.
Mr. Sparks. I am just trying to understand exactly what the
question is.
Senator Levin. The question is very clear. You said, well,
you were not sure whether or not you were buying that 50
percent for somebody else. That is what your answer was. If you
were buying, as we know you were, 50 percent of the short for
yourself, for your account, my question is, when asked how can
you be selling this security, how do you get comfortable with
the source of this security, was there an obligation at that
time, if you were going and intended to stay short with half
the short side, was it your responsibility to answer that
direct question, hey, we are going short and we are staying
short? How do you view your responsibility--that is my
question--under those circumstances?
Mr. Sparks. Mr. Chairman, this transaction was a static
synthetic, which meant the assets were the assets and they
could not change. Anybody participating in it should look at
the assets themselves.
Senator Levin. Are those assets open to everyone who buys
those synthetics, the specific assets, or are they protected?
Are those not commercially protected, the specific source?
Mr. Sparks. If that is a legal question, people have access
to the information, Mr. Chairman.
Senator Levin. The buyer is raising a question with you
about these assets. He is asking a direct question: How can you
get comfortable with these assets from this source? How do you
guys get comfortable? Your answer is not, under my
hypothetical--which is not hypothetical; it is factual. But
assuming you are going to buy half the short position and keep
it, my question is: Did you not have a responsibility to answer
a direct question, how can you get comfortable with these
products from that source by saying we are going short, half
the short is what we are buying? How do you view your ethical
responsibility?
Mr. Sparks. Mr. Chairman, and again, the facts about----
Senator Levin. Again, you do not want to answer the
question.
Mr. Sparks. No. The question that investors should and did
focus on were whether the names that they had risk to was
something they actually wanted at that price.
Senator Levin. My question, Mr. Sparks, is a very direct
question. You were asked a question, Goldman was asked a
question: How do you get comfortable with the source of these
securities? Instead of disclosing right at that time, what I
think you ought to disclose anyway when you are on the other
side of a deal--we will get into that. But instead of
disclosing that you had half of the other side of the deal,
half the short side, you did not tell them that. Instead you
told your salespeople, ``Keep pushing this deal.'' You had
three people turn it down because of the source, and you kept
pushing it. But now answer my question. When you are asked the
question, how do you get comfortable with these securities
given the dubious source of the security--you got clients, they
do not want to buy the security with so much exposure to the
New Century mortgages. Those New Century mortgages have had
problems.
I am going to ask you for the last time, and if you do not
want to answer it, you can say you do not want to answer it.
But, clearly, you understand it. Did you not have a
responsibility when you were asked point blank how do you get
comfortable in this kind of a situation when there is so much
exposure to New Century mortgages, did you not then at least
have an obligation to disclose, hey, we are not comfortable, we
are selling this thing short, we are going on the short side?
Do you understand the question?
Mr. Sparks. Mr. Chairman, I understand the question. I have
not gone through all of the emails, but what clients who did
not want to participate in that deal did not.
Senator Levin. And the client asked you a question, how do
you guys get comfortable--it is a question. What was your
answer?
Mr. Sparks. Mr. Chairman, we----
Senator Levin. Did you tell them----
Mr. Sparks. We would have had the sales force get on with
the deal team and walk through each security that they had
exposure to and answer any questions that they had about that
security.
Senator Levin. Don't you also have a duty to disclose an
adverse interest to your client? Do you have that duty?
Mr. Sparks. About?
Senator Levin. If you have an adverse interest to your
client, do you have the duty to disclose that to your client?
Mr. Sparks. The question about how the firm is positioned
or our desk is positioned?
Senator Levin. If you have an adverse interest to your
client when you are selling something to them, do you have the
responsibility to tell that client of your adverse interest?
Mr. Sparks. Mr. Chairman, I am just trying to understand
what the adverse interest means----
Senator Levin. No, I think you understand it. I do not
think you want to answer. How did you get comfortable with all
the New Century collateral?
Mr. Sparks. Mr. Chairman, I----
Senator Levin. I am just going to go on because you are not
going to answer the question. It is obvious.
In particular, let me ask you this question. Keep going now
on that exhibit.\1\ Considering that you are holding the
equity--do you see that in that email chain, March 13, 2007?
---------------------------------------------------------------------------
\1\ See Exhibit No. 172, which appears in the Appendix on page
1101.
---------------------------------------------------------------------------
Mr. Sparks. Yes, sir.
Senator Levin. They thought you were actually holding the
equity, which is being on the long side, right?
Mr. Sparks. Yes. In this email, that is what this looks
like.
Senator Levin. So they thought you are on the long side,
but not told you are on the short side of the same deal when
specifically asked the question as to how you got comfortable,
not disclosing that you are betting against it, not just buying
the equity.
Now, let me keep going. By the way, that Anderson deal was
downgraded from AAA to junk in 7 months. Did you make money on
that deal, on the short position?
Mr. Sparks. Well, I know on the longs that we took, we lost
money.
Senator Levin. I understand. I am asking about the short
position you took.
Mr. Sparks. And on the shorts, Mr. Chairman, I do not know
how much of it we had, if any.
Senator Levin. OK.
Mr. Sparks. And so I cannot--I just do not have that
number.
Senator Levin. Do you want to check your records and tell
us how much money you made on that?
Mr. Sparks. I will have to get back to you and work with
the people at Goldman Sachs.
Senator Levin. Mr. Sparks, turn to Exhibit 173.\2\ This is
an email message, November 2006, between two Goldman Sachs
employees in sales. It discusses selling Fremont securities.
One salesperson sends to the other a client's explanation of
why they do not want to buy the securities--even after talking
to Fremont, by the way. The client wrote, ``. . . [F]remont
refused to make any forward looking statements so we really got
nothing from them on the crap pools''--``the crap pools that
are out there now.''
---------------------------------------------------------------------------
\2\ See Exhibit No. 173, which appears in the Appendix on page
1109.
---------------------------------------------------------------------------
The salesperson wrote, ``They are concerned about all the
Fremont exposure they already have,'' and they ``are going to
put Fremont `in the box' for the time being.''
Were you aware of the poor reputation that Fremont had, and
that is, loans among the highest default rates in the country?
Were you aware of it at the time?
Mr. Sparks. Mr. Chairman, can I just read the email?
Senator Levin. Exhibit 173. Do you see it? ``[F]remont
refused to make any forward looking statements so we really got
nothing from them on the crap pools that are out there now.''
Do you see that?
Mr. Sparks. I do not want to slow you down. I have not read
the whole thing, so I----
Senator Levin. I am just asking you, look at the bottom
paragraph there, the last two lines. ``[F]remont refused to
make any forward looking statements so we really got nothing
from them on the crap pools that are out there now.'' Do you
see that?
Mr. Sparks. Yes, sir.
Senator Levin. OK. Now, were you aware of Fremont's poor
reputation at the time?
Mr. Sparks. This email----
Senator Levin. Do you remember whether you were aware at
the time of their poor reputation? Do you remember?
Mr. Sparks. Whether they had a poor reputation in November?
Senator Levin. Yes, with high default rates.
Mr. Sparks. Fremont originated subprime loans. People
understood that.
Senator Levin. Yes or no, were you aware of their poor
reputation and high default rate.
Mr. Sparks. I do not recall at that time.
Senator Levin. You sold about $700 million in subprime
residential mortgage-backed securities, helping Fremont do
that. Within 10 months, those securities were downgraded and
today have junk status. You also bought some of the Fremont
securities, immediately bought loss protection through a CDS on
those securities. In other words, you were betting against
those securities at the same time you were selling those crap
pools to your client. Do you know how much money you made on
those shorts? Do you remember?
Mr. Sparks. Chairman, I do not remember. The one point I
would say about this email is it looks like the customer had
the chance to evaluate the investment and decided not to
invest.
Senator Levin. I am just telling you how much you sold of
the securities. I just informed you that Goldman--helped
Fremont package and sell $700 million in subprime residential
mortgage-backed securities. That is what I am telling you when
I am asking you that. You also took out a short position. Do
you know how much you made?
Mr. Sparks. No, sir, I do not.
Senator Levin. Now, take a look at Timberwolf, a Timberwolf
deal which is Exhibit 105.\1\ This is a $1 billion hybrid CDO,
squared so-called, that Goldman put together and underwrote in
the first quarter of 2007. Timberwolf references a variety of
assets, including $15 million from an Abacus CDO and more from
a Washington Mutual Option ARM.
---------------------------------------------------------------------------
\1\ See Exhibit No. 105, which appears in the Appendix on page 674.
---------------------------------------------------------------------------
Goldman Sachs participated in this deal as one of the short
buyers. Do you remember that? Can you see that from that?
Mr. Sparks. I do not see where it says that we were short.
Senator Levin. Well, you will just have to assume that my
statement is accurate for the time being. It is accurate. I
want to go on.
You participated in the deal as one of the protection
buyers. You do not remember that? You do not remember
Timberwolf? You do not remember participating----
Mr. Sparks. No. I remember Timberwolf.
Senator Levin. Do you remember whether you were on the
short side?
Mr. Sparks. I remember a few things about Timberwolf.
Senator Levin. Do you remember whether you were on the
short side? Do you remember? Yes or no.
Mr. Sparks. We likely would have provided a number of
shorts, and I do not recall if we covered them or not.
Senator Levin. All right.
Mr. Sparks. I also recall----
Senator Levin. But not whether you covered them. That means
you would have sold them down the line. But in any event, would
you have stood to gain, do you remember, if Timberwolf assets
declined in value or if they defaulted or if there was a credit
downgrade? Do you remember?
Mr. Sparks. I know that on the Timberwolf deal, with the
longs we took, we lost hundreds of millions of dollars.
Senator Levin. I am talking about the shorts. The profits
on the shorts consistently--and that happened throughout the
year--more than made up for what you lost on longs. Do you know
how much you made on the shorts?
Mr. Sparks. Mr. Chairman, on that particular deal, I would
be surprised if that is true with respect to the gain/loss
outcome.
Senator Levin. OK. Timberwolf closed at the end of 2007.
Your sales team sold $600 million in Timberwolf securities.
Take a look at Exhibit 155.\2\ Do you see that?
---------------------------------------------------------------------------
\2\ See Exhibit No. 155, which appears in the Appendix on page 971.
---------------------------------------------------------------------------
Mr. Sparks. I see a list of sales on CDOs.
Senator Levin. OK. Take my word for it. It is $600 million.
Your sales team--now, take a look at Exhibit 105.
Mr. Sparks. Mr. Chairman, on Exhibit 155----
Senator Levin. No, just go to Exhibit 105. I will come back
to Exhibit 155.
Mr. Sparks. Could I just clarify? You are talking about--
there were sales to two counterparties. One was Greywolf, who
was the manager.
Senator Levin. Of Timberwolf.
Mr. Sparks. The other was Bear Stearns Asset Management. Is
that what you are asking me to look at?
Senator Levin. I asked you to look at Exhibit 105.
Mr. Sparks. OK.
Senator Levin. Now, before you sold all that stuff that we
just described in Exhibit 155, $600 million of Timberwolf
securities is what you sold. Before you sold them, this is what
your sales team were telling to each other. Got it? Exhibit
105?
Mr. Sparks. Yes, Mr. Chairman.
Senator Levin. Look what your sales team was saying about
Timberwolf: ``Boy that Timberwolf was one shi**y deal.'' They
sold that shi**y deal.
Mr. Sparks. Mr. Chairman, this email was from the head of
the division, not the sales force. This was----
Senator Levin. Whatever it was, it is an internal Goldman
document.
Mr. Sparks. This was an email to me in late June.
Senator Levin. Right. And you sold----
Mr. Sparks. After the transaction.
Senator Levin. No. You sold Timberwolf after as well.
Mr. Sparks. We did trades after that.
Senator Levin. Yes, OK. The trades after----
Mr. Sparks. Some context might be helpful.
Senator Levin. The context, let me tell you, the context is
mighty clear. June 22 is the date of this email: ``Boy, that
Timberwolf was one shi**y deal.''
How much of that shi**y deal did you sell to your clients
after June 22, 2007?
Mr. Sparks. Mr. Chairman, I do not know the answer to that,
but the price would have reflected levels that they wanted to
invest at that time.
Senator Levin. You did not tell them you thought it was a
shi**y deal?
Mr. Sparks. Well, I did not say that.
Senator Levin. No. Who did? Your people internally. You
knew it was a shi**y deal, and that is what your email shows.
Mr. Sparks. And, again, I think the context, the message
that I took from the email from Mr. Montag was that my
performance on that deal was not good, and I think the fact
that we had lost money related to that was not good----
Senator Levin. How about the fact that you sold hundreds of
millions of that deal after your people knew it was a shi**y
deal? Does that bother you at all? You sold a customer
something----
Mr. Sparks. I do not recall selling hundreds of millions of
that deal after that.
Senator Levin. All right. Let us take a look. Exhibit 166
is a series of emails.\1\ The first is June 26, 2007. That is
after June 22. A July 1, 2007, email tells the sales force the
top priority is Timberwolf. Your top priority to sell is that
shi**y deal.
---------------------------------------------------------------------------
\1\ See Exhibit No. 166, which appears in the Appendix on page
1012.
---------------------------------------------------------------------------
Mr. Sparks. Mr. Chairman, my comment was I did not recall
the sales, not that we were trying to sell.
Senator Levin. OK, you are trying to sell a shi**y deal,
and it is your top priority. Come on, Mr. Sparks.
Mr. Sparks. Well, Mr. Chairman----
Senator Levin. Should Goldman Sachs be trying to sell--and,
by the way, it sold it, a lot of it, after that date. Should
Goldman Sachs be trying to sell a shi**y deal?
Mr. Sparks. Well----
Senator Levin. Can you answer that one?
Mr. Sparks [continuing]. Again, I did not use those words.
Senator Levin. Can you answer that one yes or no?
Mr. Sparks. There are prices in the market that people want
to invest in things. I did not use that term with respect to
this deal.
Senator Levin. Who did use that term? Who is Tom Montag?
Who is Daniel Sparks?
Mr. Sparks. That is me----
Senator Levin. I know it is. Who is Tom Montag?
Mr. Sparks. Tom Montag was the head of the division at the
time.
Senator Levin. And he was telling you on June 22, ``Boy,
that Timberwolf was one shi**y deal.'' And then you got Exhibit
166, a series of emails pushing the Goldman sales force to sell
Timberwolf securities. The first is a June 26, 2007, email from
GS Syndicate. That is your sales force. The sales force is told
in Exhibit 166, ``Please focus on the CDO axes below,'' one of
which is Timberwolf. The next email, take a look, July 1, 2007,
tells the sales force the top priority is Timberwolf.
The next email is July 24, 2007. Timberwolf is again listed
as one of the top priorities.
Next is an email, July 3, still after ``the shi**y deal''
assessment, in which one of GS sales team leaders, Matthew
Bieber, writes that, with regard to Timberwolf, ``I'm all over
these guys.''
The last email, August 22, again, highlights Timberwolf as
a top priority.
So if you cannot give a clear answer to that one, Mr.
Sparks, I do not think we are going to get too many clear
answers from you. But I have taken much more than my time, and
we are going to come back to you and to the others on my second
round.
I will turn to Senator Collins.
Senator Collins. Thank you, Mr. Chairman.
I would like to start my questioning by asking each of you
a fundamental question. Investment advisers have a legal
obligation to act in the best interests of their clients.
Mr. Sparks, when you were working at Goldman, did you
consider yourself to have a duty to act in the best interests
of your clients?
Mr. Sparks. Senator, I had a duty to act in a very
straightforward way, in a very open way with my clients.
Technically, with respect to investment advice, we were a
market maker in that regard. But with respect to being a
prudent and a responsible participant in the market, we do have
a duty to do that.
Senator Collins. OK. You are not really answering my
question. I understand the difference between suitability
standards, which you did have to follow, versus a fiduciary
obligation to act in the best interests of your clients. I
understand that you do not have a legal fiduciary obligation,
but did the firm expect you to act in the best interests of
your clients as opposed to acting in the best interests of the
firm?
Mr. Sparks. Well, when I was at Goldman Sachs, clients are
very important and were very important, and so----
Senator Collins. Could I--I am starting to share the
Chairman's frustration already, and I am only 30 seconds into
my time. Could you give me a yes or no to whether or not you
considered yourself to have a duty to act in the best interests
of your clients?
Mr. Sparks. I believe we have a duty to serve our clients
well.
Senator Collins. I guess, Mr. Chairman, that I am not going
to get an answer to my question any more than you did with
yours.
Mr. Birnbaum, I am going to ask you the same question. Do
you have a duty to act in the best interests of your clients?
Mr. Birnbaum. Not only do I believe that we do, I believe
that we did.
Senator Collins. Mr. Swenson?
Mr. Swenson. I believe it is our responsibility as market
makers to provide a market-level bid and offer to our clients
and to serve our clients and helping them transact at levels
that are fair market prices and help meet their needs.
Senator Collins. Your clients are not paying you big fees
just to efficiently conduct transactions. I have never seen an
investment bank run ads that brag about its facility with
conducting transactions. They are paying you for judgment as
well.
Mr. Tourre, same question for you. Do you have a duty to
act in the best interests of your clients?
Mr. Tourre. Senator, I believe we have a duty to serve our
clients, and as our role--with respect to our role as market
maker, to show prices to our clients and to offer them
liquidity. I do not believe we were acting as investment
advisers for our clients.
Senator Collins. Mr. Tourre, you are giving the same kind
of answer that Mr. Sparks did. I understand that you are
serving your clients. Do you believe that you have a duty to
act in the best interests of your clients?
Mr. Tourre. Again, Senator, I will repeat, we have a duty
to serve our clients by showing prices on transactions that
they ask us to show prices for.
Senator Collins. Mr. Birnbaum, since you are the only one
who answered the question and you said yes, do you think that
since there is apparently some confusion or some difference of
opinion on this issue, do you think that Congress should impose
a clear fiduciary obligation to act in the best interests of
your clients on broker-dealers?
Mr. Birnbaum. First, I want to clarify. I worked with these
gentlemen for years, and I think they share my sentiments on
this issue, even if that is not what you are getting out of it
right now.
Senator Collins. Well, I think they spoke for themselves.
But why don't you answer my current question?
Mr. Birnbaum. Your current question is a regulatory
question?
Senator Collins. I am asking you, since we are considering
financial regulatory reform, should we amend the law to impose
a clear fiduciary duty on broker-dealers to act in the best
interests of their clients similar to the legal requirement
that is already imposed on investment advisers?
Mr. Birnbaum. I think conceptually that does not seem like
an issue. I am not completely familiar with how that works, but
conceptually it seems like an interesting idea.
Senator Collins. Mr. Tourre, I would like to ask you about
a specific email, and it is Exhibit 61 in your exhibit book,\1\
if you could turn to that.
---------------------------------------------------------------------------
\1\ See Exhibit No. 61, which appears in the Appendix on page 471.
---------------------------------------------------------------------------
This is an email that you wrote on December 28, 2006, and
it referred to a list of the clients that might be most
profitable in the coming year. And you referred to this list,
and you are not happy with this list because you believe that
the list is skewed towards sophisticated hedge funds. You
implied that the list should include fewer sophisticated hedge
funds, and it goes on to say, ``with which we should not expect
to make too much money since (a) most of the time they will be
on the same side of the trade as we will, and (b) they know
exactly how things work and will not let us work for too much
[money] vs. buy-and-hold rating-based buyers who we should be
focused on a lot more to make incremental [money] next year.''
This sounds like a deliberate attempt to sell your products
to less sophisticated clients who would not understand the
products as well so that you could make more money. Would you
like to comment on that?
Mr. Tourre. Senator, would you mind telling me where
exactly--I just do not see it.
Senator Collins. Well, it is on the bottom of Exhibit 61.
It is very clear. It is an email to you. It is the last
paragraph on that page.
Mr. Tourre. Sorry. Which date?
Senator Collins. It is Exhibit 61. It is your December 28,
2006, email, and it is at the bottom of the page.
Mr. Tourre. I see that email.
Senator Collins. OK.
Mr. Tourre. Can you repeat your question, Senator?
Senator Collins. Mr. Chairman, I cannot help but get the
feeling that a strategy of the witnesses is to try to burn
through the time of each questioner.
Mr. Tourre, the email that you sent on December 28, 2006,
refers to a list of potential clients that might be most
profitable in the coming year, and you say that the list should
include fewer ``sophisticated hedge funds with which we should
not expect to make too much money since (a) most of the time
they will be on the same side of the trade as we will, and (b)
they know exactly how things work and will not let us work for
too much [money]. . . .'' And you refer instead to another kind
of buyer, ``buy-and-hold rating-based buyers,'' who you can
make more money from because they have less sophistication.
This sounds like a deliberate strategy to sell products,
complex products to less sophisticated clients who would not
understand the products as well so that you can make more
money?
Mr. Tourre. Senator, I will try to answer your question
with two separate parts.
One, I do not think I was expressing our ability to make
more money from rating-based clients by saying that they were
less sophisticated. As far as I can read this email today, what
I think I was expressing was the fact that hedge funds have a
tendency to usually argue very much about prices, and, with
respect to our role as market maker, the money we make is bid-
offer spread on transactions where we buy and we sell.
So I think what I was expressing in that email was that
with respect to ratings-based clients, they had a tendency to
argue less about bid-offer spread than hedge fund clients.
And the second part of the answer that I wanted to make
clear is all the clients we did business with on the CDO desk,
including ACA and IKB, which we probably will talk about
separately, were highly sophisticated institutions which were
also falling in the sort of ratings-based buyer category.
Senator Collins. Well, Mr. Tourre, that is not how it reads
to me. It reads to me that you wanted to deal with people who
did not ``know exactly how things work'' and would allow you to
make more money, and that raises the whole issue of whether you
are truly disclosing all the information that you should be to
your clients and whether your clients are aware that the whole
system seems to be rife with conflicts of interest.
Mr. Birnbaum, I want to ask you a question about an
exhibit. It is Exhibit 104,\1\ and I am going to describe it. I
realize that is a big exhibit book, although it is well
ordered.
---------------------------------------------------------------------------
\1\ See Exhibit No. 104, which appears in the Appendix on page 673.
---------------------------------------------------------------------------
On July 25, 2007, the CFO of Goldman wrote an email to the
Goldman president, and in that email the CFO responded to an
update on mortgage-related investments that had declined in
value and wrote, ``Tells you what might be happening to people
who don't have the big short.''
Mr. Birnbaum. Excuse me. Are you on Exhibit 104?
Senator Collins. I apologize. It is Exhibit 26,\2\ top of
the page, ``Tells you what might be happening to people who
don't have the big short.''
---------------------------------------------------------------------------
\2\ See Exhibit No. 26, which appears in the Appendix on page 306.
---------------------------------------------------------------------------
There was also an October 29----
Mr. Birnbaum. Was that a question or----
Senator Collins. I am getting to the question. It is a 2007
internal Goldman presentation that seems to confirm that the
company took the big short position, and that document asserts
that early in 2007, Goldman's mortgage trading desk ``started
putting on big short positions.''
Mr. Birnbaum. Which exhibit is that?
Senator Collins. That is Exhibit 48.\3\
---------------------------------------------------------------------------
\3\ See Exhibit No. 48, which appears in the Appendix on page 376.
---------------------------------------------------------------------------
Mr. Birnbaum, this is my point: We have an email from the
CFO that talks about people who had lost money that says,
``Tells you what might be happening to people who don't have
the big short.'' We have an internal Goldman presentation that
refers to starting to put on big short positions. And yet
Goldman executives, this panel, and the testimony to come have
stated repeatedly that Goldman never had an overall strategy to
short mortgage-related investments.
If Goldman's position were truly to just get back to home,
to remain as neutral as possible, how do you account for all of
these references to the big short?
Mr. Birnbaum. I think the first thing to clarify is I was
not on the first email that you are referring to, so I would be
interpreting David Viniar's words in that case. And I think in
the other exhibit you mentioned--I do not know if it was
Exhibit 48 or what it was, but that departmental presentation,
I did not prepare that. I do not think I was on that email
either.
I just want to clarify. My position here was I had a role
in the ABS Group. The ABS Group was a part of the Structured
Products Group, which was a part of the Mortgage Department,
which was a part of the firm. So my role was a--I had a
singular voice, and I mentioned in my presentation, I had a
view, I took a view, and that was not necessarily the view of
the department or the firm, and that did not reflect the
position necessarily for the department or the firm. And if you
are asking me to interpret this email, again, I was not on
this, so I would be speculating as to what these people meant.
Senator Collins. Well, Mr. Chairman, I think it is very
clear what the Goldman executives meant, and I, too, am baffled
that they continue to maintain that they did not have an
overall net short position, particularly seeing the chart that
you put out.\1\
---------------------------------------------------------------------------
\1\ See Exhibit No. 162, which appears in the Appendix on page 997.
---------------------------------------------------------------------------
Mr. Birnbaum. Do you mind if I comment on that chart for a
moment? Because I saw a similar chart last week while
interviewing with your staff, and I think that chart is, at
best, misleading. That chart is an amalgam of positions that
cannot necessarily--they are apples and oranges being added up
together that do not reflect the firm's position or the firm's
profit and loss statement to the extent the market would go up
or down. And the analogy that I used with your staff last
week--and I will use it again--would be if you were to trade,
say, $100 in Johnson & Johnson versus $100 in Google, if you
were to trade those against each other--so let us say you were
long $100 in Google and you were short $100 in Johnson &
Johnson, if you added those two together, they would look like
a zero on a chart like that. But I think anybody who knows
those two stocks would know that the person who has that
position would not be indifferent as to which way the market
would go. The Google position would be much more sensitive than
the Johnson & Johnson position.
That chart is an amalgam of AAAs, BBBs, As, very different
things being added together that do not reflect the firm's P&L.
Senator Collins. Mr. Chairman, it seems to me that the
documents that you have compiled, that your staff has compiled,
tell a very different story.
Thank you, Mr. Chairman.
Senator Levin. By the way, before you proceed, Senator
Kaufman, let me just assure Senator Collins and all the other
Members of our Subcommittee and our witnesses that we are going
to stay here as long as it takes to get the answers. So there
may be a strategy. I noticed very much the same thing that
Senator Collins did about the refusal to give answers, the long
delays in those answers. But it is not going to work. We are
going to stay here as long as it takes to get this information
before the public.
Senator Kaufman.
Senator Kaufman. Mr. Sparks, can you tell us, do you know
what a stated income loan is?
Mr. Sparks. I am generally familiar. That term could be
used--at least I do not think that term is a technical term,
but that term could be used with respect to certain ways loans
were originated and how income by the borrower was represented.
Senator Kaufman. Well, we had 3 days of hearings and had
folks from Washington Mutual, regulators, and the rating
agencies. They all seemed to know what a stated income loan is.
Mr. Birnbaum, do you know what a stated income loan is?
Mr. Birnbaum. I think it is just what it sounds like.
Senator Kaufman. Which is?
Mr. Birnbaum. My understanding--and I think there are some
people who are more qualified to answer this question than me.
But my understanding is that is when the borrower stated his
income rather than being verified.
Senator Kaufman. Right. Mr. Swenson, is that your
understanding?
Mr. Swenson. I agree.
Senator Kaufman. Are you aware that stated income loans
were originally for high-net-worth incomes, Mr. Sparks, but
were beginning to spread throughout the mortgage industry? You
were not concerned about stated income loans at all or the fact
that they were stated income loans going out and being used to
determine whether loans should be given to borrowers?
Mr. Sparks. Senator, I was aware that that business
activity from the mortgage originators was growing.
Senator Kaufman. Did that cause you any concern?
Mr. Sparks. Well, we operate in the markets, and the prices
in this instance where we would probably see that is if the
loan originator that is a client of ours wanted to sell assets,
that was their objective, we would factor that in to what we
did with respect to pricing and diligence and the like.
Senator Kaufman. So the fact that some of your mortgage
originators were presenting mortgages to you for securitization
that were stated income loans--remember, a stated income loan
is a case where you walk in and you say, ``Mr. Sparks, what is
your income?'' You tell me what it is, that is the end of the
road. No W-2 form, no checking. That is it. So as this went on,
you became concerned that this was growing?
Mr. Sparks. Well, Senator, I was just saying that I had
knowledge of it. I was not making a judgment about the
practice.
Senator Kaufman. Sure. What do you think about the
practice?
Mr. Sparks. Well, we were not a big originator.
Senator Kaufman. But you did securitize----
Mr. Sparks. I believe we securitized some of that. I think
that type of loan has a risk to it that when it is verified has
a different risk to it.
Senator Kaufman. OK. Can I say that one of the regulators
said at the hearing we had earlier that it was anathema to the
banking business. The idea that someone could come in and just
based on what they say, their word could be used for these
loans would be an anathema.
Mr. Sparks. Again, Senator, we were not a big originator in
this space. We were not a big originator of that product.
Senator Kaufman. But you securitized these loans, right?
Mr. Sparks. Yes.
Senator Kaufman. Yes, you did. And do you know whether
Goldman was securitizing WaMu mortgages or Long Beach mortgages
at this time?
Mr. Sparks. WaMu, Long Beach is and was a client of Goldman
Sachs.
Senator Kaufman. And in May 2006, Goldman Sachs acted as
co-lead underwriter with WaMu to securitize $532 million in
subprime second-lien, fixed-rate mortgages originated at Long
Beach? Does that sound reasonable to you?
Mr. Sparks. Yes, Senator.
Senator Kaufman. What would you think if you heard that--
what would be a reasonable percentage, do you think, of home
equity loans that you would securitize that had stated income
as the basis for income in those loans? What would be a
reasonable number, do you think?
Mr. Sparks. Well, I am not familiar with the specifics of
that deal, and in hindsight, those deals did not perform. So I
do not know what a reasonable percentage would be. The deal
would be what it was, and----
Senator Kaufman. Take a wild guess.
Mr. Sparks. And it would be disclosed as to what it was.
Senator Kaufman. Right. It was not disclosed, how much of
these were stated income loans.
Mr. Sparks. Well, with respect to the origination
practices, those would have been disclosed.
Senator Kaufman. But they would not be disclosed to the
people who were buying your securitized mortgages. I guarantee
they were not disclosed.
Mr. Sparks. Well, with respect to the origination
practices--and, again, I would have to look at the particular
deal----
Senator Kaufman. We got the origination practices. What we
are trying to do here today is talk about what happened after
the originators got through with it and after the rating
agencies put the rating on it and the rest of it and then it
went out. There was this great sucking from Wall Street to get
more and more of these loans into the marketplace, and you can
see that it was an explosion. Is it fair to say there was an
explosion in these CDOs and RMBSs?
Mr. Sparks. Well, Senator, when we participated in the
market--and these deals are in the structured finance arena of
the market.
Senator Kaufman. Right.
Mr. Sparks. You would know from your participation in the
market what types of investors wanted to buy what types of
risk.
Senator Kaufman. Right. But you were selling--this is a
product--this is a product you were selling. It is like selling
a car----
Mr. Sparks. And there would be--and we would also know what
types of investors wanted Long Beach or Washington Mutual loans
to invest in, in securitized format. So we would know what
investors actually had demand for that product.
Senator Kaufman. Right. But what percentage do you think
would be a reasonable percentage--I mean, as you said, these
all went bad. Ten thousand loans in 2006----
Mr. Sparks. I do not know about all, but----
Senator Kaufman. Well, excuse me----
Mr. Sparks. Senator, I do not know what the right
percentage would be.
Senator Kaufman. Would you say 10 or 15 percent?
Mr. Sparks. Again, it depends on the deal, and I do not
know.
Senator Kaufman. Well, suppose I told you that in these
deals that you were securitizing, 90 percent of the home equity
loans were made on stated income. Would that be something that
would cause you concern?
Mr. Sparks. Well, this particular deal I think in hindsight
was a second-lien subprime deal, so it did not perform well.
Senator Kaufman. Would it concern you that the subprime
deals, 50 percent of them are stated income loans?
Mr. Sparks. Again, I think that many of those deals that we
brought did not perform well, and that is not a good thing for
us or our clients.
Senator Kaufman. But I mean, couldn't it be reasonable to
believe that when the great preponderance of the mortgages in
the package that you were selling to folks were stated income
loans, there was a pretty good chance that a large percentage
of these were eventually going to fail?
Mr. Sparks. Senator, at the time things happened in the
market and were accepted in the market that in hindsight look
very different than they did at the time in the market.
Senator Kaufman. I got two things out of these hearings.
One, nobody did anything wrong, this was a natural disaster,
like a hurricane hit. The mortgage market fell, and nobody knew
it, and nobody forecasted it. And the second thing is that
these things were just something that happened. Basically, I am
just saying if you did some research into this--and I am sure
had people in your organization--they were coming in. These
loans were pouring into your--you were sucking them in, in
order to sell them and make money, which is entirely
acceptable. Just a little bit of research into how these things
were being funded--by the way, let me ask you: Did you ever
have any concern during 2006 and 2007 that there were an awful
lot of home mortgage loans being securitized?
Mr. Sparks. Yes, Senator.
Senator Kaufman. And did you ever say, ``I wonder what is
going on with those loans''? I mean, ``I wonder how all these
people are coming forward that are going to need these types of
loans''?
Mr. Sparks. Senator, when I said I was concerned, I was
concerned about risk that we had----
Senator Kaufman. Risk. That is what I mean. That is what I
am saying. So normally due diligence--again, I think the
argument that, ``Well, everybody was doing it,'' is an argument
that has been used over the years. These halls are full of
folks who have come before Senate committees and said, ``Well,
everybody was doing it.'' So I do not think the ``everybody was
doing it'' thing is going to hold up real well. And so I am
just trying to figure out when--when I say this to people, I am
telling you--and I say, ``Do you know what a stated income loan
is? Do you know that you could just walk into a bank and tell
them what your income was and they would give you a loan? And
you know what happens next? They go to Wall Street''--and this
is going to sound a little--I totally believe where some of the
smartest people I know work, and you know what they did? They
packaged these things up. Did they ever ask how many were
stated income loans? I do not know. Did they ever ask, did
anybody say let us take a look at how these loans are being put
together? And stated income is just the easiest one to explain
to people.
Do you believe that they did this and no one knew, no one
knew at Washington Mutual, no one knew at Standard & Poor's and
Moody's, and no one knew at the premier investment banking
house of the United States of America, Goldman Sachs?
Mr. Sparks. Senator, I did not mean to imply that we did
not know anything. We had a team that did diligence to
understand originators and loan packages that we bought. But I
would like to make the point----
Senator Kaufman. Sure.
Mr. Sparks [continuing]. That that team may have liked that
risk and, in fact, did. And on that deal----
Senator Kaufman. Liked the risk that somebody could go in
and originate a loan just on their stated income that 90
percent--the stated income started out as something that was
for high-wealth individuals. It was a very small percentage.
But starting around 2005, 2006, it grew and grew and grew. But
when you are talking about 90 percent of the prime home equity
loans, 73 percent of the Option ARMs, and 50 percent of the
subprime loans where the basis for income for the borrower is
what they say their income is.
Mr. Sparks. And, Senator, we made a number of poor business
decisions, especially in hindsight, but at the time there were
people in my business unit who actually wanted to be long that
risk, and on that type of deal----
Senator Kaufman. They had no idea that the risk was 90
percent stated income loans. I do not think anybody knew that.
Mr. Sparks. Well, again, I would have to look at the
particular deal.
Senator Kaufman. I mean, that is--I am just having a hard
time--I am trying to put myself back in your position, which is
always a difficult thing to do. But I see these mortgages
pouring in. I would say: Where are they coming from? And
especially the people in your operation who were originating
these loans. The idea that you can get away with--I will get
away with it and I am for it, you are just selling something
and that is the way it is, and, they are taking the risk, and
people want to buy these things. I do not think anybody in
America wants to buy a mortgage from someone whose income is
what they state their income can be. I do not think anybody
wants to buy that. Is that fair?
Mr. Sparks. Today?
Senator Kaufman. No. Anytime.
Mr. Sparks. Well, there were a lot of investors who had a
lot of appetite in the period we are talking about, including a
number of people in the firm and in my business unit. So I
think hindsight and your own investment view is an example of
why there are markets----
Senator Kaufman. Look, I hate hindsight, and I hate Monday
morning quarterbacking, and I hate connecting the dots and
connecting all this. So I do not--I really do not feel on this
one that I am up here, using a morality that was developed in
the last 15 minutes in order to ask you questions about this
thing and embarrass you. That is not what I am about at all.
And I do not think anybody in this room, if I polled them,
would say that it is unreasonable to expect that when you are
securitizing loans, that the idea that these loans are stated
income loans is a problem. It is a problem in terms of risk. So
that language works a lot of places, but I just do not think it
works in these stated income loans.
By the way, do you--and I guess this is really for the
folks that worked for you down the line, but did you ever have
a situation where you eliminated originators?
Mr. Sparks. Yes, and we had a number of situations where we
just did not start doing business with originators. When you
say eliminated,. I am assuming you mean stop doing business----
Senator Kaufman. No, the same thing, yes, either not do
business----
Mr. Sparks. I do not know, Senator, for sure about that. I
do know that there were a number of originators that we chose
not to do business with.
Senator Kaufman. And do you know what was the standard for
them? I mean, how did you get to be an originator? I mean, what
were some of the criteria? Do you have any idea?
Mr. Sparks. How did we choose certain people to do business
with and not do business with?
Senator Kaufman. Yes.
Mr. Sparks. Well, our team would go out and anybody we
bought loans from, we would do due diligence on. We would work
to understand their origination guidelines and standards. We
would also look at the institution itself with respect to their
capital and what they did.
Senator Kaufman. And Long Beach, you looked at Long Beach
and said, ``Boy, that is a great originator. I would love to
have them''? That is right here, Long Beach. You were doing
Long Beach----
Mr. Sparks. Yes, we did business----
Senator Kaufman [continuing]. In 2006, 2007, and I am not
going to get into the Long Beach thing because we do not have
time to do it. But Long Beach was one of the main players in
the stated income. I do not know how you could turn someone
else down and accept Long Beach. I cannot ask you about a
specific case because that is not your area of expertise.
The Treasury Department Inspector General, Eric Thorson,
testified before the Subcommittee that the mix of stated income
loans from one originator of the numbers I gave you was a
target-rich investment for fraud. What do you think about that?
Do you think if you got these originators using stated income
loans that it is a target-rich environment for fraud?
Mr. Sparks. Well, I think as the purchaser and assumer of
risk from these originators, we suffered with respect to that.
And so, I do not--that particular point I do not know that I
have a particular view on, but it appears that there were a
number that actually was the case in hindsight.
Senator Kaufman. Yes, in--well, no. Do not do the hindsight
thing with me. I mean, come on. In hindsight--at the time, if
you knew at the time what was going on, you would say this is
as target-rich investment for fraud, that 90 percent of the
home equity loans are stated income loans, these things are
just pouring out of these originators. I mean, I am not
interested in new data. I am just talking about data that was
available at the time. You would think that something was going
on here when you have 90 percent of your loans stated income
loans.
Mr. Sparks. When we are buying loans, we do not want to buy
loans with fraud in them.
Senator Kaufman. Exactly. No, I know that. I am just saying
that this information--do you know anything about thin files?
Have you ever heard the term ``thin files''?
Mr. Sparks. Senator, I may have heard it. I do not really
recall the specifics of it.
Senator Kaufman. Mr. Birnbaum, do you know anything about
thin files?
Mr. Birnbaum. I think I read something about that recently
in ``The Big Short.''
Senator Kaufman. So you understand what thin files are, but
you did not know----
Mr. Birnbaum. It is detailed in the book.
Senator Kaufman. Right. Did anybody at Goldman Sachs ever
use thin files in putting together CDOs, the thin-file
approach?
Mr. Birnbaum. Well, just to be clear, my job function had
nothing to do with putting together CDOs, so I cannot speak to
that.
Senator Kaufman. In terms of securities----
Mr. Birnbaum. Thin files is something I literally heard of
for the first time last week.
Senator Kaufman. Right. And, Mr. Swenson, as far as you
know, Goldman Sachs never used the thin-file approach in order
to make more--organizing CDOs?
Mr. Swenson. No.
Senator Kaufman. And, Mr. Sparks?
Mr. Sparks. Again, I am not familiar with the approach, but
if you described it to me, I would be happy to----
Senator Kaufman. No, I mean, if you did not hear of it,
then clearly you did not use the process, it is fair to say. I
mean, you never heard about it in Goldman Sachs, anyone ever
doing anything like using this thin files specifically. And how
about barbelling? Mr. Sparks, have you ever heard of
barbelling?
Mr. Sparks. Well, I have heard of barbelling mainly with
respect to trading positions.
Senator Kaufman. Have you ever heard of barbelling with
regard to RMBSs?
Mr. Sparks. That term could just mean a number of things,
so could you----
Senator Kaufman. Mr. Birnbaum, did you just read about it
recently?
Mr. Birnbaum. I will go with that.
Senator Kaufman. OK. Mr. Swenson.
Mr. Swenson. I am not aware of that term.
Senator Kaufman. What is alleged, what happened was people
would take advantage of the fact that rating agencies went with
an average. So what they would do with barbelling is they would
go out and pick up FICO scores of 550, which are almost
guaranteed to fail, mix them in with FICO scores of 650, so
they came out with about 615 and then sold them.
Mr. Sparks, you never heard of anything like that at
Goldman Sachs, right?
Mr. Sparks. Well, I know that clients--or when we were
putting deals together--the deal teams would work very hard to
put together--whatever the loan package was, and work with the
rating agencies to come up with what the capital structure
would be. That includes credit enhancement. So I do not recall
somebody coming to me saying, ``Hey, we are going to barbell
this.''
Senator Kaufman. Right.
Mr. Sparks. But there would be a mix of collateral----
Senator Kaufman. Let me ask you a similar question then.
How about gaming the rating agencies? Did you ever think there
were people at Goldman Sachs sitting around trying to figure
out, whether it is barbelling or thin files or something like
that, trying to figure out what can we get through here,
through the rating agencies?
Mr. Sparks. No. As far as gaming, no. As far as working
with the agencies, to come up with a capital structure and a
credit enhancement that worked for the deal, yes, there was
constant dialogue and work together for that.
Senator Kaufman. And, Mr. Birnbaum, dealing with rating
agencies, did you ever get the feeling there were folks sitting
around trying to figure out what is the best way to put this
together for rating agencies so that we can make the most money
on these RMBSs?
Mr. Birnbaum. Just to be clear, I never deal with the
rating agencies----
Senator Kaufman. Oh, you never did. Mr. Swenson, you never
dealt with that either?
Mr. Swenson. No, I did not. We were secondary traders
responsible for making markets in ABS securities.
Senator Kaufman. Mr. Sparks, how did you feel about dealing
with the rating agencies? Did you ever feel like sometimes you
might pick a rating agency based on--if you had two rating
agencies, one would give you AAA and the other give you AA,
that you might go with the AAA rating agency?
Mr. Sparks. There were times that that is correct, Senator.
Senator Kaufman. And did you ever think there was kind of
subtle pressure on the rating agencies that maybe they ought to
rate something AAA?
Mr. Sparks. Well, I think the rating agencies worked very
hard and were under a lot of pressure to analyze the pools that
they were rating. So I think they were under a lot of pressure.
Senator Kaufman. They were under a lot of pressures in
order to keep market share and in order to keep their business
alive, so, therefore, they had to rate competitively against
the other rating agencies. Is that a fair assumption of what is
going on?
Mr. Sparks. Well, I think there was some competitiveness to
it, but I also--I felt like the rating agencies attempted to do
their job and worked hard at it. I think there was some
component of competitiveness in it, but I think they were
honestly trying to do their job and rate the deals.
Senator Kaufman. Mr. Tourre, you have dealt with rating
agencies, right?
Mr. Tourre. I did, Senator.
Senator Kaufman. And how did you find the rating agencies?
Did you ever work with them in such a way as to try to turn AA
into AAA?
Mr. Tourre. I merely applied their rating models--they had,
a lot of documentation about how they rate, all these
transactions, and we merely applied those models to rate our
products.
Senator Kaufman. So under oath you are saying you were
never involved in any gaming like barbelling or thin file or
anything like that?
Mr. Tourre. Well, each transaction had its specific aspects
that require discussions with the rating agencies.
Senator Kaufman. No, I am just saying, but during those
discussions you never at Goldman Sachs ever engaged in what is
popularly known as barbelling or thin files in order to come up
with a security?
Mr. Tourre. First, I do not know what thin files was, and
I--not that I remember.
Senator Kaufman. Thank you. Thank you, Mr. Chairman.
Senator Levin. Thank you very much. Dr. Coburn.
OPENING STATEMENT OF SENATOR COBURN
Senator Coburn. Thank you, Mr. Chairman. I am going to take
my privilege as Ranking Member to make my opening statement
now, and I apologize to the panel that I was not here. I am
working on another financial problem that is a little bit
bigger than this one with the White House and the Debt
Commission.
Senator Levin, I want to thank you for this fourth and
final hearing. I want to thank the staffs. I think they have
worked well together, and I think we have done a good role of
putting forward what the questions are. I also want to thank
the witnesses for making themselves available to answer our
questions.
The hearing to me is particularly important because this
week the Senate is trying to consider major financial reform
legislation that could have profound effects on our economy.
And we are hurrying these hearings. The Commission that the
Congress commissioned to study this that is going to have a
report due in December is not going to have a report, and yet
we are going to pass a bill before we find everything, and that
is somewhat concerning to me. But, nevertheless, there is a lot
of evidence in front of us that needs to be clarified.
In recent months, Congress and the American people have
been debating the causes of our financial crisis and looking
for solutions. Mr. Chairman, I commend you for advancing the
discussion with our investigations of institutions like
Washington Mutual, the Federal regulators, and particularly the
Office of Thrift Supervision. We would have been fine without
them ever being there because they actually did not do
anything.
What we have learned is that there are no easy answers.
This is important to keep in mind when Congress debates major
legislation. I certainly have my own views about what caused
the financial crisis, but most honest observers would
acknowledge that the roads of responsibilities lead to places
like Washington and Congress as well as Wall Street.
We also cannot forget that there are numerous causes to the
financial crisis, not just one. In truth, we all took turns
inflating the housing bubble. Today we are looking at the role
of one investment bank, Goldman Sachs. My goal is simply to
uncover the truth of what happened in several of these
transactions. If we can understand this piece of the puzzle, we
will be in a much better position to craft responsible
legislation that addresses the real problem, not the symptoms
of the problem. And more importantly, the American people will
be better informed and more equipped to hold us accountable.
The investigation into Goldman Sachs has given the
Subcommittee an opportunity to dive into the firm's decisions
regarding mortgage investments. Even though Goldman Sachs is
the focus, I would suggest that the questions we are going to
ask the witnesses today should also be asked of other leading
investment banks. Congress has a responsibility to understand
how widespread some of these complex financial transactions may
be and the ethics and motivations behind them.
The key question before us, I believe, is whether Goldman
Sachs was making proprietary trades that were contrary to the
financial interests of their customers. Sorting out these
potential conflicts is central to understanding how we move
forward with financial reform and also understanding that there
is a role for a market maker who plays both sides of the
market. And we cannot lose sight of that.
Several instances, however, seem to show bankers and
traders were focused on doing what was right for the firm
rather than what was in the best interest of their clients. In
an exchange over the Abacus deal, one employee remarked, ``The
way I look at it, the easiest managers to work with should be
used for our own priorities. Managers that are a bit more
difficult should be used for trades like Paulson.''
Goldman employees knew that such tactics could hurt their
reputation if they were uncovered. Markets can be complex, but
they are built on three simple concepts: Truth, trust, and
transparency. Without them, the cost of doing business is too
high, and markets cannot function properly.
I have several questions about these deliberations within
Goldman Sachs. I am committed to withholding final judgment
until all our hearings are complete. Some of what we uncovered
paints a fairly dark picture of what was going on inside
investment banks.
To the witnesses, I would say this is your opportunity to
explain to us and the American people what happened. And,
again, I thank you for being here.
Now I would like to move to my questions, Mr. Chairman.
Mr. Swenson, if you would, would you turn to Exhibit
55b?\1\ This is a copy of your own performance evaluation for
2007, and I want to spend some time with you on that, with your
own self-assessment, and I have some questions. You wrote this
document, I believe. What was the purpose of this document?
---------------------------------------------------------------------------
\1\ See Exhibit No. 55b, which appears in the Appendix on page 441.
---------------------------------------------------------------------------
Mr. Swenson. The purpose of this document was to go over my
accomplishments for that year.
Senator Coburn. OK. You say, ``It should not be a surprise
to anyone that the 2007 year is the one that I am most proud of
to date. I can take credit for recognizing the enormous
opportunity for the ABS synthetics business 2 years ago.''
You go on to say that you identified ``key market
dislocations that led to tremendous profits.''
Is that an accurate representation?
Mr. Swenson. Yes, it is.
Senator Coburn. Later in this document, you run through
some of your biggest trades, including a $1.8 billion short on
CDOs, collateralized debt obligations, and you say you oversaw
and directed the covering of $9 billion in short positions. Is
it accurate to say that you went extremely short and made a lot
of money?
Mr. Swenson. Dr. Coburn, you were not here for my opening
statement. I went over a number of the trades that we did and a
timeline and a series of trades that we did over the course of
2006 and 2007. So for others in the room, I am sorry I am
repeating myself a little, but we did a number of trades in
2006 and 2007 that made us put our ABS Desk specifically net
short at various times with a short bias and at times flat, and
we added a significant amount of risk where we went long at the
end of the first quarter. Throughout the second quarter, we
added a lot of risk, net long positions. And in the third
quarter, at one point we had a short bias, and we covered a
substantial amount of risk over the course of that quarter into
the end of August.
Senator Coburn. Thank you. But you did in 2007 go much more
short than you were in 2006. Is that an accurate statement?
Mr. Swenson. It is----
Senator Coburn. Because of what you saw in the market. I am
not critical of it. That is your job as a market maker: To read
the tea leaves. I am not being critical. I am just saying you
had a stronger short position in 2007 than you did in 2006.
Mr. Swenson. Yes, we did.
Senator Coburn. All right. Mr. Birnbaum in his review
writes, ``I consider myself to be initial or primary driver of
the macro trading direction for the business.'' Would you agree
with this statement?
Mr. Birnbaum. Is there----
Senator Coburn. I am asking this to Mr. Swenson.
Mr. Birnbaum. Oh.
Mr. Swenson. I viewed our business as being market makers
for ABS securities.
Senator Coburn. All right. But the question I am asking
you: Do you agree with Mr. Birnbaum's statement in writing in
his review, he said, ``I consider myself to be the initial or
primary driver of the macro trading direction for the
business.'' Do you agree with that?
Mr. Swenson. I do not know the context of those particular
words. Is it in a document here, sir?
Senator Coburn. Yes, we can get that for you.
Mr. Birnbaum, what do you think? You wrote it. The reason I
am asking the question, you seem to have--in your own self-
assessment, you are both taking credit for the same thing. And
I am wanting to know who is the driver here. Who made the
decision?
Mr. Birnbaum. We worked as a team.
Senator Coburn. Well, you worked as a team, but somebody
leads the team. Who led the team?
Mr. Birnbaum. We worked as a team
Senator Coburn. Who led the team? Who was the leader of
your team?
Mr. Birnbaum. Are you implying that you can only have one
person leading teams?
Senator Coburn. Well, you only have one Lloyd Blankfein,
right? He is the CEO. So in terms of your team, who has the
line responsibility for your team?
Mr. Birnbaum. Mr. Swenson was my superior.
Senator Coburn. OK.
Mr. Swenson. And ultimately Mr. Sparks.
Senator Coburn. OK. So there was a leader. Somebody is
ultimately responsible, correct.
Mr. Swenson. Correct.
Senator Coburn. Mr. Birnbaum says he had his own plan
implemented by buying up ``almost every single name CDO
protection . . . opportunity in a 2-month period.'' Is that the
same thing that you were taking credit for, Mr. Swenson?
Mr. Swenson. Yes. We worked together on the same desk.
Senator Coburn. Mr. Swenson, you also say in this
assessment that it was clear to you in the early summer of 2006
that ``the market fundamentals in subprime and the highly
levered nature of CDOs was going to have a very unhappy
ending.'' That is a quote from your self-assessment. Did you
share that knowledge with anybody else at the firm other than
those who read your self-assessment?
Mr. Swenson. Sir, do you mind pointing exactly where this
quote was so I----
Senator Coburn. It is in your self-assessment.
Mr. Swenson. Yes, I understand, but what page?
Senator Coburn. I will get it to you here in a second. We
will move on while----
Mr. Swenson. I am just trying to be helpful, sir.
Senator Coburn. Let us assume--I will get you where that
was stated, all right? And my staff will find that and we will
give it to you. It is on Exhibit 55b, on page 2, is where you
made that statement. Single-name CDO short.
Did you share that with other members of the firm other
than those who read your self-assessment?
Mr. Swenson. No.
Senator Coburn. You were obviously correct, weren't you, in
your assessment?
Mr. Swenson. Yes.
Senator Coburn. All right. Given your awareness, were you
concerned that your mortgage division continued to market and
sell mortgage-related CDOs to the firm's clients? You are
sitting here projecting what you see happening in the market.
Was there any concern that you were continuing to market into a
market that looked like it was declining and you were
recommending taking a position against it?
Mr. Swenson. Dr. Coburn, at that time in the summer of 2006
and into 2007, the market was going up in price. We were very
long ABS assets and ABX single-name synthetics at that time.
The market for the underlying securities in RMBS transactions
was generally very tight and very robust with deals
oversubscribed.
So at that time, there was a great deal of demand for
securities, and there were not many players that had a negative
view on the product or the housing market in 2006 that were
buying a lot of these securities. Those views changed, but over
time there was a great deal of debate on the direction of the
mortgage market. All through the third and fourth quarter,
there were opportunities when prices went down, and it brought
in a tremendous amount of demand for people to buy securities
at lower prices. No one was certain that these things were
going to happen.
Senator Coburn. No, I agree with that, and I can appreciate
it. But part of your expertise was in terms of you put that in
as a statement of qualifications of a great job that you had
done that year because you recognized the potential for it. So
let me go back. The statement was ``the market fundamentals in
subprime and the highly leveraged nature of CDOs was going to
have a very unhappy ending.'' That is your quote. And so I go
back. Did you share that, your feeling that you put in your own
self-assessment, with other principals at the firm?
Mr. Swenson. We debated the direction of the market as a
group all the time. I mean, there were a number of traders on
our ABS Desk. There were, five or six, and we discussed the
nature of the performance of the underlying transactions. At
that time our desk was long.
Senator Coburn. But you had sold $1.8 billion in short
CDOs.
Mr. Swenson. Not at that point. Over time that position
through our market making and principaling was put on--not in
September 2006.
Senator Coburn. All right. Go to Exhibit 69,\1\ if you
would. And while you are looking for that, I want to follow up
on something Senator Kaufman asked. You packaged and sold
mortgage-backed securities from Long Beach that were AAA rated
that the vast majority of them were stated income loans. Is
that an accurate statement?
---------------------------------------------------------------------------
\1\ See Exhibit No. 69, which appears in the Appendix on page 486.
---------------------------------------------------------------------------
Mr. Sparks. I do not know the number percentage-wise, Dr.
Coburn, but that is possible.
Senator Coburn. Well, it was well over 50 percent. We know
the number.
Mr. Sparks. We did a number of deals with Long Beach.
Senator Coburn. And so going back to follow up on what
Senator Kaufman said, the rating agencies rated these AAA in
spite of the fact on their due diligence they should have known
that the majority were stated income loans.
Mr. Sparks. Dr. Coburn, yes, and--well, I do not know
exactly what they knew. It would have been determined under the
diligence they did. But I will tell you, Goldman Sachs also
many times invested in the equity of those deals.
Senator Coburn. I understand. Everything can be invested in
if the price is right compared to the risk. I am not disputing
that. But I am going back to the question that you have AAA
rating on stated income loans, on packages you put together to
underwrite. Correct?
Mr. Sparks. Yes.
Senator Coburn. OK. Now, Mr. Swenson, again, Exhibit 69. In
October 2007, Goldman Sachs made quite a bit of money when
Moody's credit rating agency downgraded $32 billion in BBB and
BBB-minus bonds. After you send this email informing your
colleagues of those downgrades, Donald Mullen emails you and
says, ``Sounds like we will make some serious money.'' Why was
that?
Mr. Swenson. Just give me one second to read the context of
the email.
Senator Coburn. OK.
Mr. Swenson. Sorry.
[Pause.]
Mr. Swenson. This email specifically goes over a position
in a single-name CDO, ABS CDO synthetic that we have. What
happened was when the rating agencies downgraded a number of
the underlying RMBS securities, it triggered an event which
would mean that we would end up with an implied write down
event which would shut off the coupons in a number of the
tranches--or one of the tranches that we were short on. So we
would not need to pay our protection payment on that security
and eventually recoup the gains on that trade.
Senator Coburn. And I am not stating that there is anything
wrong to hedging your long position. Do not get me wrong. I
guess the thing that I would ask: Did you at any time see any
flaws in the rating agencies' assessment of the products that
you were putting out there?
Mr. Swenson. Dr. Coburn, I did not work on the construction
of CDOs. I was a market maker in ABS securities, and as a
market maker, we are asked to take principal risk from our
clients, whether it is a buy or a sell, at various times.
With that, it is for us to manage our risk as principal
because clients expect us to transact at the time that they
come to us and ask to transact, not wait for us to find the
other side. So as principal, we manage that by incorporating a
view or a bias in the way we position ourselves.
Senator Coburn. Let us say somebody brought to you another
package that you were making a market in. And you are making a
market for a product that absolutely stinks. You know it
stinks. The rating agency knows it stinks. Would Goldman still
make a market in that if the money could be made off of it by
the client and Goldman?
Mr. Swenson. We bid on--our requirement for our desk is to
bid on ABS securities. When clients come to us, we try to
give--we give the market value bid or the offer for that
security.
Senator Coburn. So you are a true market maker. So even if
it is the worst possible combination of securities, there is a
price at which the risk is worth taking. Is that correct?
Mr. Swenson. That is correct.
Senator Coburn. All right. Mr. Tourre, I know it is a
difficult time for you. In addition to the SEC accusations
against you and the media circus around you, this past weekend
your employer released some rather embarrassing personal emails
from you that appear to be largely unrelated to this or any
other investigation. Do you have any feelings or questions
about why that was done?
Mr. Tourre. Dr. Coburn, these emails were personal emails
that I deeply regret. They reflect----
Senator Coburn. I am not making a judgment on it. I am
asking you a question. Do you have any thought about the
motivation on why they were released?
Mr. Tourre. I do not know, sir.
Senator Coburn. How did it make you feel when they were
released publicly?
Mr. Tourre. As I will repeat again, Dr. Coburn, I regret,
these emails. They reflect very bad on the firm and on myself,
and, I think, I wish I had not sent those.
Senator Coburn. Is there a large number of in-house Goldman
lawyers that have spoken with you prior to this hearing?
Mr. Tourre. I have spoken to lawyers prior to this hearing,
yes.
Senator Coburn. How many?
Mr. Tourre. I don't remember.
Senator Coburn. Several?
Mr. Tourre. Yes.
Senator Coburn. It is true that they have hired an
interpreter, a French interpreter, to translate for reporters
personal notes you had written to close friends? Is that true?
Mr. Tourre. I do not know.
Senator Coburn. OK. Are you personally represented by
lawyers paid for by Goldman Sachs?
Mr. Tourre. Yes.
Senator Coburn. OK. Mr. Chairman, my time is up.
Senator Levin. Thank you very much, Dr. Coburn. Senator
McCaskill.
Senator McCaskill. I want to make clear that I understand
that for most of these transactions we are talking about today
you considered yourself a market maker. And by that, you were
trying to allow clients to bet on a certain outcome. And for
purposes of my questions today, I would like to limit this to
synthetic CDOs because I think they are the best representative
of why most of America does understand what happened. We are
not talking about a farmer trying to get certainty on a
commodity. We are not talking about an airline company trying
to get certainty on jet fuel, which is the societal reason that
we have market makers to put predictability into a business
model that will allow more informed risk taking as it relates
to a business model. But the synthetic CDOs were really about
somebody just wanting to place a bet, and so I want to try to
continue with the analogy of you being the house or the bookie.
Most people in America understand about a football bet. I
have usually bet on MU versus KU because I went to MU and I
care about MU. But the line is important. Obviously, if you are
going to be a serious bettor, you have got to know what the
line is. You have got to know how many points you are going to
get or how many points you are going to give. And that is, I
think, where we can start drawing the analogies to your jobs.
You were trying to make a market, and staying close to home was
trying to get the line right. Staying close to home was to not
be too far out on one side or the other. When the bookie gets
too many bets on MU, if MU is getting points, it gives fewer
points to MU to move more bettors over to KU and vice versa.
The bookie moves the line in order to even out the bets. So the
perfect bookie who makes a lot of money is somebody who just
gets the vig. And depending on whether you are betting in an
office pool that is illegal or whether you are betting in Las
Vegas, the vig is going to vary anywhere from 5 to 10 percent.
I do not know who the right person is to ask this--what is
your vig, Mr. Sparks, on these deals? What is the vig you make,
assuming all you are doing--not playing in the market, but all
you are doing is trying to stay close to home like a bookie
would try to do in order to minimize their risk?
Mr. Sparks. Senator, can I just, instead of using the
bookie analogy, just talk about--I think your question about
profits and what we can make as a client----
Senator McCaskill. I want to know, generally speaking, the
vig on a bookie bet. You are the house. You are the bookie.
People are booking their bets with you. That is what they are
doing. That is what a synthetic CDO is. I do not know why we
need to dress it up. It is just a bet. That is all it is.
Mr. Sparks. There is fee business, which I do not think is
what you are talking about, and then there is market-making
business. In this particular sector, typically you would have
to do trades where you assumed risk. When that was not the
case, there is an SEC markup rule with respect to a certain
percentage, but that is for risk-free trades, and at this time
in this market, that was not a typical thing where you would
have a purely risk-free trade.
The amount of bid-offer spread, which would be a term we
would have used, would be very dependent on the product, the
rating, the liquidity of the product, and the--if I did not
mention liquidity, it was a huge issue. So, the bid-offer
spread could vary at various times, but one of the things
people expected us to do was to make a market and to have a
bid-offer spread.
The great thing about making a market is when you do that,
clients can tell from your price relative to the prices that
other people are making in that market on similar securities,
if you are a better seller or buyer.
And so, I actually--I am a believer in markets, and I think
that is one of the nice things that price can affect, both your
risk and it can also help people know where to go if they want
to acquire risk.
Senator McCaskill. OK. Let us talk about what people are
betting on. And what I would like to ask a couple of questions
about are the--you call them different things in different
memorandums in here, whether it is Timberwolf or Abacus--the
asset selector or the asset selecting agent. I think you called
it a different term. Now, this is important because these are
the folks that are figuring out what is going to be in the bet,
right? What everybody is betting on. So the compilation of what
is in this thing you create for people to bet on is done by
these asset selectors. Who decides who the asset selector is
for a deal?
Mr. Sparks. Senator, in CDOs or synthetic CDOs, there were
a number of different forms, and that term, the importance was
what the term was defined as. Typically, you would have or you
may have a manager for a CDO, and that manager----
Senator McCaskill. But let me ask specifically because you
are going to get off on--let me ask, who decided who the asset
selector was on Timberwolf? What person in your organization
would decide who the asset selector is on Timberwolf?
Mr. Sparks. Well, Timberwolf was--there is a client of
Goldman Sachs called Greywolf, and they are an asset manager
and had a desire to grow their assets under management. By
being CDO manager, that is one way for them to do that. And we
worked with them to help them with respect to growing their
assets under management. So we would have chosen that client to
do that deal with.
Senator McCaskill. OK. Who would have chosen the--I think
in the Abacus it was called the portfolio selection agent. Who
chose ACA in Abacus? Who chose ACA?
Mr. Tourre. If I may answer, Senator, in the Abacus 07 AC-1
transaction, it was a combination of Goldman Sachs and Paulson
who selected ACA.
Senator McCaskill. OK. Now, this is weird. This is where
people do not get this. This is where I do not get it, and this
is where a lot of the anger and passion and energy is coming
from. Paulson came to you and said: I want to make a bet. I
want to go short on all these really bad mortgage loans that
are out there that are all going to start going belly up.
You want to help him make a market, right? Is that correct,
Mr. Tourre?
Mr. Tourre. Yes.
Senator McCaskill. OK. So he comes to you and says: I am
your customer, and I want to bet short. Now, the weird thing
is--I read your statement carefully, and you parsed your words.
You said, ``I recall informing ACA that Paulson's fund was
expected to buy credit protection on some of the senior
tranches of the AC-1 transaction.'' Well, why wouldn't you just
tell them we are doing this because Paulson wants to go short?
Mr. Tourre. I worded this carefully, one, because I do not
remember the exact words I used.
Senator McCaskill. OK.
Mr. Tourre. And, two, because we were not sure at that time
which tranches Paulson was expecting to buy protection on. And,
three, because Goldman Sachs ultimately was not under any
obligation to resell protection to Paulson. It could decide to
keep that risk position for itself.
Senator McCaskill. OK. So here is the weird thing. What is
Paulson doing in the room with the guy picking the assets? Why
is Paulson even in the room much less meeting with them without
you there? Was IKB there?
Mr. Tourre. Senator, in----
Senator McCaskill. Answer my question. Was IKB there?
Mr. Tourre. No.
Senator McCaskill. OK. And was IKB going to be a bettor,
too?
Mr. Tourre. IKB was going to be--well, at which point in
time, Senator?
Senator McCaskill. When they were deciding--when Paulson,
who came to you to place a bet, and you put him in the room
with the folks that were going to decide what they were betting
on.
Mr. Tourre. Senator, at----
Senator McCaskill. Who put him in the room?
Mr. Tourre. Senator, at that time, we had not discussed
with IKB, this investment yet.
Senator McCaskill. OK. So when you did discuss the
investment with IKB, did you say we had a client--by the way,
we are the house, we are supposed to be the bookie, but you
need to know that we decided to let the client who wanted to
bet against this deal, we decided to put them in the room with
the people who were picking what was going to go in it? Did you
tell IKB that?
Mr. Tourre. I did not tell IKB about the existence of
Paulson.
Senator McCaskill. And do you see how that seems weird?
Mr. Tourre. Well, IKB knew that this was a synthetic CDO
transaction for which by construction there was both----
Senator McCaskill. I just need somebody to acknowledge that
that seems weird, that one side is coming to you wanting to
place a bet short. You put them in the room with the people you
decide are going to pick what is in the deal to bet short on,
and the people you sell the transaction to that you want to
sell an equity position in never gets to know that Paulson is
in the room picking the stuff. That just seems bizarre to me.
Mr. Tourre. Senator, if I may say a couple of things.
One, ultimately ACA selected the reference portfolio, so
there were suggestions from many different parties.
Senator McCaskill. Were they in the room with them or just
Paulson? I do not think anybody was ever in the room but
Paulson, were they, Mr. Tourre, really, honestly? I mean, let
us be honest here. This was a Paulson deal. You were trying--
and you put ACA in there as some kind of fig leaf so you could
do exactly what you are doing now and say ACA was a reputable
firm and they had all this CDO experience. Why didn't you use
ACA on any of the other deals? Why did you use--you know what
the interesting thing is on Timberwolf? You know who Greywolf
is? It is all your alumni. It is the former guys that sat at
your desks. They are all Goldman Sachs people on the Greywolf
deal. Why didn't you take any warehouse position on Abacus as
you did on Timberwolf?
Mr. Tourre. We were left with unsold risk in the Abacus 07
AC-1 transaction, Senator.
Senator McCaskill. Yes, I know. I mean, here is the thing.
You have got these two transactions--and, by the way, they are
very close in time, OK? One is March and one is April. And I--
well, maybe I will take some time to go through them. Let me go
through some of the Timberwolf documents because--and I am not
going to have you look at them because it takes too long if you
look at them. I am going to make representations to you that I
am going to read directly out of the documents, and then the
record will bear out that I am reading directly out of the
document, because I think it is important to get a sense of
this.
Mr. Sparks. Senator, can I make a point that might be
helpful on disclosure in this sector?
Senator McCaskill. Yes.
Mr. Sparks. These securities are backed by assets. There
are years and years of input that regulators, internal and
external counsel, and investors and market participants have
had with respect to asset-backed securities.
Senator McCaskill. You are talking about the assets, these
subprime loans that you were buying from Long Beach that you
knew had--already you had to buy back $1 billion worth of
mortgages----
Mr. Sparks. No, Senator.
Senator McCaskill [continuing]. Because half of them were
fraudulent? Are you talking about those assets?
Mr. Sparks. Senator, I am talking--this is a broad topic
about this industry and disclosure for securities when they
were sold, and I do think it is relevant, if that is OK.
Senator McCaskill. OK. I understand that there is--we are
trying to hone in on why I have got so many unemployed people
in my State and why so many people that I work for in Missouri
have lost incredible amounts of money in their pensions. That
is what we are honing in on today. So I want to look at these
two transactions, and I want to talk a little bit about
Timberwolf.
OK. Timberwolf, in a document dated November 10, 2006--this
is the memorandum, and you were cc'd on it, Mr. Sparks.\1\ This
is basically where you go through and you talk about the asset
selector, and that is where you learn that this firm that you
picked on the asset selector on that, you had Greg, who was a
partner at Goldman Sachs and was co-head of the Structured
Products Group. In addition to Greg, you had Joe Marconi, a
former managing director at Goldman Sachs in ABS Finance,
joined Greywolf and is focused on structured product
opportunities.
---------------------------------------------------------------------------
\1\ See Exhibit No. 98, which appears in the Appendix on page 603.
---------------------------------------------------------------------------
Of the 26 members of the research investment team that were
investing--that were researching these assets to go into this
synthetic derivative--by the way, this is the same one that
your folks called ``shi**y'' later. This is the same one, OK?
Seventeen members of the research staff are Goldman Sachs
alumni.
Now, they are not charging any management fees, Greywolf is
not, and they are committing to 50 percent of the equity. You
guys were sharing the warehousing risk, and, by the way, you
were approving every asset going into the warehouse. Every
single one. Now, that is in November 2006.
Now, keep in mind, this instrument does not----
Mr. Sparks. Senator McCaskill.
Senator McCaskill. Yes.
Mr. Sparks. I do not know what page it is, but that is
correct that former colleagues of ours had started a firm or
joined the firm and that we shared warehouse risk on that
transaction, if that is the question.
Senator McCaskill. OK. That was in November. And then in
December, we have an email from Deeb Salem--I do not know if I
said his name right. No, it is from Michael Swenson.\1\ It is
from Michael Swenson, and it is to Kevin Gasvoda and Justice
Mahoney, and it says, ``After initially passing at 65-00 -
ollie hit us at 65-00.'' Then Deeb Salem says, ``This is worth
10. It stinks. I don't want it in our book.'' This is all on
Timberwolf.
---------------------------------------------------------------------------
\1\ See Exhibit No. 98, which appears in the Appendix on page 603.
---------------------------------------------------------------------------
Now, keep in mind, this is December before you had gone out
and tried to sell this thing, OK?
Mr. Swenson. Senator, I am sorry, but I do not believe that
email is regarding Timberwolf. Could you please point us to the
exhibit here in the book?
Senator McCaskill. Sure. I am sorry, it may not be. GSAMP
06-FMIN N2, is that Timberwolf?
Mr. Swenson. Senator, without the document I cannot answer
your question. I am sorry. I am trying to be helpful.
Senator McCaskill. OK. It just takes so long. It is--what
document is it? It is under Tab 98, and it is immediately
following the memorandum about the makeup of Timberwolf. Maybe
0277 is the page right in front of it.
Did you find it?
Mr. Swenson. No.
Senator McCaskill. OK. Well, I will come back to it.
Mr. Swenson. The Deeb Salem email----
Senator McCaskill. We will have another time, and I will
make sure you have a copy of it in front of you. OK? I have got
plenty more. Let us go to March.
Mr. Swenson. Senator, I think this email does not have
anything to do with Timberwolf. I am sorry.
Senator McCaskill. OK. All right. Well, we will show it to
you, and if it was placed in the wrong place, then that is
fine.
But in March, the subject line says--it does say
Timberwolf. ``Great job, Cactus Razzi trading us out of our
entire Timberwolf single A position.'' That is March.
Now, then we have some interesting representations in May.
This is Exhibit 103,\2\ where there is a series of emails,
basically where there is some worrying about
misrepresentations. And these are emails from Daniel Sparks to
Donald Mullen. ``There are some people working on Timberwolf
[blank] is continuing to work [blank] sales person feels there
is a decent chance (but it will be a week out as they are
traveling). Also, Cornac team working on it. If we get strong
bids, can't we hit them?''
---------------------------------------------------------------------------
\2\ See Exhibit No. 103, which appears in the Appendix on page 671.
---------------------------------------------------------------------------
And then a response back from Don Mullen to Daniel Sparks:
``I doubt they will sell over weekend. And Harvey is concerned
about the representations we may be making to clients as well
as how we will price assets once we sell them to clients. I
think we need to sort these things out before we make sales.''
And then the next one is from Harvey Schwartz to Daniel
Sparks and Donald Mullen: ``Don't think we should slow or delay
discussions. However, we need to huddle quickly before hitting
bids, I think.'' This is all in May.
Then the next email from Daniel Sparks says, ``Sounds
fine.''
Then the next email is from Tom Montag to Daniel Sparks and
others: ``Of course we should but this is how we find value by
showing assets and seeing where bid comes. If [blank] can value
bad debt from [blank] they can do this. They don't look to us
for guidance. They pay what they think it's worth. Is there a
different issue? We will value where the market shows us . . .
if we find a bid, won't we?''
And then the last one from Donald Mullen to Sparks and
Montag: ``Agreed we just need to make sure the proper
communication occurs with clients. And we have thought through
post sale pricing.''
So what is clear--and then you have the one later about how
shi**y it was, OK? What is clear here is that there did not
seem to be a great deal of confidence in the long side of this
particular instrument. But the salespeople were being pushed to
move it, and, it just looks like that you guys are not only
making the market, you are playing in the market and mucking it
up. Do you understand that?
Mr. Sparks. Senator, I just read this particular email, and
the issue that was being discussed in this particular email was
when you make a sale on an illiquid asset, what is your bid
price, you show that client, because oftentimes you marketed it
and sometimes you had financed it. So there is a bid-offer
spread with respect to securities and market makers, and my
recollection of this particular point was what are we going to
show them as our bid after that, and let us make sure we
thought that through. And so on this particular email, that is
what I recall.
Senator McCaskill. OK. Well, I guess what I would really
like more clarity on--and I will come back to this in my next
questioning--is, where in the organization does the decision
made about someone who is coming to you--was somebody wanting
to bet one side or the other on Timberwolf? It says in the memo
that ``we have been approached.'' Were you approached by
Greywolf or were you approached by a client?
Mr. Sparks. Well, Greywolf is a client, and Greywolf wanted
to grow assets under management. So that is something money
managers do.
Senator McCaskill. So Greywolf was--they wanted to do this
to grow their assets under management as a client of yours?
Mr. Sparks. Correct.
Senator McCaskill. In that instance, you did not have a
client wanting to bet one side or the other. You were helping
them be part of the house. You were not helping them bet one
side or the other.
Mr. Sparks. Well, I would need to review it, but I believe
that they were willing to take an equity stake in their own
deal. I would like to review that just to make sure.
Senator McCaskill. They did. They took a 50-percent equity
stake.
Mr. Sparks. And so I would like to avoid the betting
analogy, but part of their goal was to earn fees by managing
assets, and we were trying to be helpful to them in that
regard.
Senator McCaskill. OK. And who is it that picked ACA? Who
picked ACA?
Mr. Tourre. Again, it is a combination of Goldman Sachs and
Paulson.
Senator McCaskill. Now, typically, when somebody wants to
make a bet, do you let them pick who picks what is in it?
Mr. Tourre. From an ACA perspective, they achieved two
objectives in that transaction. One, similar to what Mr. Sparks
said, they grew their assets under management and earned fees;
and, two, they invested close to $1 billion of risk in the
transaction as well for their insurance company. So they
achieved their investment objectives.
Senator McCaskill. OK. But you did not answer my question.
Typically, do you let a client who wants to make a bet, wants
you to do an instrument so they can make a bet--that is what
Paulson wanted. He wanted you to make up a synthetic that he
could bet on. Typically, when somebody comes to you and wants
to bet, do you let them help pick the assets that go into the
instrument, typically?
Mr. Tourre. In every synthetic CDO transaction, the
protection buyer has to be involved in some shape or form in
the creation of the portfolio; otherwise, there would be no
transaction. If only the sort of protection seller could decide
in its sole capacity as protection seller, the end assets, the
protection seller would only select Treasury securities, and
the transaction would have no risk. And no protection buyer
could be in a situation to buy protection on such transactions.
So even though in these transactions ultimately the
portfolio selection agent ends up selecting all the securities,
there are always suggestions from different parties as to, what
the portfolio selection--how the portfolio gets constructed.
Senator McCaskill. You understand that this does not make
common sense, right? That somebody would want to go long on a
fund that they were letting somebody who was going short pick
the stuff in it. You understand that does not make common
sense?
Mr. Tourre. Once again, the portfolio selection agent
approved every single security in the deal. However, without a
protection buyer, there is no deal. So Goldman Sachs and
Paulson had to be also buying protection on this portfolio.
Senator McCaskill. My time is up, Mr. Chairman.
Senator Levin. Thank you very much, Senator McCaskill.
Senator Pryor.
Senator Pryor. Thank you, Mr. Chairman. And I would like to
start, if I could, with Mr. Sparks.
Mr. Sparks, I would like to follow up on a question that
Chairman Levin asked you in his first series of questioning,
and what he said was, ``Do you have a responsibility to
disclose to a client when you have an adverse interest to the
client?''
Do you have a responsibility to disclose to a client when
you have an adverse interest to the client?
What is the answer to that?
Mr. Sparks. And, Senator, by adverse interest, do you mean
a position that is different than them, or that there is
something that we can effect that could harm them? Because if
it is the former, our positioning, the answer is no. If we can
do harm to them, the answer is absolutely.
Senator Pryor. OK. So you do have, at least in some
contexts, but not all, a responsibility to disclose to a client
when you have an adverse interest to the client?
Mr. Sparks. I mean, Senator, I am just trying to be careful
with my words with respect to what adverse interest could mean.
If we were positioned a certain way, that is one thing. Again,
we could have positions, there could be other positions at the
firm.
Senator Pryor. Do you have a responsibility to tell them
what your positions are?
Mr. Sparks. No.
Senator Pryor. Why not?
Mr. Sparks. Market makers are going to have positions all
the time, and that is not something that is a responsibility of
a market maker to tell your counterparties at all times how you
are positioned.
Senator Pryor. But why not? Shouldn't there be more
transparency there?
Mr. Sparks. That is a prospective question or a current
question?
Senator Pryor. Either way.
Mr. Sparks. Well, currently that is not an obligation.
Senator Pryor. Should it be?
Mr. Sparks. I know you are trying to figure this out----
Senator Pryor. You have been in this business for close to
20 years, correct?
Mr. Sparks. Sure. I think it would create a number of
issues because those positions change a lot, and, frankly, you
do not always know what the positions are with respect to the
person making that transaction. So I think functionally it
would be very difficult. I also think that there are some
things about it that could create other problems, such as if
you--let us say you sold something to somebody and you were
long, and you told them you were long. And then you went short.
Do you need to call them back and tell them, ``I am now
short''? Or do I need to call them before I go short? I just
think there are a lot of issues that it could raise with
respect to that.
Senator Pryor. But at the moment when one of your clients,
one of your customers, is making their decision, don't you
think you owe them all the information that you have, including
where your company is and how your company is positioned?
Mr. Sparks. I think we owe them all of the information with
respect to that instrument that they are going to take a
position on. That is not necessarily where we are, including
because how we are positioned is not going to affect how that
instrument performs.
Senator Pryor. Well, it may not affect how it performs. It
could, but it may not. But it does indicate, how you understand
the deal, and if you think this is a good investment or not,
or, if you are anticipating it doing one way or the other,
shouldn't they know how you internally evaluate this?
Mr. Sparks. Senator, we could be----
Senator Pryor. Put your money where your mouth is. You put
your money somewhere. Shouldn't they know that?
Mr. Sparks. Senator, we could be long a deal and not think
it is a great deal, and we could be short a deal and like the
deal but have it that position. So I do not think it is the
obligation currently to disclose what your position is at that
time.
Senator Pryor. Well, let me ask about the rules of the
road, because you just said you do not think it is a
responsibility. Is there an established set of ethics in your
industry of certain things you have to do or cannot do?
Mr. Sparks. Well, again, I am not in the industry anymore.
I do know, Senator, that----
Senator Pryor. But you were in the industry for, what, you
said 18 years? I think that is what you said.
Mr. Sparks. About 19 years.
Senator Pryor. Nineteen years.
Mr. Sparks. There are things such as--and the comment about
investment adviser and fiduciaries. There are also rules with
respect to research that I know that market makers in the
investment banking industry are very careful to make sure that
they follow. But market making itself, so long as people
understand what they are investing in, I do not think that
knowledge of the position of their counterparty is something
that has to be disclosed, and I do not think it currently is
disclosed by market makers.
Senator Pryor. So you are saying that there is a time in
which you put on the market maker cap and the rules change for
you?
Mr. Sparks. We are market makers--in my business, we were
market makers.
Senator Pryor. OK. But let me ask this: When you are
selling a security such as a CDO, my understanding is you are
not a market maker. Isn't it true that you are a placement
agent and as a placement agent you have a duty of full
disclosure?
Mr. Sparks. Senator, that is correct. It might be helpful
if I talk about in our department we really had two--we had a
number of business activities, but we had two major business
activities. One was an aggregation and distribution business
where we aggregated assets, loans or securities or synthetics,
and then distributed them in new issue type situations. In
those situations, disclosure with respect to the assets and how
the deals work--and that is very specific disclosure that has
had years and years of input from regulators, counsel, other
investors. That is that business.
Senator Pryor. And those rules work well, those disclosure
rules work well.
Mr. Sparks. Well, those disclosure rules are meant to
provide an investor with what they need to make their decision
investing in that particular product.
Senator Pryor. OK.
Mr. Sparks. The second part of the business is a market-
making business, which is a trading business. Now, there are
risks in both of those businesses, but I thought it might be
helpful for you to understand how we approach things.
Senator Pryor. But the market-making business does not have
the same disclosure rules as the other one does.
Mr. Sparks. Because it is not creating new securities.
There is disclosure on new securities, that is, if it is
registered, it is dictated by the SEC. If it is not, then it is
not. But usually they follow guidance for similar types of
transactions. In secondary trading, it is just trading products
that were already created.
Senator Pryor. So let me go back to my question earlier
about ethics. I mean, lawyers have to follow certain ethical
standards. A doctor has to follow certain ethical standards.
CPAs follow ethical standards, and, most professions have some
sort of manual or some sort of code of ethics that they follow.
Are you saying that is not the case in all aspects of your
industry?
Mr. Sparks. No, Senator. I know where I worked, ethical
standards were very important.
Senator Pryor. Were those done by the company, or were they
done by the industry, or were they done by the government?
Mr. Sparks. At Goldman, ethical standards were a focus.
Numerous times there would be various off-site--when I say off-
site, I mean you would take people out of what they were
currently doing to go and discuss ethics and how important it
is and how you deal with complex issues.
Senator Pryor. Were those Goldman standards, or were they
some sort of national standard or some industry standard? When
you talk about ethics, what are you talking about?
Mr. Sparks. Those were Goldman standards, but I would tell
you that industry--they factored in industry standards, and I
would say, I guess, national standards. But I think Goldman
Sachs had its own view of what those standards should be, and I
found them to be typically very well thought out and, probably
more robust than what a number of people in the industry would
have had.
Senator Pryor. And I think this goes back to Senator
Collins' question where she asked you do you have a duty to act
in the best interests of your clients, and based on what you
have just said, it just depends on the circumstances.
Mr. Sparks. Well, I was trying to be careful with the
concept of fiduciary, and we should work with clients to help
them achieve their objectives. That does not mean that we are
always going to have the same view on a particular investment,
and they may want to sell something that we want to buy or vice
versa. And I do not think there is a problem with that in the
role of a market maker.
Senator Pryor. OK. I am not sure everyone agrees with you
on that, but I will take your answer.
Let me ask now about a statement. I have just jotted
something down here, and it says, ``Goldman sold a synthetic
collateralized debt obligation''--CDO--``without disclosing
that a hedge fund manager, John Paulson, helped design the CDO
and was betting against the CDO.'' Is that true?
Mr. Sparks. Well, I think you are referring to the ACA
transaction, the Abacus transaction that has been discussed.
Any CDO--well, let me tell you how we, at Goldman Sachs, when
CDOs were constructed, they were not constructed in a vacuum.
Typically, we knew people who had investment criteria that they
wanted to fill and wanted to invest in various parts of the
capital structure with various underlying assets at various
prices. At the same time, we had to get that risk, which means
somebody had to sell the risk to create it. That could be done
in cash form. It could be done in synthetic form. So I think it
is helpful to note that these deals were not created in a
vacuum.
In that particular transaction, the function of providing
the risks to it is from Goldman Sachs Capital Markets, I
believe is the correct entity. I would like to check it, but I
am pretty sure that is correct. That Goldman actually provided
the risk, meaning went short into the Abacus ACA transaction.
Goldman Sachs then, in its hedging of its positions, laid that
risk off to a client that Goldman knew wanted to take that. So,
I am trying to be specific on that question, Senator.
Senator Pryor. Right, but so let me ask again: Goldman sold
a synthetic collateralized debt obligation without disclosing
that a hedge fund manager, John Paulson, helped design the CDO
and was betting against the CDO. Did you disclose to your
customers there that John Paulson was on the other side of this
transaction and he had helped put it together?
Mr. Sparks. Well, I did not disclose--I was not
specifically involved in that, but I would tell you that the
disclosure documents would show what had been industry
standards and what were material to that deal, which were the
assets and how the deal worked. How the assets got in there,
who was short it or long it, other than Goldman--because
Goldman was technically shorted into that deal. In making the
investment decision, what people should focus on and what is
relevant to focus on were the assets and how the deal worked,
not necessarily whose idea it was or various people who might
have had input, because in the asset-backed business, the focus
and what determines the outcome of those securities are the
securities themselves and how the deal works.
Senator Pryor. Do you believe that Goldman's actions
contributed to the financial downturn we experienced in 2008?
Mr. Sparks. We had clients who lost money, and that is not
good. That is not good for us. That is not good for our
clients. We dealt with institutional investors. But when you
look at the overall economy, there were a lot of individuals
out there who were harmed because of the financial crisis, and
although we did not deal directly with them, I know that I do,
and I think my colleagues do or my former colleagues do, have
sympathy for them.
With respect to regrets, which I think may be what you are
asking----
Senator Pryor. I did not ask about regret. I noticed,
though, from the record that----
Mr. Sparks. Senator, if I could finish.
Senator Pryor. Go ahead.
Mr. Sparks. Regret to me means something that you feel like
you did wrong, and I do not have that. What I do have, though,
is, we made mistakes in our business, like I think any business
does, and we made some poor business decisions in hindsight.
Senator Pryor. So do you think you contributed, your
actions contributed to the financial downturn that we
experienced in 2008?
Mr. Sparks. Do I think my personal actions did?
Senator Pryor. Goldman Sachs.
Mr. Sparks. I do not know. I would like to think about that
and respond. I have not thought about that specifically.
Senator Pryor. Let me go ahead and ask the rest of the
panel that. Mr. Birnbaum, do you believe that Goldman Sachs'
actions contributed to the financial downturn that we
experienced in 2008?
Mr. Birnbaum. I think it is important to distinguish our
role in terms of the products that we were trading versus
making broader judgments about Goldman Sachs. So I just want to
be clear. Are you asking about our specific role with the
products that we traded? Or are you asking us to sort of
editorialize about the financial system and how investment
banks played a role?
Senator Pryor. Well, I was actually asking about Goldman
Sachs, but if you want to editorialize on the financial system,
you can. But I was asking about Goldman.
Mr. Birnbaum. Look, I think that, not working in a lot of
areas of Goldman, there are things that may have happened that
multiple investment banks and commercial banks may have
provided too much credit, and that may have contributed to a
bubble. And I would second what Mr. Sparks said. We are all
sympathetic to the negative impact of that bubble. There was a
lot of human pain and suffering that came from the bursting of
the housing bubble. And to the extent that investment banks and
commercial banks may have extended too much credit at certain
periods of time--and, again, that is just--I do not have any
personal witnessing of that--then it is possible.
Senator Pryor. I guess what I am hoping to hear from the
answers here is that you all take responsibility for your
actions, and I have not heard that really so far in the first
two, but I would like to ask the third. Mr. Swenson, did--or
excuse me----
Mr. Birnbaum. Well, I do not think--which actions are you
referring to that I took that I am not taking responsibility
for? And Mr. Sparks as well.
Mr. Sparks. Senator, just to clarify, I do take
responsibility for my actions, so if I left you with that
impression, I want to be clear. I take responsibility for my
actions.
Senator Pryor. And do you think that your actions at
Goldman and Goldman's actions generally contributed to the
downturn that we experienced in 2008? Or you think Goldman was
not part of the problem here. Is that what you are telling the
Subcommittee?
Mr. Sparks. Well, and I think that the purpose of this
Subcommittee is to talk about what the problem is. I think it
is clear that credit standards overall got loose.
Senator Pryor. Got what?
Mr. Sparks. Loose, too loose.
Senator Pryor. OK.
Mr. Sparks. And that there were assumptions made, and I
think risk overall was not respected across the industry, and
we participated in that industry. So I do not know--I am not
trying to avoid your question, Senator, but, I mentioned my
feelings of what I did, and I do not have regrets about doing
things that I think were improper. But we were a participant in
an industry that got loose.
Senator Pryor. Mr. Swenson.
Mr. Swenson. I think the reservation here is on the
contributed part versus what caused, and we did not cause the
financial crisis specifically to the mortgage desk, which is
what I am here to speak about. You have two panels in
subsequent meetings to speak about Goldman Sachs and our
businesses.
I do not think that we did anything wrong. There are things
that we wish we could have done better in hindsight, but at the
times that we made the decisions, I did not think we did
anything wrong.
Senator Pryor. Mr. Tourre.
Mr. Tourre. Senator, I would echo some of my colleagues'
comments. First, I take full responsibility for my actions.
Second, I am saddened and humbled by what happened, in the
market in 2007 and 2008, in the overall financial crisis. But I
believe my conduct was proper.
And, again, to the extent excess credit contributed to the
asset price bubble which ultimately magnified the crisis,
Goldman Sachs was involved in some of these products that
potentially could have excessive credit extension, but, again,
I firmly believe that my conduct was correct.
Senator Pryor. I think that is one of the problems here,
Mr. Chairman. I think as part of your oversight here, I think
the American people are hoping that you help us all figure out
what went wrong and how we can fix it, but also I think that
there is a lot of concern with the general public--and I know I
am speaking for Arkansas here--that people around the country
feel like Wall Street has contributed, in fact, has largely
caused--I am not talking about one individual or one company,
but Wall Street has contributed to and caused a lot of the
economic crisis that we have been going through, and hopefully
most of that is behind us now. But, my sense is that people
feel like you are betting with other people's money and other
people's future because, for example, in the real estate area,
someone gets a mortgage and that gets sold and it gets chopped
up and bounced around; and, instead of Wall Street, it looks
more like Las Vegas. But they look at that, and all of a sudden
they are losing control of their financial security. And I feel
like, the fact that all of you have said basically throughout
the course of this hearing really there is not a real clear
ethical standard, there are not real bright lines on what you
can and cannot do, and you wear different hats, and it is
complicated; and, the fact, as Senator McCaskill said, you are
market makers, but you are also playing in that market. And
whether that is truly a conflict of interest or not, whether
you truly have a fiduciary responsibility or not, I just think
that we need to spend some time as the Senate and the
Subcommittee and various committees in the Senate thinking
through that. And, anyway, some of the things that we have
heard today are very troubling, and I do sense that you are not
taking full responsibility for your actions at Goldman's and
also Goldman's actions and also the industry's actions that
helped contribute to this financial meltdown.
So, with that, Mr. Chairman, thank you.
Senator Levin. Thank you, Senator Pryor. Senator Ensign.
Senator Ensign. Thank you, Mr. Chairman. This is an
incredibly important hearing, and I appreciate you holding
this. I want to make a couple of comments before I get into
your questions.
First of all, Senator Pryor, I think most people in Las
Vegas would take offense at having Wall Street compared to Las
Vegas, because in Las Vegas actually people know that the odds
are against them. They play anyway. On Wall Street, they
manipulate the odds while you are playing the game, and I would
say that it is actually--it is much more dishonest because it
is almost like somebody was playing a slot machine and the guys
on Wall Street were in there kind of tweaking the odds while
you were playing it, and in their favor the vast majority of
the time.
Senator Pryor. That is a fair point. And also in Las Vegas
people are betting their own money, and that is not always the
case with----
Senator Ensign. That is very good.
A couple other comments. First of all, I think that Wall
Street definitely had a role in the financial crisis, but I
also think we have a responsibility here on our end between the
Community Reinvestment Act, Fannie and Freddie, out of control
that we let them get, that is certainly--because without the
real estate market doing what it was doing, I mean, that is
where these bets were occurring, and everybody got the false
idea that the whole real estate value was going to continue to
go up and up and up, where bubbles never continue to go up. We
know that. And, unfortunately, a lot of smart people on Wall
Street got fooled by that.
The point that I want to make also is that you all have
mentioned that you are market makers, and I think part of this
hearing is to find out whether you were actually market
manipulators instead of just market makers. And I think that is
a key part of it, and that is where I am going to take some of
my questioning.
I want to start with talking about the role of the credit
rating agencies. Did you personally or do you know of Goldman
Sachs employees who actually spoke to the credit rating
agencies and tried to influence how some of these tranches were
rated? Go down the line, just yes or no.
Mr. Sparks. Senator, I personally did not typically speak
with them, but people on my team worked with the agencies on
new issues with respect to helping them understand it and how
the deals would be rated.
Senator Ensign. OK. Next.
Mr. Birnbaum. I did not know anyone who would fit under
that category.
Mr. Swenson. I have the same answer as Mr. Birnbaum.
Senator Ensign. OK.
Mr. Tourre. I did work with rating agencies, Senator,
similarly to explain to those rating agencies the products that
needed to be rated.
Senator Ensign. OK. This would be for Mr. Sparks and Mr.
Tourre. How do you justify taking BBB-rated products,
repackaging them, and getting the rating agencies to re-rate
those as AAA-rated products? Because that is what they did.
Mr. Tourre. Should I try to address that question, Senator?
Senator Ensign. Sure.
Mr. Tourre. Ultimately, rating agencies have their own
models to rate products. We were not influencing in any shape
or form, the way they rated these transactions, at least their
models. We were just applying their modeling assumptions.
Senator Ensign. In their modeling assumptions, which nobody
supposedly knows about, though, you both said that you either
did yourself or you know people who did, went to the rating
agencies and tried to convince them about the products. How can
you justify taking BBB-rated products, repackaging those as AAA
products--trying to sell those as AAA products? I mean, because
that is what a lot of the CDOs did, correct?
Mr. Sparks. Yes.
Senator Ensign. That is correct?
Mr. Sparks. Senator, the rationale that the agencies gave,
I believe, was because of an assumption of diversity, which
meant that certain deals would perform differently than other
deals. And so in that collection, the assessment from the
agencies and I think the market assessment at the time was that
deal performance had less correlation amongst themselves.
Senator Ensign. Mr. Tourre, you were about to answer.
Mr. Tourre. I would just add one more point, which is that
rating agencies rely on, historical data to rate those
transactions, and when rating the products I think you are
referring to as CDO products, repackaging BBB securities, they
relied on the historical performance of BBB-rated obligations
to rate the CDO products.
Senator Ensign. Do you think that their ratings made sense?
Mr. Tourre. I mean, the methodology made sense.
Senator Ensign. You believe their methodology made sense?
Mr. Tourre. The mathematical methodology made sense. The
assumption that, historical performance is a good indicator of
future performance for certain asset classes proved to be not
correct.
Senator Ensign. Did you ever feel an obligation to people
who were buying those products from you to let them know that
these were BBB-rated products that were repackaged as AAA?
Mr. Tourre. I mean, the specifics of the products were
always disclosed in the offering documents.
Senator Ensign. That is not what my question was. Did you
feel an obligation at all--this gets back to not necessarily a
fiduciary obligation, but did you feel these people are buying
this stuff from us, and do you understand that these are
triple--I mean, did you tell them specifically that these were
actually BBB-rated products that were repackaged and the credit
rating agencies somehow in their wisdom repackaged them or
rescored them as AAA-rated products?
Mr. Sparks. Senator, you are exactly right on point, and
that relates to a point I am not sure if you were here for,
which is what the underlying assets are is what is material. So
that information would be disclosed at new issue as to what
underlies the security.
Senator Ensign. Goldman Sachs, though, is looked at, I
think, by a lot of people--one of the reasons that people want
to do business with Goldman Sachs and some of the other major
players in Wall Street is that they feel that you have a
certain level of expertise. And I think that is kind of what we
are trying to get at up here, is whether or not you believe the
modeling was correct, good modeling as far as rating agencies
were concerned, Mr. Sparks?
Mr. Sparks. I do not have the specifics of their modeling.
I think in hindsight the historical correlation was much higher
than what the rating agencies assumed.
Senator Ensign. I think for anybody to defend what the
rating agencies did would be ludicrous at this point, and I
think that there is plenty of evidence out there to show what
they did.
Do you all pay the rating agencies?
Mr. Sparks. Typically, that would be paid by people
involved in the deal. So it could be a deal expense. It could
be an issuer.
Senator Ensign. Right. So Goldman Sachs does pay large
amounts of money to the rating agencies. Is that correct?
Mr. Sparks. On those deals, oftentimes it did.
Senator Ensign. And do you think that that maybe appeared--
has at least an appearance of a potential conflict of interest?
Mr. Sparks. With respect to maybe appearance of a conflict
of--yes, I think that there is that concern with respect to
that particular point.
Senator Ensign. I want to go to a deal that Goldman Sachs
did, known as Hudson 1. It was a synthetic CDO that referenced
$2 billion in subprime BBB-rated mortgage-backed securities.
Goldman selected the referenced assets. The purpose of the
transaction appears to have been to get those assets off
Goldman's own books. Basically Goldman was the only buyer to
sell this CDO and then make a bet against it. Is that an
accurate description of what happened with Hudson 1?
Mr. Sparks. Senator, I believe that deal was purely static
synthetic, which means----
Senator Ensign. Describe static synthetic, because one of
the things that I think confuses a lot of people is the
definitions that you all put on things. For instance, you
called something that was actually the first floor, the bottom
floor, you described it as a mezzanine so it did not sound so
bad. There is a lot of spin that happened in your terminology
in dealing with all these financial products to make them sound
a little better than others. So could you please explain as we
are going just for other people listening?
Mr. Sparks. Yes, Senator. The term ``static'' meant that
the assets that were set in the deal could not change. The
reason that is important is there were other CDOs that were
done where an asset manager or someone else could choose to
change the assets in the pool under certain parameters. So in
this particular case, static meant here are the reference
notes, the reference obligations that you are exposed to, and
this is what they are going to be.
Synthetic meant that there were no actual cash securities
that had been put in there, so, Goldman did not sell those
securities into that because there were not securities with
respect to the reference on that.
Senator Ensign. Yes, but it operated the same way as cash
being in there, didn't it?
Mr. Sparks. Correct. It had the risk of that, and that
deal, my recollection is it had a combination of single-name
CDS and some of the risk related to the ABX Index outright.
Senator Ensign. And Goldman obviously recognized that there
was some significant risk with that particular product, and
that is why they sold them short, correct?
Mr. Sparks. Well, again, this deal I think was done in
October 2006, if I----
Senator Ensign. I do not have the date in front of me.
Mr. Sparks. There were investors, a lot of investors, in
2006 and there continued to be investors in 2007 who wanted
exposure and risk in certain forms. And so, I had mentioned
that these deals did not operate in a vocuum----
Senator Ensign. Is that a little unusual, though, for
Goldman Sachs to be the only part of it that did the entire
deal on the short?
Mr. Sparks. Well, most of the time--not all the time--on
synthetics, Goldman would provide the synthetic short into the
deal for a number of reasons, some of which included the fact
that we were involved in the deal. But then what we did with
our risk on the other side could vary.
Senator Ensign. I think that one of the points that needs
to be made, first of all, is--and I think it is evidenced by
the hearings that this Subcommittee has been having--is that
this is an incredibly complex area of not only our markets but
of our law. And, Mr. Chairman, I think that the hearings that
you are holding are very valuable. But I think that we are just
scratching the surface, and I think it is one of the reasons
that I believe very strongly we need to fix the markets, we
need to have a lot more transparency, and we need to make sure
that people are not being market manipulators, that, some of
the lines of questioning today that have come out, actually
probably some good suggestions in there, but a lot more needs
to be done and a lot more research needs to be done. And I hope
that the Senate actually takes its time, so one is that we do
not end up hurting the little guys out there in Main Street and
we actually go after the people that--whether it was AIG,
Goldman Sachs, any of the other big traders, whether it was
Fannie Mae and Freddie Mac. I hope that is what the financial
regulatory reform focuses on.
I do want to get--and just I hate to keep harping on this,
but I think this is going to be an important part of what comes
out, and that is, do you believe that--and since the two of you
are the only ones who responded to this earlier, getting back
to the rating agencies, do you believe that Goldman Sachs
improperly influenced the rating agencies?
Mr. Sparks. No, Senator.
Senator Ensign. Mr. Tourre.
Mr. Tourre. No, Senator.
Senator Ensign. I appreciate having that on the record.
The other point that I think that needs--kind of an
interesting point, when everything was going up, markets were
going up, everybody was batting happy, people at your firms and
people at other firms on Wall Street made a heck of a lot of
money in bonuses. Would you agree with that? I mean, large
amounts of money. A pretty factual statement, wouldn't you
agree?
Mr. Sparks. Are you asking me?
Senator Ensign. Yes. Interesting when everything kind of
came to a crash, incredible bonuses were still paid out, even
in firms where their actual investors lost huge amounts of
money, lost everything. Do you think that the incentives that
are set up in firms like Goldman Sachs are the proper
incentives to have folks engage in ethical behavior?
Mr. Sparks. Well, Senator, I think Goldman Sachs works hard
to engage in ethical behavior in all aspects----
Senator Ensign. I did not say that. I said: Do you think
the way that the pay structure and the bonuses are set up lead
to the proper incentives to have the people at Goldman Sachs
and other folks who do what you do on Wall Street, do you think
that those incentives are there that lead to ethical behavior?
Mr. Sparks. Well, again, Mr. Birnbaum and I do not work
there anymore, so I do not know exactly what their----
Senator Ensign. That is why I am asking you just a general
comment about the way that bonuses are paid on Wall Street.
Obviously, when the bonuses are paid when everybody is making
money, that kind of makes sense to me. But when everybody is--
all your people who are buying things from you who bought in
the past, all of a sudden they lose huge amounts of money, and
folks still get paid huge bonuses, that does not make sense.
That does not make sense to a lot of Americans. That is what I
am asking. Do you think the incentives are the proper
incentives to have ethical behavior on Wall Street?
Mr. Sparks. Again, Senator, I do not know----
Senator Ensign. It is just your opinion.
Mr. Sparks. I do not know currently what those are, so I do
not want to----
Senator Ensign. The way that you were paid in the past, how
about that?
Mr. Sparks. I believe consistent--yes, in the past, I
believe at Goldman Sachs that----
Senator Ensign. You had proper incentives, bonus structures
were proper?
Mr. Sparks. I believe at Goldman Sachs in the past I had
every reason to be ethical with respect to what the firm did
with me, including compensation.
Senator Ensign. Mr. Birnbaum.
Mr. Birnbaum. I mean, just to give some background on how
people at Goldman--and I cannot speak for the way it works
today because I am not there anymore. But the way people are
paid there and the way people are promoted there, it is a
function of performance, and a lot of that performance is
indeed financial. But a huge component of performance at a
place like Goldman is of a qualitative nature. It has to do
with the culture of the firm, and it has to do with ethics, and
it has to do with how one works within a team. And I can assure
you that you can have enormous financial performance, but if
you were not cognizant of ethics, you would not be promoted,
you would not be paid; in fact, you would probably be fired.
Senator Ensign. OK. Mr. Swenson.
Mr. Swenson. I echo the comments that Mr. Birnbaum said.
The simple answer to your question is yes.
Senator Ensign. OK. Mr. Tourre.
Mr. Tourre. I would echo some of my colleagues' comments
that the compensation structure which is based on the firm's
performance, the business' performance, and, the personal
performance, at least at Goldman Sachs, I think were aligning
incentives correctly.
Senator Ensign. OK. Thank you, Mr. Chairman.
Senator Levin. Thank you, Senator Ensign. I think as all
the questions have gone today, I think that we are seeing some
of the problems.
Thank you, Senator Ensign. Senator Tester.
Senator Tester. Thank you, Mr. Chairman. I appreciate your
holding this hearing. It has been a pretty long morning. I do
not know if there is going to be anybody coming after me or
not, but I want to thank you folks for being here today. I
appreciate it very much. I think we will head in a couple
different directions here.
Mr. Birnbaum, why, how, and when did you become convinced
that there was a housing bubble on the verge of collapse?
Mr. Birnbaum. I do not believe I used those words.
Senator Tester. OK. You guys have got a bevy of attorneys
that have briefed you on everything. If you do not want to
answer my questions, you do not have to.
Mr. Birnbaum. I want to answer your questions precisely.
Senator Tester. I will rephrase it. Why, how, and when did
you become convinced that there was a housing bubble that was
in decline?
Mr. Birnbaum. My sentiment that I expressed in my opening
statement was that there was a market in residential mortgage-
backed securities in subprime that I thought was overvalued.
Senator Tester. OK. So it was based on the housing bubble,
and its decline or collapse, however you want to put--however I
want to put it.
Mr. Birnbaum. I did not say that, though. That is how you
put it.
Senator Tester. OK. So did you not think the housing market
was in decline?
Senator Tester. Do you think the housing is in decline
right now?
Mr. Birnbaum. At that point in time, housing was in decline
already.
Senator Tester. What point in time? I did not bring up a
date.
Mr. Birnbaum. You were referencing my opening statement, I
think.
Senator Tester. I was just asking you a question. When do
you think the housing market started in its decline? When did
you come about that?
Mr. Birnbaum. When did housing start to decline or when----
Senator Tester. When did you become aware of it?
Mr. Birnbaum. When did I become aware that housing values
were declining?
Senator Tester. Yes.
Mr. Birnbaum. I believe housing started to decline in the
beginning or to the middle of 2006. It depends on how you track
these things.
Senator Tester. OK. Middle or end of 2006. And you base
that--and I do not want to put words in your mouth--on the
subprime market?
Mr. Birnbaum. Well, no. You asked me about housing.
Senator Tester. OK. The housing market, what did you base
that decline upon?
Mr. Birnbaum. Well, typically when people are talking about
the housing market declining or going up, they are talking
about housing prices. So we all have publicly available
information on housing prices that is released, typically
monthly, sometimes quarterly, and if that is what you are
referring to----
Senator Tester. So the housing decline was based on housing
prices around the middle to end of 2006. It was not based on
subprime or--it was based on that pattern. I am not trying to
set you up for anything.
Mr. Birnbaum. No, I just want to understand the question.
Senator Tester. I want to know when--look, a lot of these
vehicles that were developed were based on housing. You guys
are smart guys, and particularly I want to know from you, Mr.
Birnbaum, when you saw the downturn, the potential collapse.
You said the middle, end of 2006. I was wondering what you base
that on, and you said the value of housing at that point in
time. Or what did you say?
Mr. Birnbaum. Well, we had all seen a deceleration--first,
a deceleration and then a decline in housing values. That was
one of many things that I think concerned people.
Senator Tester. Did this change your view of mortgage-
backed securities?
Mr. Birnbaum. Well, the mortgage market is a big market.
You have agency mortgages, you have non-agency mortgages, you
have prime mortgages, subprime mortgages.
Senator Tester. Sure.
Mr. Birnbaum. I believe what I referred to in my opening
statement was the subprime market.
Senator Tester. OK. So based on subprime, did it change
your view of the mortgage-backed securities?
Mr. Birnbaum. It changed my view of the likely direction of
the market.
Senator Tester. OK. Did you share your thoughts with others
at Goldman, or did you keep them to yourself?
Mr. Birnbaum. I did socialize my thoughts with some people.
As I mentioned in my opening statement, there was a vigorous
debate about Goldman about that issue.
Senator Tester. OK. Given that knowledge, were you
surprised by Mr. Tourre's statement that the Abacus deal was
similar to others in terms of quality?
Mr. Birnbaum. I was not surprised by that statement.
Senator Tester. You were not surprised by it?
Mr. Birnbaum. No.
Senator Tester. OK. Should we be reassured that the Abacus
deal was no worse than any of the others, then?
Mr. Birnbaum. Well, I did not work on the Abacus deals. I
could not be surprised because I did not work on those deals.
Senator Tester. OK. All right. That is fine.
They always say you always want to know the answer to a
question before you ask it, and I do not know the answer to
this question because it is--I am going to start with you, Mr.
Sparks. Do you think that Goldman Sachs did anything wrong in
this whole process of these synthetic CDOs?
Mr. Sparks. Well, I do not think Goldman did something
wrong, meaning----
Senator Tester. So you do not think Goldman did anything
wrong?
Mr. Sparks. But that does not mean that we did not do deals
that were bad decisions to do and did not perform like we
wanted them to do, and it does not mean that we did not
periodically make mistakes like any other business does. But
``wrong'' to me has some qualitative comment about doing
something inappropriate. That does not mean we did not make
mistakes or do deals that did not turn out the way we had hoped
they would.
Senator Tester. OK. What is your definition of a synthetic
CDO so we know if we are on the same page?
Mr. Sparks. Sure. It would be a collection of--well, there
could be a number. Basically it is a CDO where there is no cash
instruments involved, so the reference portfolio, although it
is listed as a bunch of assets, it is clear it is actually not
that. It is done by shorting in some sort of derivative into
that, and from that you can either create cash instruments for
people to invest in or synthetic instruments.
Senator Tester. Do you know when this idea was thought up,
the synthetic CDO idea? Is this a fairly new phenomenon or has
it been around for decades?
Mr. Sparks. I believe it would have been--and I cannot give
you an exact date, but I believe it would have been in the
early 2000s. It happened to a larger degree in the corporate
market.
Senator Tester. And this was just to give folks that had
money something to gamble on? You can say what you want, but it
is gambling. I am not going to go down to bookie and all that
line, but you are basically gambling on something that has--you
are not going to get any money out of it to do the synthetic
CDO.
Mr. Sparks. No. Sometimes you can do a synthetic CDO and
actually create cash bonds by putting in some collateral, but I
think your question is why.
Senator Tester. Yes.
Mr. Sparks. There are and were investors who wanted to
invest in these types of structures at those market levels.
They actually desired to get more exposure or exposure tailored
to something that they wanted.
Senator Tester. And in letting the people know about how
they are designed and what is in them, does anybody have
obligation to let those investors know what is in that
financial instrument?
Mr. Sparks. Yes, and at new issue, disclosure is provided
that shows both what the underliers are, how the deal would
work with respect to any potential changes to the underliers,
and then how the cash flows actually will work, because
typically those transactions would be tranched with respect to
risk layers, but not always.
Senator Tester. OK. So the Chairman in his questioning
asked--I think it was you, Mr. Sparks--how you got comfortable
with sales. And I am just going to bring three of them up--four
of them, actually. I am going to bring four of them that came
out of documents the Subcommittee did.
There was a Hudson 2006-1 synthetic CDO sold December 2006;
18 months later it was--these were AAAs--downgraded to junk.
There was an Anderson 2000-1, set up the first quarter of
2007; 7 months later it was downgraded to junk.
There was the Timberwolf that has been talked about here
before, March 2007, AAA downgraded to junk in less than year.
That was the bad deal one.
There was the Abacus, closed end of April 2007; within 6
months it was rated down by 84 percent.
Now, going back to the answer that Mr. Birnbaum gave that
we could see some things happening in the middle of 2006,
middle of 2007, all of these--all but one of these came after
that effect. How can you in good faith set these aside and sell
them out and collect the fees and make the dough?
Mr. Birnbaum. Well, is that to me, sir?
Senator Tester. Yes, sure.
Mr. Birnbaum. I just want to clarify. The things that I was
referring to are things that every market participant observed.
Senator Tester. That is OK. That is all right. I am not
assuming that you were brilliant in that assertion. I think it
is spot on. I appreciate that answer. I am just asking Mr.
Sparks, after the fact we saw things happening, and every one
of these were--it looks like a wreck waiting to happen because
they were all downgraded to junk in very short order.
Mr. Sparks. Well, Senator, at the time we did those deals,
we expected those deals to perform.
Senator Tester. Perform in what way?
Mr. Sparks. To not be downgraded----
Senator Tester. Perform to go to junk, so that the shorts
made out?
Mr. Sparks. To not be downgraded to junk in that short a
time frame. In fact, to not be downgraded to junk. And so, if I
could finish.
Senator Tester. OK. Keep going.
Mr. Sparks. I mentioned that we made some bad business
decisions. These deals performed horribly. That is bad.
Senator Tester. And there is a pattern of it, yes.
Mr. Sparks. OK. That said, at the time, just because one
person in my business unit or a few people might have had one
view, I can tell you there were a lot of other people in my
business unit that had a very different view, and there were a
lot of other investors that had a very different view.
Senator Tester. Do you feel confident that the information
about each one of these that was about these was given to the
investors, all the information that was out there, and the
credit rating agencies, too?
Mr. Sparks. Well, I generally feel that the disclosure for
the new issues that Goldman Sachs brought was good.
Senator Tester. How about these?
Mr. Sparks. Including these.
Senator Tester. OK. I think there was a credit rating
agency that testified--correct me if I am wrong, Mr. Chairman.
I know you are busy so you might not be able to--but that said
that in the Abacus deal they did not know anything about
Paulson; it would have changed the thing markedly if they would
have. Whose obligation is it to tell the credit rating agency?
Mr. Sparks. Senator, I do have a view on that comment, and
I think I said earlier that I found the rating agencies to work
very hard in what they did and trying to get the right answer.
On that particular comment, the rating agencies rate the deal.
That means what the assets are in the deal and--whatever the
assets are, they are. And so I found--I was surprised by that
comment because the deal is the deal, and the agency understood
that, and so that was a surprising comment to me.
Senator Tester. It does not--and this has happened before,
but it really does not click--going back to Senator McCaskill's
question, it does not click that there was something
fundamentally wrong with Paulson being able to pick these?
Mr. Sparks. Well, Goldman Sachs--Senator, I just want to
make sure you understand mechanically how that type of deal
worked.
Senator Tester. Are you saying Paulson did not have any
role in this at all?
Mr. Sparks. No, sir, I am not.
Senator Tester. OK. Then----
Mr. Sparks. Goldman Sachs----
Senator Tester. Then let us just leave it at that level.
Mr. Sparks. OK.
Senator Tester. Paulson had a role in picking these
securities, and you do not see anything wrong with that? In
fact, if the credit agency is saying that it would have
fundamentally changed the way they rated it, you cannot
associate yourself with those comments because you do not think
they are right?
Mr. Sparks. Well, Goldman Sachs provided the short risk to
that transaction, a very specific set of names. Whatever
Goldman did with those names, how that affects what a rating
agency rates that, that to me does not make any sense.
Senator Tester. OK. We have got--I do not know what you
call it--a fault line or whatever it might be. That may be the
wrong term.
I want to go back to a previous question that was asked
that dealt with--and you kind of all skirted it except for Mr.
Birnbaum. But it has been brought up several times here, by the
Ranking Member also. That is, who do you consider yourself
working for? Who is in the best interest here, the client or
the firm? Now, I do not want to go back and forth and go
through the same questions that were answered before. But the
question is that you have to work for one or the other when
push comes to shove. You cannot be for both because there are
certain times where you just cannot be for both. Am I wrong in
that assumption? Go ahead, Mr. Sparks.
Mr. Sparks. Senator, that is a very complicated question,
but if you do not prudently manage your risk, you will not be
around to work for your clients.
Senator Tester. OK.
Mr. Sparks. So I think you are looking for a broad response
to that, and I would say clients are extremely important to
Goldman Sachs and to market makers that I think are going to
have a chance to succeed. But that does not mean that you
should be imprudent with respect to risk.
Senator Tester. OK. I think everybody--I should not speak
for everybody on the Subcommittee, but I will try and they can
correct me later if they want. But I think everybody
understands that there needs to be some level of regulation
here, mainly because from my perspective, because of the TARP
bailout, it is probably why Goldman is still here, because of
the taxpayers and because the Congress did what they did.
But I guess the question here is that, as we move forward--
and I list Anderson and Timberwolf and Abacus, and all these
where I think they were clients of yours that bought this
stuff. It went south in a regular pattern. It just was not one,
it was not a changed interest. And you guys made some dough on
it, on the short selling of it. You did. And Paulson made out
like a bandit on this thing.
Mr. Sparks. Senator, on each of those deals, I----
Senator Tester. So the firm did pretty well.
Mr. Sparks. I do not think the firm did well on every one
of those deals. In fact, it is possible and more likely that on
those particular deals the firm lost a fair amount of money. I
would have to go back and do the math on each one, but on those
deals that you picked out that performed very poorly--and they
did--Goldman Sachs I think lost a fair amount of money because
Goldman retained a fair amount of risk on those deals.
Senator Tester. Yes, I mean, even including the short
selling you did on it?
Mr. Sparks. That is why I would need to go back and net it
off.
Senator Tester. Yes, I think the Chairman asked you for
that information, so we will be looking forward to that.
OK. If you were in my shoes and we are on the verge of
doing some Wall Street reform, potentially--I hope we get pass
the verge and get into the debate of it--what would you change?
Anything?
Mr. Sparks. Senator, I think clearly some things need to be
changed. I have not read what is proposed, so I am not in a
great position to----
Senator Tester. You really do not need to read what is
proposed. Actually, you are in the business. OK? I am a farmer,
and if you asked me what we need to change in agriculture, I
could tell you pretty quick. I am assuming that you are a smart
guy in the financial services--I know you are, and I do not
mean that as a derogatory comment.
As you look at the regulations that fell in--and some
people made a lot of money, some people lost a lot of money. I
do not know if it was because people did not get told the whole
story or not. If they did not, then I think there is a problem
there. But is there anything in the regulatory that you looked
at--you work and you are high up in management--what would you
change?
Mr. Sparks. Well, again, I do not work at Goldman Sachs
anymore, so I do not want to speak for Goldman----
Senator Tester. I know, but going back, I do not think
things have changed with the regulatory structure at all since
you worked there.
Mr. Sparks. I feel like we worked really hard to manage our
risk prudently. I think it is a very hard question, and I think
that when you look at what gradually became too much credit
available in the system and there were many people who
participated in that system and actually, so long as that was
going, it was good for those people. The kind of regulator, not
meaning technical regulator, but there was not a defuse valve
to monitor that.
Senator Tester. OK. And, actually, the testimony says it.
Even when the markets were going down--Senator Ensign talked
about it. Let me see if I can find the exact statement here.
You guys did pretty well--2009 Goldman Sachs' annual report
states that the firm did not generate enormous net revenues by
betting against residential-related products. Documents
obtained by the Subcommittee, however, indicate two top Goldman
mortgage traders, Michael Swenson and Joshua Birnbaum,
discussed their 2007 performance evaluation as a very
profitable year and extraordinary profits. So you guys made
money going both directions.
Mr. Sparks. Senator, I would just like to clarify a couple
of the numbers----
Senator Tester. And there is a lot of folks that did not
make money going both directions. There is a lot of guys that
lost their retirement, they lost everything they had when it
dropped off.
Senator Ensign. Senator Tester, one of the clarifying
points is even if Goldman Sachs did not make it, the executives
did.
Senator Tester. Yes.
Senator Ensign. They made huge bonuses.
Senator Tester. I am with you. We are together. Go ahead,
Mr. Sparks.
Mr. Sparks. Senator, there are two things I thought just to
clarify. One, on the graph that was shown--I ran the Mortgage
Department, and I was responsible for risk in my department. I
do not think that was reflective of the risk that I managed.
And two, I have heard a lot of numbers about what Goldman
Sachs made. My department, which included these guys and other
businesses, including commercial mortgages where we made money,
the number was $1.1 to $1.2 billion in 2007. That is the
revenue number. So that is the number I know. That was roughly
20 to 25 percent more than the year before. And the reason I
give you that, I felt--and I said I was proud. I thought the
firm managed it well.
Senator Tester. OK.
Mr. Sparks. But that was not that typical a year in that
business. So I just wanted to make sure that the numbers that I
know--that I pointed that out, because I had heard some numbers
that I felt like were not accurate.
Senator Tester. OK. Well, first of all, I do want to thank
you all for being there, and I mean that. I also would like to
have you guys just go out and have a pop, and we will leave the
attorneys out of this thing, because I know you have got to
cover yourselves on a lot of this stuff. The fact is I think we
have got a problem, and I think we have got a problem with what
has gone on on Wall Street, and I do not want to see it reoccur
again. And the truth is I need good information if I am going
to make good decisions. A lot of that good information could
come from you guys. I think you have had to temper it. I
understand that. That is OK. I think it has been pretty
obvious. But that is OK. That is what you were instructed to
do, and you did a good job.
But the fact is that the bottom line is we cannot let this
happen again, or if it does happen, the chances have to be very
slim of it. And when you have got folks out there that are
betting basically on the weather or whatever it might be, I
just think it can put the whole thing into a turmoil unless it
is pretty tightly controlled. That is my own opinion. But I do
not--we have got to figure out how to do that so it is done
right and transparency is the bottom line.
Thank you, Mr. Chairman. I overspoke my time. Thank you
very much.
Senator Levin. Thank you, Senator Tester.
Turn to Exhibit 170c,\1\ if you would, Mr. Sparks. A number
of my colleagues have raised the Hudson deal. This is the deal
where you were selling your own stuff from your own inventory
to people, and bet against it heavily. We are going to go into
that deal now. You were selling this to others.
---------------------------------------------------------------------------
\1\ See Exhibit No. 170c, which appears in the Appendix on page
1085.
---------------------------------------------------------------------------
First of all, what are you selling to others? Here is what
you are selling to others, according to your own employee,
Exhibit 170c. You are selling junk. OK? That is what that
employee says. The question from a man named Tetsuya Ishikawa
to Sarah Lawlor. ``Understand AIB''--which is Allied Irish
Bank--``do . . . deals but what specifically did AIB say was
`junk' about the Hudson Mezz deal?''
What did one of your potential clients say was junk about
the stuff you were trying to sell? And what is the answer to
that? ``You may want to ask Sarah about this when she's there
tomorrow and Friday. . . . She said''--this is now your
employee--``AIB are too smart to buy this kind of junk''--that
is the junk you are selling, Mr. Sparks.
Now, let us see what is it you are selling. Take a look at
Exhibit 86.\1\ This is an exhibit entitled--same thing--Hudson
Mezzanine, sent by Peter Ostrem, who is the head of Goldman's
Asset-Based Securities CDO Desk, to the Goldman team,
announcing a new CDO. What is this new CDO? It is Hudson. ``We
have been asked to do a CDO of $2 billion for the [trading]
desk.'' That is the Goldman trading desk, and that is
``obviously important to [structured product]'' folks. They say
that in Exhibit 86. We have been asked to put together a CDO
that contains our stuff from our inventory. Your inventory is
too long. This is now towards the end of 2006.
---------------------------------------------------------------------------
\2\ See Exhibit No. 86, which appears in the Appendix on page 550.
---------------------------------------------------------------------------
Now take a look at Exhibit 90.\3\ Who do you think is
betting against the stuff that you are referencing in this
synthetic CDO? You are referencing your own stuff, and it is
junk. That is your own employee's assessment. And you are
trying to get out of this, and so you create a synthetic CDO so
you can transfer that risk to your customers. OK? And who do
you think is going to benefit when you transfer that risk on
the short side? The so-called protection buyer. Take a look at
Exhibit 90. ``Goldman was the sole buyer of protection on the
entire $2.0 billion of assets.''
---------------------------------------------------------------------------
\3\ See Exhibit No. 90, which appears in the Appendix on page 588.
---------------------------------------------------------------------------
If you can sell your junk and shift the risk on that in a
synthetic CDO, Goldman puts $2 billion in its pocket.
Now, you have got a marketing booklet. That is Exhibit
87.\1\
---------------------------------------------------------------------------
\1\ See Exhibit No. 87, which appears in the Appendix on page 551.
---------------------------------------------------------------------------
Mr. Sparks. Senator, I missed the one before Exhibit 87. I
apologize. Could you tell me----
Senator Levin. No, I am not going to waste any more time.
Mr. Sparks. OK. I am just trying to flip through to make
sure I understand exactly--there were a number of Hudson deals,
and I am just making sure----
Senator Levin. OK. All right.
Mr. Sparks [continuing]. I remember which deal it was.
Senator Levin. Maybe we can get an answer this time. Hudson
Mezzanine. Are we ready? Which one didn't you understand? Did
you understand the one about junk?
Mr. Sparks. I read the one where AIB called it junk and
decided not to invest.
Senator Levin. And your own person said they are too smart
to buy this kind of junk.
Mr. Sparks. I thought they said that it was junk and they
were too smart to buy it. I will look at it again. I am just
trying to go fast.
Senator Levin. OK, take your time, Exhibit 170c. A Goldman
Sachs person, Ishikawa, wrote: ``You may want to ask Sarah
about this when she's there tomorrow and Friday. . . . She said
`AIB are too smart to buy this kind of junk . . .' ''
Mr. Sparks. I see that now, Senator.
Senator Levin. OK. Now let us talk about what you are
selling.
Mr. Sparks. So then I go to Exhibit 86----
Senator Levin. You are on the short side of this, right?
You are going to make money if this synthetic CDO is sold. Is
that correct? You are getting rid of----
Mr. Sparks. Senator, at this particular time, because I
believe this email was September 2006. I believe at the time
the firm was positioned very long with respect to the market at
that time.
Senator Levin. It was, and you are trying to be less long.
Mr. Sparks. You had said the firm got short. I do not
believe it got short.
Senator Levin. You are creating a synthetic CDO, and there
is a bet going on against stuff that is in your inventory; you
are betting against that stuff, and someone else is betting for
it.
Mr. Sparks. We were long risk, and we were reducing risk.
Senator Levin. That is exactly what I said. You are trying
to shift the risk of that junk to somebody else. This is what
is going on.
It is a synthetic CDO, OK? The whole point of the synthetic
CDO, if you will take a look at that exhibit that I just
referred you to, Goldman is the sole buyer of protection. You
got that?
Mr. Sparks. That is the one I was looking for, but I----
Senator Levin. Exhibit 90.\1\
---------------------------------------------------------------------------
\1\ See Exhibit No. 90, which appears in the Appendix on page 588.
---------------------------------------------------------------------------
Mr. Sparks. Thank you.
Senator Levin. Do you see it there, the middle of the page?
October 30, 2006. ``Goldman was the sole buyer of protection on
the entire $2 billion of assets.'' You are trying to shift the
risk, exactly as you said. You are trying to shift the risk,
and you did it.
So you are benefiting now from selling stuff from your
inventory. You want to go less long, and you are betting
against that. OK? We are together?
Mr. Sparks. Mr. Chairman, any time we sell something to
somebody, we have transferred the risk. I agree with that.
Senator Levin. Right. That is all I am saying. In this
case, it is junk from your inventory, and you are trying to go
less long.
Mr. Sparks. Well, I can tell you at the time, Mr. Chairman,
I did not believe it was junk, and we did not believe it was
junk. A salesperson said that. I think that is a salesperson
who had an opinion, and as I mentioned, a lot of people had
different opinions.
Senator Levin. Right. That is true. Your salesperson
believed it was junk. That is who was selling your stuff.
Now, take a look at Exhibit 87.\2\ This is your sales
pitch. ``Goldman Sachs has aligned incentives with the Hudson
program by investing in a portion of equity and playing the
ongoing role of Liquidation Agent.'' So now you are telling
people that you are on the long side. That is your Executive
Summary. You tell them in some fine print somewhere that you
are shifting the risk, but this is what the Executive Summary
says. It states you have ``incentives aligned with the
program.''
---------------------------------------------------------------------------
\2\ See Exhibit No. 87, which appears in the Appendix on page 551.
---------------------------------------------------------------------------
No, you do not. Your incentives are aligned against this
thing. Your incentives are to sell $2 billion and shift the
risk. And so you are telling people, that you are selling this
to--that Goldman Sachs has aligned incentives with the Hudson
program by investing in a portion of equity. That means you are
on the long side. You are investing a little bit on the long
side. Two billion bucks of risk you are shifting, and you are
telling people in the Executive Summary that the incentives are
aligned. They are not aligned. They are the opposite. You are
shifting risk. You are not taking on risk. This is one of your
structured products that you are selling, these synthetic CDOs
that nobody can figure out.
Take a look at Exhibit 91,\3\ Mr. Sparks. This is another
synthetic CDO that you guys are peddling, shifting risk, making
money when you go short. You tell Mr. Montag, ``Need you to
send message to Peter Ostrem and Darryl Herrick telling them
what a great job they did. They structured like mad''--``they
structured like mad''--``and traveled the world, and worked
their tails off to make some lemonade from some big old
lemons.'' Making lemonade from some big old lemons!
---------------------------------------------------------------------------
\3\ See Exhibit No. 91, which appears in the Appendix on page 589.
---------------------------------------------------------------------------
You say that--by the way, going back to Hudson----
Mr. Sparks. Is that in Exhibit 91, lemonade?
Senator Levin. Exhibit 91. Look right in the middle. ``Need
you to send message''--you see those words? ``Need you to send
message to Peter Ostrem and Darryl Herrick''--who is Peter
Ostrem?
Mr. Sparks. Peter Ostrem at the time was a managing
director that ran our cash CDO business.
Senator Levin. All right. And who is Darryl Herrick?
Mr. Sparks. Darryl was part of Peter's group.
Senator Levin. ``. . . and tell them what a great job they
did. They structured like mad.'' What did they do? They made
some lemonade from some big old Goldman Sachs lemons.
You have got no regrets? You ought to have plenty of
regrets. I do not think that you are willing to acknowledge
them, but you ought to have them. I do not think you will
acknowledge them. That is why we have got to do some regulation
and reregulation.
Take a look, Mr. Birnbaum, if you would, at your own
assessment of what you did in 2007. You had a great year.
Mr. Birnbaum. What page?
Senator Levin. Exhibit 55c.\1\ Now, you had made a decision
to shift the direction and go from a long position to a short
position. And here is what you said, that the ``execution of
strategies has clearly been a concerted team effort.'' Do you
have this now, Mr. Birnbaum? Do you see where I am at?
---------------------------------------------------------------------------
\1\ See Exhibit No. 55c, which appears in the Appendix on page 447.
---------------------------------------------------------------------------
Mr. Birnbaum. I am catching up to you.
Senator Levin. OK. Well, I will not make you catch up. I
want you to read every word with me, so I will wait until your
eyes are on the same words I am on.
Mr. Birnbaum. So which page are you on?
Senator Levin. Page 2.
Mr. Birnbaum. I am with you.
Senator Levin. It says, ``Vision, risk taking, market
calls.''
``Whereas execution of strategies has clearly been a
concerted team effort, I consider myself the initial or primary
driver of the macro trading direction for the business.'' Got
it? Macro trading direction for the business. Here is what you
say.
You made three major calls: ``December to February''--that
is December 2006 to February 2007--``With the desk quite long
and ABX trading down from par . . ., we had a rough start to
the year.'' By the way, that year started in December. ``The
prevailing opinion within the department was that we should
just `get close to home' and pare down our long.''
This is what Mr. Sparks was talking about. There are
differences in the department. Everyone does not agree. There
is a difference of opinion. I am going to keep going.
So there was some opinion that we ``should just get `close
to home' and pare down our long.'' But you--and then reading at
the bottom of the page, you had five reasons there why you
should not just pare down, you ought to make a big bet going
short. And then you said, ``I concluded that we should not only
get flat, but get VERY''--capitalized--``short.'' That is not
my emphasis. That is yours, that you should get very short. And
what did you do? You began ``socializing'' the idea. You wanted
to avoid group-think, so you independently went to a whole
bunch of folks to see if anybody could poke holes in the plan.
``Although opinions varied on execution probability, primarily
on the back-end, we all agreed the plan made sense.'' ``We all
agreed the plan made sense.''
And then you socialized with Sparks and Ruzika, and what
did you do? You ``implemented the plan by hitting on almost
every single name CDO protection buying''--that means you are
heading in the short direction--``in a 2-month period. Much of
the plan began working by February . . . our very profitable
year was underway.'' This is a very profitable year where you
were working. You were betting against the market. You were
going short.
And then down at the bottom of that paragraph, ``Again,
when the prevailing opinion in the department was to remain
close to home, I pushed everyone on the desk to sell . . .
aggressively and quickly.'' OK?
You made a lot of money monetizing that. ``We sold billions
of index and single name risk''--you sold them, and you cashed
in. And here is what you said: ``when the index dropped 25
points in July, we had a blow-out profit and loss month, making
over $1 billion that month.''
Now, what you said in the report is what happened. This is
what you folks reported to the SEC. October 4, 2007. This is
Exhibit 46.\1\ This is a letter from Goldman to the SEC. Take a
look at the bottom of page 3.
---------------------------------------------------------------------------
\1\ See Exhibit No. 46, which appears in the Appendix on page 361.
---------------------------------------------------------------------------
``[I]t is important to note . . . that we are active
traders of mortgage securities and loans and, as with any of
the financial instruments we trade, at any point in time we may
choose to take a directional view . . .'' That is your words,
Goldman Sachs. You may choose to take a directional view.
Mr. Birnbaum. This is Exhibit 46? I am just asking you.
Senator Levin. Exhibit 46, bottom of page 3. I am not
asking you this question. I am asking Mr. Sparks this question,
or any of you. But basically making a statement and then asking
if you want to respond to it. I mean, this is a statement of
Goldman Sachs to the SEC. I am not sure you want to quibble on
this one. But, in any event, October 4, 2007.
So, ``at any point in time we may choose to take a
directional view of the market and will express that view
through the use of mortgage securities, loans and derivatives.
Therefore, although we did have long balance sheet exposure to
sub-prime securities in the past three years, albeit small
exposure, our net risk position was variously either long or
short depending on our changing view of the market.''
So your risk position was dependent on your changing view
of the market. But now comes the line which we might as well
all agree upon before the next two panels start--this is what
you represented to the SEC and what the facts clearly show.
``For example''--presumably of your decision on directional
view--``during most of 2007, we maintained a net short sub-
prime position and therefore stood to benefit from declining
prices in the mortgage market.''
Is there any doubt in your mind that was true? Is there any
doubt in your mind that what Mr. Viniar said later on that year
was also true? This is what Mr. Viniar said at the end of the
third quarter. He is the Chief Financial Officer. This is
Exhibit 45,\1\ by the way, if you want to track it.
---------------------------------------------------------------------------
\1\ See Exhibit No. 45, which appears in the Appendix on page 349.
---------------------------------------------------------------------------
``Let me also address mortgages specifically''--this is the
end of the third quarter. It was around September. ``The
mortgage sector continues to be challenged and there is a broad
decline in the value of mortgage inventory during the third
quarter. As a result, we took significant markdowns on our long
inventory positions during the quarter, as we had in the
previous two quarters.'' That is getting out of the long
position.
And then he said the following: ``However, our risk bias in
that market was to be short and that net short position was
profitable.''
Do you disagree with that, Mr. Sparks? Do you disagree with
that one statement?
Mr. Sparks. During the third quarter that we had a net
short bias? I do not disagree with that statement.
Senator Levin. And you disagree with this statement?
Mr. Sparks. I said I do not disagree. I am sorry.
Senator Levin. Do you disagree with the statement that was
made to the SEC, bottom of Exhibit 46, page 3, last line, that
``during most of 2007, we maintained a net short sub-prime
position and therefore stood to benefit from declining prices
in the mortgage market''? That was stated to the SEC. Was
Goldman Sachs telling the truth to the SEC?
Mr. Sparks. I understand that. I did not write this.
Senator Levin. All right. Mr. Birnbaum, do you know whether
that was a true statement or not?
Mr. Birnbaum. Again, these are not my words. I did not----
Senator Levin. I am just asking you if the statement is
true that Goldman Sachs made to the SEC. That is all I am
asking you.
Mr. Birnbaum. Well, this is a long document. I mean, I have
not even read it----
Senator Levin. I am asking you about that statement at the
bottom of page 3, that ``during most of 2007, we maintained a
net short sub-prime position and therefore stood to benefit
from declining prices in the mortgage market.''
Mr. Birnbaum. There is only one thing I can comment on, and
that is my position. And you read my self-review.
Senator Levin. OK.
Mr. Birnbaum. And I stand pat with what I wrote there,
and----
Senator Levin. And is that review totally consistent with
this?
Mr. Birnbaum. Just to be clear, my review pertains to my
business that I worked with----
Senator Levin. I got you. Is your review----
Mr. Birnbaum. This is only a small part of the firm.
Senator Levin. Is your review consistent with what I just
read?
Mr. Birnbaum. My review only----
Senator Levin. Mr. Swenson.
Mr. Birnbaum. My review only relates to my----
Senator Levin. I understand. Is this something that you
agree was an accurate statement when Goldman Sachs made it to
the Securities and Exchange Commission in October 2007?
Mr. Swenson. Yes.
Senator Levin. Thank you.
Mr. Swenson. And I would like to add the nature of our
risk----
Senator Levin. Oh, I was just hoping for a yes.
Mr. Swenson. Yes, but the nature of our risk changed over
the course of that year, which I mentioned in my opening
statement.
Senator Levin. We understand. Thank you very much. Dr.
Coburn.
Senator Coburn. Thank you, Mr. Chairman.
I have a question for each of you that I would like just a
yes or no answer. Is there a policy within Goldman Sachs that
if you feel something is either out of the ordinary or
unethical, that you are not to communicate that in an email?
And have you ever been instructed on what you will or will not
communicate on emails? In other words, are there things that
you are not to communicate in emails? Mr. Sparks.
Mr. Sparks. The ethical question, if there is something
that you have an ethical question about, you are supposed to
raise it to your superior. But with respect----
Senator Coburn. Have you ever been instructed not to raise
that in an email?
Mr. Sparks. No.
Senator Coburn. There is no policy within Goldman that you
cannot raise ethical questions on emails?
Mr. Sparks. Not that I am aware of.
Senator Coburn. Mr. Birnbaum.
Mr. Birnbaum. I am not aware of a policy like that.
Senator Coburn. Mr. Swenson.
Mr. Swenson. I am not aware of a policy.
Senator Coburn. Mr. Tourre.
Mr. Tourre. I am not aware of a policy.
Senator Coburn. Are you aware of any policy that would
restrict your communication on emails about anything related to
your business within Goldman? And, again, you all have been--
are under oath. All I want is a yes or no. Have you been
instructed on certain things you will not communicate in an
email relating to the business? I am not talking about personal
now.
Mr. Sparks. Within the firm, no. Personal stuff, the firm
does not--prefers you not to, and then I would say there are
things about what can go outside of Goldman that there are
policies about.
Senator Coburn. OK.
Mr. Birnbaum. It has been a little while since I worked
there, and I do not remember all the policies. We had a lot of
policy updates.
Senator Coburn. Well, you would know this policy if it was
there.
Mr. Birnbaum. I do not remember all the policies.
Senator Coburn. So your answer is you do not know?
Mr. Birnbaum. My answer is, I do not remember all the
policies.
Senator Coburn. That is a very unsatisfactory answer.
Mr. Swenson.
Mr. Swenson. There is no policy.
Senator Coburn. Thank you.
Mr. Tourre.
Mr. Tourre. There is no policy.
Senator Coburn. OK. Thank you. I want to go just a little
further on an email. If you all will look at Exhibit 26,\1\
this is an email dated July 25, 2007, from the executive VP and
chief financial officer, and it was not necessarily
communicated to you. This is a summary of revenues and
estimates year to date, and this would be the estimate for
revenues and estimate for pre-tax profit, and this goes to Mr.
Cohn and copied to several others. It says, ``Tells you what
might be happening to people who don't have the big short.'' It
is not really fair to ask you to comment on that, but there
were discussions about changing your positions in relationship
to the mortgage market, the derivatives, and the packaged
securities. There is no question about that, right? You all
have testified you were changing position. Correct?
---------------------------------------------------------------------------
\1\ See Exhibit No. 26, which appears in the Appendix on page 306.
---------------------------------------------------------------------------
Mr. Sparks. Yes, Dr. Coburn.
Senator Coburn. All right. Everybody agrees with that? You
were changing positions. You saw a market that was tanking. You
were trying to limit your loss as good fiduciaries for your
business, but also to balance that loss as a market maker. Is
that correct?
Mr. Sparks. Can I just, Dr. Coburn, I thought you said we
were changing our positions. We were oftentimes changing our
positions. I thought you meant did----
Senator Coburn. I understand, but there has never been a
position change like what took place in the last 4 years in
this country in the mortgage markets. There has never been
anything like that. Maybe when we shut off exports of
commodities to the Russians during the Afghanistan invasion,
but there has never been a change like that before in this
country. So I understand you change positions all the time, but
there has never been anything to compare to what happened in
terms of the collateralized debt obligations and the
residential mortgage-backed securities in this country. Would
you agree with that? Do you know anything in your history? I am
62 years old. I have never seen anything like it.
Mr. Sparks. It was definitely unique.
Senator Coburn. I am not critical of it. It is smart, if
you see a market tanking, to get out of the market. I mean, you
are market makers, but you are also proprietary traders. So you
are not only having to make a market, which puts you on
exposure for some losses, but you also have proprietary
trading, so you make more of your money now proprietary trading
than you do any other way, at least the last few quarters you
have.
So it is a fact that you were changing positions as a firm
in the mortgage-backed industry and the derivatives associated
with that. Correct? Anybody disagree with that? I am taking it
that means nobody disagrees.
Mr. Birnbaum. I would just second what Mr. Sparks said. We
were changing positions all the time.
Senator Coburn. Mr. Birnbaum, you did not hear what I just
said. Everybody changed positions. As a matter of fact, they
got so much change in their position they lost half of
everything they owned, the vast majority of people who did not
have access to the same data you did or were not smart enough
to take care of it. So you cannot compare this change in
position--this was a drastic change in position where you went
significantly short on the basis of smart knowledge of what was
going on in the market. You do not have to apologize for it,
but do not compare it to a change in what the CPI might be one
month over the next to changing positions. It is inappropriate,
and it is also discourteous to us. We are not that stupid.
Now, I am going to pass out for each of you copies of some
things that are not in the reference binder, but they are
copies of emails collected from your firm.\1\ Have they been
passed out? So everybody has that, and I think our panel
members have it as well.
---------------------------------------------------------------------------
\1\ See Exhibit No. 174, which appears in the Appendix on page
1110.
---------------------------------------------------------------------------
The first is related to Mr. Tourre, and I want you to go
along with this and try to answer some of these questions for
me, if you would. Tell me, in your mind what is an equity
investor?
Mr. Tourre. It is a party who buys an equity position in a
transaction.
Senator Coburn. And describe an equity position. What are
they buying, in your mind?
Mr. Tourre. They are buying the residual piece of a
transaction.
Senator Coburn. OK. And it may be long, it may be short, it
may be a derivative, it may be a combined--or it may just be a
pure equity, right? A stock.
Mr. Tourre. It could be a stock.
Senator Coburn. Right. OK. Did you ever tell ACA Paulson
would be an equity investor?
Mr. Tourre. No.
Senator Coburn. At no time did you infer that, tell them
that, or state that, at any time with ACA?
Mr. Tourre. No, sir.
Senator Coburn. OK. Did you tell ACA that Paulson was short
on the deal? I am talking about the Abacus deal.
Mr. Tourre. I do not specifically remember the words I
used, but I did mention to ACA that Paulson's expectation was
that they were buying credit protection on senior tranches of
that portfolio.
Senator Coburn. OK, but that is the same thing as saying
they are going to buy a short position.
Mr. Tourre. Yes.
Senator Coburn. Was there ever any inference when you said
that they were also taking a long position--that they were
taking a long position and insure their long position by buying
on the short side?
Mr. Tourre. To me, buying protection on senior layers of
risk means being short.
Senator Coburn. OK. So somebody would not necessarily buy
long on the higher tranche and sell equity protection on the
lower-quality tranche.
Mr. Tourre. Correct.
Senator Coburn. Nobody would do that?
Mr. Tourre. Correct.
Senator Coburn. OK. Why wouldn't they? If the different
tranches have different values, even though the whole thing is
AAA rated, why would they not buy protection on the highest-
risk portion of the deal?
Mr. Tourre. I am sorry. Can you repeat the question,
Senator?
Senator Coburn. Why would somebody not buy protection on
the lowest potential performing component of the deal and buy
long on the top end of the deal?
Mr. Tourre. If somebody has an interest in buying
protection on a portfolio, depending on the objectives from a
carry perspective, that party may decide to buy protection on
the first loss, the mezzanine, or the super-senior tranche. I
think it is an investment decision that has to do with carry,
and----
Senator Coburn. So they might straddle that for their own
insurance, but that is it?
Mr. Tourre [continuing]. Views on ultimate losses on the
reference portfolio.
Senator Coburn. Right. OK. Mr. Tourre, to your knowledge,
of the securities that were kicked out by ACA of the Abacus
deal, do you have any knowledge that anywhere in Goldman that
they--once those were kicked out, that they bought a short
position in the securities that were kicked out?
Mr. Tourre. I am sorry. Who bought a short position?
Senator Coburn. Goldman. Of the securities that were kicked
out of the Abacus deal, do you have any knowledge anywhere
available to you that anybody in Goldman created a short
position on those securities that were kicked out?
Mr. Tourre. When you say ``kicked out,'' you are----
Senator Coburn. They were not part of the deal. In other
words, ACA said, ``No, we are not taking these.'' Did anybody
within Goldman take a short position on the ones that they were
not included in the tranches?
Mr. Tourre. I do not know, Dr. Coburn.
Senator Coburn. Does anybody else have an answer for that
question? Is there any knowledge anywhere about anybody knowing
whether or not you specifically took short positions on
portfolios that were rejected from the Abacus deal?
Mr. Sparks. Dr. Coburn, I do not know.
Senator Coburn. OK.
Mr. Birnbaum. As I had mentioned earlier, I did not work on
those transactions.
Senator Coburn. OK. Mr. Swenson.
Mr. Swenson. I do not know.
Senator Coburn. All right. Thank you. Now to the documents.
The first document is an email about a location--``Canceled:
Meet with Paulson, potential equity investor.'' And this
actually comes from Laura Schwartz, which is on January 8,
2007, 7:05 p.m. Laura is communicating to a
[email protected], with a copy to Keith Gorman on a
Paulson meeting. ``I have no idea how it went - I wouldn't say
it went poorly, not at all, but I think it didn't help that we
didn't know exactly how they want to participate in the space.
Can you get me some feedback?''
She is talking about Paulson there, right? You have these
in front of you, correct?
Mr. Tourre. Yes, sir.
Senator Coburn. Is she talking about the Paulson group?
Mr. Tourre. I believe she is talking about the Paulson
meeting, yes.
Senator Coburn. OK. And then a phone call on January 10,
2007. Did you have that phone call?
Mr. Tourre. I do not remember, Senator.
Senator Coburn. You do not remember. All right. But it is
in the record that it happened. You would agree to--this is
your records.
Mr. Tourre. I am sorry. When you say this is my----
Senator Coburn. These are not your records. I take it back.
They are ACA records.
On January 28, 2007, you have an email from Laura Schwartz
to Alan Roseman and Ted Gilpin; subject: ``Not a boon doggle.''
And, again, the Abacus deal comes up at a per chance meeting in
Colorado--no, in Wyoming. She went to a conference, hammered
out collateral and structural issues on two deals with both the
Paulson PM--does the PM refer to ``prime mover'' or ``principal
maker'' or----
Mr. Tourre. Traditionally, it is ``portfolio manager.''
Senator Coburn. Portfolio manager, OK. That fits. And the
Morgan Stanley proprietary head. ``The Paulson [portfolio
manager] wasn't even at the conference but came over to me in
the mountain cafeteria and asked to get together.''
So here is a meeting between ACA and Paulson's portfolio
manager, correct? You would agree that is what this implies?
Mr. Tourre. Reading this email right now, it looks like it,
sir.
Senator Coburn. OK. Thank you.
So then back from Mr. Gorman to Laura Schwartz, ``Looks
good to me. Did they give a reason why they kicked out all of
the Wells deals?'' And then at the bottom of this email is,
``Attached is the revised portfolio that Paulson would like us
to commit to - all names are at the Baa2 level. The final
portfolio will have between 80 and these 92 names. Are `we' ok
to say yes on this portfolio?''
OK. And, again, this is inside ACA documents. You probably
have not been aware of this.
And then Mr. Pellegrini with Paulson & Company sends to
Laura Schwartz on February 13th, ``In answer to your question,
the reasons we decided to go ahead with ACA are that, on the
one hand, you have an impressive infrastructure and track
record and, on the other hand, you are willing to execute a
relatively less lucrative assignment with the same level of
diligence and energy that you apply to all your deals. I also
appreciated your direct personal involvement in selecting the
deal's portfolio of reference obligations.''
Mr. Tourre, what does that say to you?
Mr. Tourre. Well, I have never seen this email before, so I
am just----
Senator Coburn. But what would you infer from the fact that
somebody at Paulson is saying that it was Ms. Schwartz who was
directly personally involved in selecting the deal's portfolio
of reference obligations?
Mr. Tourre. The way I read this email today is, Paolo
Pellegrini is thanking Laura Schwartz for working on this
transaction.
Senator Coburn. Well, you do not think it is significant in
light of the accusations that have been made about Abacus that
a Paulson representative would imply in this email that he
selected the deal's portfolio of reference obligations rather
than them?
Mr. Tourre. Dr. Coburn, I think we went through this
before. Goldman Sachs, Paulson, and IKB all made suggestions. I
apologize because you were not here when I made my statement.
Senator Coburn. Right.
Mr. Tourre. But out of the initial list of obligations that
Goldman Sachs and Paulson had identified, ACA removed more than
half of them. So ultimately there is not a single obligation in
the 07 AC-1 transaction, there is not one single one that was
not selected by ACA.
Senator Coburn. OK. Thank you. That is helpful.
All right. Mr. Chairman, I am over my time. I will yield
back.
Senator Levin. Mr. Tourre, let me go back to where Dr.
Coburn left off. When my staff talked to you, we asked you
whether or not Paulson had established the portfolio selection
criteria, such as FICO scores, loan-to-value ratios, etc. Was
that true? And did you answer that was true, in fact?
Mr. Tourre. I think what I remember discussing with your
staff, Mr. Chairman, is the fact that the very original
portfolio that Paulson and Goldman discussed had been selected
from a universe of 2006 vintage subprime RMBS obligations,
removing, several obligations, and those obligations were
removed based on certain criteria.
Senator Levin. Right, and those criteria were selected by
Paulson?
Mr. Tourre. As far as I can remember, yes.
Senator Levin. And half of the portfolio was selected by
Paulson then. Is that correct?
Mr. Tourre. Which portfolio are you referring to, Mr.
Chairman?
Senator Levin. The Abacus.
Mr. Tourre. The portfolio for Abacus 07 AC-1 was selected
by ACA based on suggestions----
Senator Levin. Half of those items in the portfolio were
suggestions that came from Paulson. Is that correct?
Mr. Tourre. I do not remember the exact----
Senator Levin. You said they only used half of the
suggestions. I am asking you--they did not use, you said--or
they did use half. So either way, half of his suggestions were
incorporated in the Abacus portfolio. Is that correct?
Mr. Tourre. Mr. Chairman, I did not say half. I said more
than half the securities were kicked out by ACA.
Senator Levin. Kicked out, OK. So about what percentage of
the securities were not kicked out?
Mr. Tourre. A small percentage.
Senator Levin. A small percentage?
Mr. Sparks. No, Mr. Tourre, you misspoke.
Mr. Tourre. Can you repeat the other question, Mr.
Chairman?
Senator Levin. You said that more than half of the
suggestions of Paulson & Company were not accepted by ACA. What
percentage of their suggestions were accepted by ACA?
Mr. Tourre. I do not remember the exact percentage, Mr.
Chairman.
Senator Levin. Was it nearly half?
Mr. Tourre. Again, I do not remember.
Senator Levin. Was it more than a few?
Mr. Tourre. Yes.
Senator Levin. And this came to you as a reverse inquiry.
Is that correct? Do you know what a reverse inquiry is?
Mr. Tourre. A reverse inquiry is a very loosely defined
term. With respect to how I use it and how some of my
colleagues use it, it is basically a party that comes in with a
transaction idea and the party that basically drives a
transaction.
Senator Levin. And that party with the reverse inquiry is
somebody who wants to sell short. Is that correct? Go short?
Mr. Tourre. Mr. Chairman, it depends on the circumstances.
Senator Levin. Well, is that what you mean by reverse, that
the person that comes in--is that what is meant by that term?
Mr. Tourre. No, Mr. Chairman.
Senator Levin. All right. Did Mr. Paulson or Paulson &
Company come in wanting to go short?
Mr. Tourre. They came in and expressed an interest in
buying protection on----
Senator Levin. Which means going short, right?
Mr. Tourre. Yes.
Senator Levin. And did those criteria which Paulson gave to
you, were they plugged into your model? Did they then generate
a list of possible reference securities for that portfolio?
Mr. Tourre. Yes. They were used to actually trim down the
universe of RMBS.
Senator Levin. Using his criteria. Now, take a look at
Exhibit 152,\1\ if you would, Mr. Tourre. Do you see that,
Exhibit 152?
---------------------------------------------------------------------------
\1\ See Exhibit No. 152, which appears in the Appendix on page 963.
---------------------------------------------------------------------------
Mr. Tourre. Is this the email from Michael Swenson to
myself?
Senator Levin. It is from Michael Swenson--no. It is from
you to Mr. Sparks.
Mr. Tourre. Well, the first email----
Senator Levin. No, I am talking about the original message,
the bottom.
Mr. Tourre. Understood.
Senator Levin. OK? Do you see where the second paragraph
says, ``At the end of the meeting, the Paulson team''--this is
you speaking--``told us that they were happy to have met''--and
we do not put the name of the person in, obviously--``and
assuming that (1) could get comfortable with a sufficient
number of obligations that Paulson is looking to buy protection
on in Abacus format.'' Do you see that, that he is looking to
buy protection? That means to go short, right?
Mr. Tourre. Yes.
Senator Levin. And those are your words, right?
Mr. Tourre. Yes, Mr. Chairman.
Senator Levin. All right. Then take a look at Exhibit
107,\1\ the top of page 2. This is now the question of what
managers are you going to work with. And do you see that at the
top of page 2?
---------------------------------------------------------------------------
\1\ See Exhibit No. 107, which appears in the Appendix on page 677.
---------------------------------------------------------------------------
Mr. Tourre. One moment, Mr. Chairman.
Senator Levin. OK.
Mr. Tourre. Exhibit 107?
Senator Levin. Exhibit 107, yes.
Mr. Tourre. I am with you, Mr. Chairman.
Senator Levin. It says--well, first look on page 1, that
you are looking for portfolio selection agents--and this is one
of your criteria--who ``will be flexible with regard to
portfolio selection . . . ideally we will send them a list of
[those bonds] that fit certain criteria, and the portfolio
selection agent will select 100 out of the 200 bonds'' that you
send to them. Do you see your words there?
Mr. Tourre. I see my words, Mr. Chairman.
Senator Levin. Is that accurate? Did that reflect the facts
at the time?
Mr. Tourre. This reflects the fact that we were----
Senator Levin. Was that accurate when you said it? Is that
what you were looking for?
Mr. Tourre. The intention was to send a range of
securities, to give some guidance to the portfolio selection
agent.
Senator Levin. And you were looking for an agent that would
be flexible. Is that correct? That is your word?
Mr. Tourre. That is my word.
Senator Levin. OK. Now, keep going. On page 2, by the way--
and this is from Geoffrey Williams to you. He said, ``There are
more managers . . . than just [so-and-so]. The way I look at
it,'' he said--this is page 2 at the top--``the easiest
managers to work with should be used for our own axes.'' In
other words, I guess that means for Goldman's own goals instead
of your clients'--here is another example where Goldman is
putting themselves ahead of their own client, by the way.
``There are more managers out there than just [so-and-so].
The way I look at it, the easiest managers to work with should
be used for our own axes''--I think which means goals or our
own ambitions. ``Managers that are a bit more difficult should
be used for trades like Paulson given how axed Paulson seems to
be (i.e. I'm betting they can give on certain terms and overall
portfolio increase).'' So you think, hey, give the less
flexible folks to our customers. We will save the more flexible
for ourselves.''
Then you keep going. Take a look at Exhibit 112.
Mr. Tourre. Mr. Chairman, can I interrupt you one second?
Senator Levin. Sure.
Mr. Tourre. With respect to your point about our own axes
and your suggestion that they would be for--Goldman's own sort
of use, if you will, again--and I do not remember the specific
email, but the way I read it today is that there were
transactions for which the best way to risk-manage those
transactions was to re-offer the protection we were buying from
the market directly in tranche format to certain investors.
Senator Levin. I understand.
Mr. Tourre. And there were other--and the other types of
transactions and the other way we could risk-manage our risk
was by writing single-name CDS protection on these obligations,
and what I meant by, our own axes was I would rather risk-
manage a tranche short with a basket of single-name credit
default swap contracts.
Senator Levin. OK.
Mr. Tourre. So that is what I meant by this.
Senator Levin. Now, take a look at--I said Exhibit 112, but
I meant Exhibit 109.\1\ This is from Laura Schwartz at ACA to
Gail Kreitman. Who is she?
---------------------------------------------------------------------------
\1\ See Exhibit No. 109, which appears in the Appendix on page 682.
---------------------------------------------------------------------------
Mr. Tourre. She is a salesperson who used to cover ACA.
Senator Levin. For Goldman?
Mr. Tourre. Yes.
Senator Levin. So now ACA is writing Goldman. ``Gail, I
certainly hope I didn't come across too antagonistic on the
call with Fabrice last week but the structure looks difficult
from a debt investor perspective. I can understand Paulson's
equity perspective. . . .'' Where did they get that from?
Mr. Tourre. I do not know, Mr. Chairman.
Senator Levin. Well, but Gail Kreitman sure was told that
somehow or other Paulson had an equity perspective. Then she
said, ``but for us to put our name on something, we have to be
sure it enhances our reputation.''
So you do not know where ACA got the impression that
Paulson was on the long side, right? You do not know where they
got that?
Mr. Tourre. I do not know, Mr. Chairman, but, again----
Senator Levin. Do you know where they got that impression?
Mr. Tourre. No, I do not know, Mr. Chairman.
Senator Levin. Now, take a look at Exhibit 108--well, we
will skip that one. It is too long.
Exhibit 118.\2\ This is the big formal memo that went to
the Capital Committee from you, and a number of other people.
This is what you said, on page 3, about the sixth line from the
bottom. Do you see where it says, ``The Reference Portfolio has
been selected and mutually agreed upon by ACA and Goldman''? Do
you see that?
---------------------------------------------------------------------------
\2\ See Exhibit No. 118, which appears in the Appendix on page 713.
---------------------------------------------------------------------------
Mr. Tourre. Yes, I see that.
Senator Levin. Was that true?
Mr. Tourre. Well, as I mentioned to your staff last week--
--
Senator Levin. No, not staff. I am just asking you right
now. Was that true, that statement that you sent to your own
committee? Was that accurate?
Mr. Tourre. It is not very accurate. It could have been
more accurate, Mr. Chairman.
Senator Levin. It could have been what?
Mr. Tourre. It could have been more accurate.
Senator Levin. I am not sure it could have been, but at any
rate, you deny that is accurate.
Mr. Tourre. I am saying it could have been more accurate.
Senator Levin. Where was it inaccurate?
Mr. Tourre. Mr. Chairman, before I answer that question,
this was merely a copy paste from previous transactions where
there was a portfolio manager involved.
Senator Levin. Well, where is it inaccurate?
Mr. Tourre. Well, again, this could have been more
accurate----
Senator Levin. No. I am saying where was it inaccurate?
Mr. Tourre. Mr. Chairman, I did not say it was completely
inaccurate.
Senator Levin. Was it inaccurate in the reference to
Goldman?
Mr. Tourre. Had I been----
Senator Levin. No. Are you claiming that was inaccurate now
in reference to Goldman?
Mr. Tourre. I am claiming it is inaccurate in reference to
the fact that it does not say exactly the----
Senator Levin. Was this portfolio mutually agreed upon by
ACA and Goldman, yes or no?
Mr. Tourre. It was mutually agreed by Goldman, ACA, IKB,
and Paulson.
Senator Levin. All right. So you say it was mutually agreed
upon by ACA and Goldman, you are saying that there were others
that were left out.
Mr. Tourre. Well, let me----
Senator Levin. And Paulson was left out. Is that correct? I
think you have not answered the question the best you can, so
let us go on.
Take a look at Exhibit 123.\1\ Have you got it?
---------------------------------------------------------------------------
\1\ See Exhibit No. 123, which appears in the Appendix on page 843.
---------------------------------------------------------------------------
Mr. Tourre. Yes, Mr. Chairman.
Senator Levin. Do you see near the bottom there, it is an
email from you to Josh Birnbaum? Do you see that?
Mr. Tourre. On page 1 or page 2, Mr. Chairman?
Senator Levin. Page 1 near the bottom.
Mr. Tourre. Yes, I see that email.
Senator Levin. It says here ``100 [percent] of the Baa2
RMBS selected by ACA/Paulson.'' Now, you are saying here that
Paulson was one of the two people that selected this and the
other was ACA. Was that an accurate statement?
Mr. Tourre. Mr. Chairman, I was responding to a specific
question from Josh Birnbaum, and----
Senator Levin. I know. Was that accurate?
Mr. Tourre [continuing]. With a view to actually type fast,
I did not really----
Senator Levin. I know how fast----
Mr. Tourre [continuing]. Write something accurate. What I
should have written was that this was a portfolio selected by
ACA with suggestions from Paulson, from Goldman Sachs, and from
IKB. That would have been the factually correct statement. Here
my objective was to write something quick to answer Josh, which
was to answer a question that was more related to risk and risk
management.
Senator Levin. Right. But what you said then was that it
was selected by ACA/Paulson, right? That is what you said at
the time? Is that accurate--am I reading this accurately?
Mr. Tourre. That is what I wrote in this email, Mr.
Chairman.
Senator Levin. You now deny that it was accurate. Is that
right?
Mr. Tourre. I am just saying----
Senator Levin. Was it accurate, yes or no?
Mr. Tourre. It could have been more accurate, Mr. Chairman.
Senator Levin. Let me just summarize this. You knew Paulson
was on the short side of the trade. Is that correct?
Mr. Tourre. Yes.
Senator Levin. You knew Paulson had helped select the
mortgages to be referenced. Is that correct?
Mr. Tourre. They made suggestions, yes.
Senator Levin. And that a significant number of those
suggestions were put into the document. Is that correct?
Mr. Tourre. I do not remember the exact number.
Senator Levin. But you know that it is more than a few?
Mr. Tourre. Yes.
Senator Levin. You did not disclose to ACA that Paulson was
on the short side of this deal. Is that correct?
Mr. Tourre. I did mention to ACA that the expectation was
that Paulson was going to buy protection on senior layers of
risk in the transaction.
Senator Levin. That they were going to be only on the short
side.
Mr. Tourre. Yes.
Senator Levin. So you did say to ACA that Paulson was going
to be on the short side of this transaction?
Mr. Tourre. Yes. I do not remember the words, but I did
mention that to ACA.
Senator Levin. And was it reflected in the Goldman Sachs
security offering to investors that Paulson had been part of
the selection process? Was that represented in that document?
Mr. Tourre. Paulson was not disclosed in the Abacus 07 AC-1
transaction, Mr. Chairman.
Senator Levin. It was not?
Mr. Tourre. No, it was not.
Senator Levin. Did Goldman intend to keep a long stake in
that transaction when the deal was structured? I know it ended
up with a piece. Was it intended that it end up with a piece of
that deal?
Mr. Tourre. We tried to hedge our risk by selling that
piece as well, but were not successful in doing so.
Senator Levin. So it was intended to sell that piece?
Mr. Tourre. For prudent risk management reasons, we were
trying----
Senator Levin. Oh, I am sure for all the right reasons. But
it was intended that Goldman not have any long stake on that
piece. Is that correct?
Mr. Tourre. Yes.
Senator Levin. Dr. Coburn.
Senator Coburn. I just have a couple of other questions.
Mr. Birnbaum, if you would turn to Exhibit 55c,\1\ your
self-review, page 3 of your 2007 review: ``I have been the
primary proponent of trading related equity names on the ABS
desk.'' Can you tell me what that means?
---------------------------------------------------------------------------
\1\ See Exhibit No. 55c, which appears in the Appendix on page 447.
---------------------------------------------------------------------------
Mr. Birnbaum. Just let me get the exhibit first. You are on
which page of the review?
Senator Coburn. Page 3.
Mr. Birnbaum. OK.
Senator Coburn. You state there, ``I have been the primary
proponent of trading related equity names on the ABS desk.'' In
plain English, what does that mean?
Mr. Birnbaum. That refers to trading equities as part of
our hedging strategy.
Senator Coburn. OK. Were you involved in or did you direct
Goldman taking short positions on companies with exposures in
the mortgage meltdown?
Mr. Birnbaum. I do not remember the names that we used as
part of our--specific names as part of our hedging strategy,
but as part of our macro hedging strategy, we did use primarily
put options on equities as a component of what we did.
Senator Coburn. You bought puts?
Mr. Birnbaum. We bought puts.
Senator Coburn. OK. And you do not remember any of the
names of the companies that you bought puts in?
Mr. Birnbaum. It was a while ago. I do not remember the
specifics.
Senator Coburn. OK. Exhibit 156 \1\ is a report in an email
addressed to you dated March 28, 2007. It is a breakdown of
Goldman Sachs' risk exposure to various companies.
---------------------------------------------------------------------------
\1\ See Exhibit No. 156, which appears in the Appendix on page 972.
---------------------------------------------------------------------------
Mr. Birnbaum. OK.
Senator Coburn. Do you ever recall receiving something like
this?
Mr. Birnbaum. I do not remember seeing this.
Senator Coburn. But it was an email addressed to you?
Mr. Birnbaum. I can confirm that, just looking at it here.
Senator Coburn. OK. That email to me reflects that Goldman
took a short position on Bear Stearns and Merrill Lynch, your
former competitors. Is that what that would indicate?
Mr. Birnbaum. There is a lot of information in this email.
It looks----
Senator Coburn. I will wait for you to assess it.
Mr. Birnbaum. I see those names on this email.
Senator Coburn. Were you responsible for those positions
since you were the director of that?
Mr. Birnbaum. Well, I do not know if these names were as a
result of my trading or someone else's trading within the firm.
Senator Coburn. Well, it would certainly look like it would
be since the email is directed to you. Go to Exhibit 155, if
you would.\2\
---------------------------------------------------------------------------
\2\ See Exhibit No. 155, which appears in the Appendix on page 971.
---------------------------------------------------------------------------
Mr. Birnbaum. There are a lot of other people in this
email.
Senator Coburn. I understand, but you are the one that took
credit in your own self-evaluation that you are the one that is
responsible for that strategy.
Mr. Birnbaum. Which I think is--just to give you some
background, I mean, that is a perfectly----
Senator Coburn. I am not saying there is anything wrong
with the strategy. I did not say that.
Mr. Birnbaum. Exhibit 155?
Senator Coburn. Yes.
Mr. Birnbaum. OK.
Senator Coburn. This is a document that reflects that the
biggest piece of Timberwolf was purchased by a division of what
was formerly Bear Stearns, $300 million worth. Does this
document show that Goldman took a short position on Bear
Stearns?
Mr. Birnbaum. Exhibit 155?
Senator Coburn. Yes.
Mr. Birnbaum. I think Exhibit 155, which--is this an email
or is this--what is this?
Senator Coburn. Well, it is in front of you.
Mr. Birnbaum. OK. It is not an email. I have never seen
this report before.
Senator Coburn. I did not say it was an email. I said it
was a document.
Mr. Birnbaum. OK. I have never seen this document before.
Senator Coburn. Do you have any recollection at all of ever
recommending the short on Bear Stearns or buying a put?
Mr. Birnbaum. I do recall, yes.
Senator Coburn. OK. So here is the question I have for you,
and I am not saying it is not fair, but I want to get your
assessment. You are looking at what you see is a change in
residential backed mortgage securities. You are changing
positions within Goldman. At the same time, you are selling
them Timberwolf, which you are now seeing and you are buying
stuff on the other side of, which was used with a fairly
humorous description by some in your sales department, and now
you are carrying that even further by shorting a company that
bought your product because the thinking is it is a smart way
to hedge because you are already betting against it inside on a
CDO product, and they have got $300 million of it, and you do
not think it is going to be worth much, so it might mean that
their stock is going to decline.
Is that an accurate assessment of the trading strategy?
Mr. Birnbaum. Absolutely not.
Senator Coburn. OK. What was the indication for the
trading--why would you short Bear Stearns after they had just
bought $300 million worth of Timberwolf from you?
Mr. Birnbaum. Well, keep in mind the Timberwolf
transactions were not part of my job function.
Senator Coburn. Were you aware of Timberwolf sales?
Mr. Birnbaum. I heard the name Timberwolf. I was not----
Senator Coburn. You had no knowledge that Bear Stearns had
exposure to multiple mortgage-backed securities?
Mr. Birnbaum. I never had knowledge of that.
Senator Coburn. So what did you base the idea that you
would short a Bear Stearns for?
Mr. Birnbaum. When I spoke earlier, I used the word
``macro'' to describe some of those hedges, and sort of
inherent in that description is that I had a portfolio of
several names that I felt that would have some exposure----
Senator Coburn. More downside risk than others?
Mr. Birnbaum. Well, keep in mind when you buy a put, you
are not just betting on downside, you are also betting on
uncertainty. And at the time there was a lot of uncertainty in
the market as to which way the market was going to go, and you
can buy insurance, buy a put----
Senator Coburn. I understand.
Mr. Birnbaum [continuing]. And that can be a very effective
hedge against a portfolio. You are not necessarily betting----
Senator Coburn. Just as selling the call can be.
Mr. Birnbaum. But you are not necessarily betting the
market is going to go down, and I agree, just like a call can
be.
Senator Coburn. OK. All right. So you do not see any
connection between Goldman's position in mortgage underwriting
sophisticated instruments and your position looking at a macro
sense of what you see happening there and taking and shorting
your competitors or buying a put insurance against your
competitors?
Mr. Birnbaum. None at all.
Senator Coburn. There is no connection?
Mr. Birnbaum. No connection.
Senator Coburn. OK. And you had never had any conversation
within the firm about that connection when--do you deny any
knowledge that the firm had taken a significant change in
position in terms of mortgages and mortgage-backed securities,
CDOs and CDS?
Mr. Birnbaum. Well, I can only speak----
Senator Coburn. Were you aware of----
Mr. Birnbaum. I am aware of my position.
Senator Coburn. Were you aware of the firm's position that
was communicated widely through a lot of emails?
Mr. Birnbaum. Well, most of those emails I was not on.
Senator Coburn. I did not ask you that. I said were you
aware.
Mr. Birnbaum. I was not aware of what the firm as a whole
was--what the firm's position on mortgages was. The only thing
I was aware of is the firm asked me to be a good risk manager.
Senator Coburn. Right, OK. And I think----
Mr. Birnbaum. And I was long----
Senator Coburn [continuing]. You probably were. But I
cannot believe that when you execute a strategy to take
advantage of greater knowledge within your firm to increase the
return for your firm that you can at the same time sit there
and tell you are not taking advantage of the knowledge from the
other areas of the firm. You cannot have a strategy both ways.
You are going to say we can build a strategy based on this, but
we are not going to take any information inside the firm to
make those decisions. I mean, that is not plausible.
Mr. Birnbaum. It is plausible because that is what
happened.
Senator Coburn. In other words, without any knowledge--you
had no knowledge that the firm took any short positions in the
mortgage-backed security business?
Mr. Birnbaum. Well, that is not what you asked me. You
asked me----
Senator Coburn. I am asking you that now.
Mr. Birnbaum. You asked me regarding Timberwolf.
Senator Coburn. I am asking you about mortgage-backed
securities. Were you aware that the firm had changed its
position? You were testifying before--you jumped in when I was
asking Mr. Sparks--that you do change positions. I understand
that.
Mr. Birnbaum. Right, and, again, I do not speak for the
firm. I speak for my position. So I was not aware of any firm-
wide guidance as to a direction on the mortgage market.
Senator Coburn. So you would not think it would be prudent
for somebody in risk management like you to maximize a position
for Goldman Sachs to take advantage of that information and
then make decisions about your competitors who were long in
these areas?
Mr. Birnbaum. Sorry. Which information?
Senator Coburn. The information of the fact that the
housing market, the prices in the housing market, as you
testified earlier, as an indicator, that you were seeing
softness in that market, you were seeing a decelerating
increase in prices, then you saw a flat price, then you saw a
deceleration of price.
Mr. Birnbaum. Well, I think taking publicly available
information and trading a publicly traded equity is perfectly
fine----
Senator Coburn. But that is counter to what you were
promoting yourself and your own deal, that you were going to
expand the use and leverage the use of the knowledge within the
firm. All I am asking you is you did not use any of the
knowledge anywhere else in the firm to advantage your ability
to make a better return as a risk management?
Mr. Birnbaum. You were asking me about a specific----
Senator Coburn. No. I am asking you what I just asked you.
You did not at any time use other information within the firm
of what was going on, the coffee talk, everything else, all the
emails, the positions, the SEC reports, the internal management
report, you never at any time used that to enhance your ability
to make Goldman money?
Mr. Birnbaum. The typical way that I would synchronize with
other people within the firm was with a research group that
might help me in the evaluation of some of these securities.
Senator Coburn. Well, the research group would certainly
know about whether or not the firm had been advised to take a
different position in terms of collateralized debt obligations
and residential mortgage-backed securities?
Mr. Birnbaum. Well, I was not advised of that, and I am not
sure why they would be advised of that. I am not sure we have
even established that there was a firm-wide change in position.
Senator Coburn. Well, we will let the record speak to that.
All right. I will give up on that.
Senator Levin. Mr. Swenson, would you look at Exhibit
160?\1\ Do you have it?
---------------------------------------------------------------------------
\1\ See Exhibit No. 160, which appears in the Appendix on page 983.
---------------------------------------------------------------------------
Mr. Swenson. Yes.
Senator Levin. This is a financial summary. Take a look at
page 2 where it says ``Mortgages.'' Do you see where it says
``Mortgages Performance.'' Do you see that box?
Mr. Swenson. Yes, up top.
Senator Levin. It says there what your performance was for
the year to date, YTD. Do you see that?
Mr. Swenson. Yes.
Senator Levin. And then SPG. What does that stand for?
Structured Products Group?
Mr. Swenson. That is correct.
Senator Levin. And were you the co-head of that group?
Mr. Swenson. Yes.
Senator Levin. And that group made, as I understand it,
$3.7 billion on the short side, basically, right?
Mr. Swenson. Yes.
Senator Levin. And the first three items there, residential
prime, residential credit, and CDO-CLO, those were mainly from
the old inventory, I gather, and they continued to lose money.
That was the long that had been previously dragging the company
down. And if you look at what was lost on that side of it,
residential prime, residential credit, CDO, when you add those
three together, those losses come to $2.9 billion. Does that
look about right to you?
Mr. Swenson. It looks about right.
Senator Levin. So you guys made $3.7 billion that year. The
previous year's inventory, mainly, was deducted from that in
order to come up with the total performance. But that is where
that revenue number of $1.130 billion comes from, is that
correct?
Mr. Swenson. As it is broken out on this sheet, yes.
Senator Levin. Who put this sheet together? This is your
sheet, isn't it? Isn't this a Goldman Sachs sheet that you
helped put together?
Mr. Swenson. It is a sheet that I am not familiar with.
Senator Levin. All right. Do those numbers look right to
you?
Mr. Swenson. We are going back a number of years----
Senator Levin. Well, did your group have a pretty good year
for 2007?
Mr. Swenson. Yes, we had a pretty good year that year.
Senator Levin. Did you start off that year with a value at
risk number?
Mr. Swenson. The VaR was not broken out on the ABS Desk. It
was broken out----
Senator Levin. It was broken out according to what?
Mr. Swenson. The business lines, the Mortgage Department
line.
Senator Levin. The mortgage line. So the Mortgage
Department had a VaR at the beginning of the year, right?
Mr. Swenson. Yes.
Senator Levin. Do you know what it was?
Mr. Swenson. No, I do not recall.
Senator Levin. Do you remember what it was about?
Mr. Swenson. I remember what it was about, but I don't
know----
Senator Levin. At the beginning.
Mr. Swenson [continuing]. A specific number. Since we are
talking about----
Senator Levin. How does 20 or 30 sound to you?
Mr. Swenson. I don't know.
Senator Levin. Well, it was around 20 at the beginning.
Mr. Swenson. And, Mr. Chairman, where are you getting that
number----
Senator Levin. The Mortgage Department.
Mr. Swenson. Where are you getting that number, Mr.
Chairman?
Senator Levin. From your numbers.
Mr. Swenson. No, but in this book.
Senator Levin. I don't know that we have it in the book.
[Pause.]
Senator Levin. Exhibit 164.\1\
---------------------------------------------------------------------------
\1\ See Exhibit No. 164, which appears in the Appendix on page
1010.
---------------------------------------------------------------------------
Mr. Swenson. Thank you.
Senator Levin. That red line there, that is your permanent
VaR limit.
Mr. Sparks. Mr. Chairman, would it be helpful if I helped
on this point, because----
Senator Levin. I don't know that you have been very helpful
on too many points, but give it another try.
Mr. Sparks. OK. With respect to risk in the overall
Mortgage Department, I would have been responsible for that
number----
Senator Levin. All right.
Mr. Sparks [continuing]. So I might have more information.
Senator Levin. The VaR for the overall Mortgage Department
started off, it looks like, in December at around 20. It went
up to a little over 30, and that was your permanent VaR limit,
is that right?
Mr. Sparks. Yes, but I would like to point out, Mr.
Chairman, that with respect to how I managed risk in our
mortgage business----
Senator Levin. I am just asking if that was your permanent
limit.
Mr. Sparks. I don't recall what my permanent limit was
because I didn't use VaR as a primary risk measurement or
management tool.
Senator Levin. Somebody else did, didn't they, in the firm?
Someone else was using VaRs as a risk measurement, weren't
they?
Mr. Sparks. That is correct. That is what the firm overall
uses.
Senator Levin. Right.
Mr. Sparks. But I wanted to be clear with respect----
Senator Levin. Your department was given a permanent limit
by the firm, is that correct?
Mr. Sparks. We had limits, and until things started to
vary, they usually weren't an issue and----
Senator Levin. But you guys wanted to take a heck of a lot
more risk on shorts, and that is, according to your own
numbers, what happened, huge bets on shorts so that your VaR
limit was allowed to go up to 100, which was at one point more
than half of the whole risk the firm was taking, although you
were only around 2 or 3 percent of the income of that firm.
So that red line there, that was supposed to be the
prescribed limit. That was the limit on the risk, a very
cautious, prescribed limit. But that other line that is blue or
green--I can't see from here--but the line that looks like
mountains, those were big excesses above your VaR limit. It
went way up there in February, all the way to 100. Then you
cashed in on those shorts, it came down--you made billions
there--went up in August to over 100, and then gradually came
down and settled by the end of the year at something like 80.
So you had a permanent limit of something between 20 to 30
that the leaders of the firm said was the right limit for the
Mortgage Department, but you were allowed to go so far short
that your risk limit and your short position pulled you up to a
VaR, a value at risk number, that was probably unheard of, by
the way, but represented more than half the risk that the firm
was taking. We think 56 percent of the total risk of the firm
was in your department, which was producing 2 percent of the
revenue. Does that sound right to you?
Mr. Sparks. Chairman Levin, I think this is a very
important point with respect to VaR and the mortgage business--
--
Senator Levin. But just the numbers. Do the numbers sound
right to you?
Mr. Sparks. VaR, with respect to the mortgage business, had
some fundamental flaws, including not all the products were
included, especially many of the long positions. The firm
continually worked to improve that. I mentioned that we had
made mistakes in the past and one of those mistakes was we had
not invested enough with respect to this to have that
accurately reflect our risk.
Senator Levin. OK.
Mr. Sparks. As the market got more volatile, that number
moved up a lot. So when I said that was not the primary tool I
used with respect to managing the risk in the department, that
is accurate. That doesn't mean I didn't ignore it and that
doesn't mean that the firm----
Senator Levin. That doesn't mean you did ignore it?
Mr. Sparks. No, it doesn't mean that I didn't ignore the
VaR----
Senator Levin. Did not or did?
Mr. Sparks. I meant to say, I had to pay attention to the
VaR because it affected the firm's overall VaR, so we had two
issues to deal with: One, a flawed measurement that we had to
try and work with, and the second was, though, it was still a
very big number that was creating issues with respect to the
firm.
Senator Levin. Right, and the senior management was using
the VaR, is that correct?
Mr. Sparks. The senior management was using the VaR and the
senior--but the senior management understood my concerns that
that was not reflective of what our risk was.
Senator Levin. All right. In any event, using that
measurement which you were using, it started off in January
2007 somewhere around 20, and then your permanent limit was at
30, and that is what happened. That is what you were allowed to
do on the short. That reflects the short positions that you
took. That is how big a short position you folks took. You made
billions.
At the same time, in many cases, and we have laid out many
of them here, where you were taking short positions, you were
selling securities to your customers, taking short positions on
a number of those securities. We have laid out a number of
those today in this morning's hearing.
I think there is a clear conflict of interest when that
happens. There is a big conflict of interest question that has
to do with when you are betting big time against a whole
market. Should your clients and customers know that? That is
one issue. But for heaven's sake, it should be abundantly clear
that when you are selling securities to clients and customers,
that they should know that you are betting against those same
securities.
And what happened during that year is that you were making
a lot of money, in the billions, from your short positions
betting against the market and against securities that you were
selling to customers. That is, I think, intolerable. There is a
fundamental conflict of interest that needs to be addressed. We
obviously have to address it either by legislation or by
regulation, and unless Dr. Coburn has additional questions, I
will----
Senator Coburn. I just want to make one remark to temper
yours. Markets have to have people on both sides of them. My
concern is where is the ethical standard on when you expose
your position as a market maker and does there need to be some
refinement in that so that people can see, transparency and
trust and truth in a market.
Senator Levin. No, I agree totally with that, and with that
positive note, you will be excused and we will stand in recess
for 10 minutes.
[Recess.]
Senator Levin. We will now move to our second panel of
witnesses for today's hearing, David Viniar, an Executive Vice
President and Chief Financial Officer of Goldman Sachs, and
Craig Broderick, the Chief Risk Officer of Goldman Sachs. We
appreciate your being with us today.
Pursuant to the rules of this Subcommittee, which you are
familiar with, I believe, all witnesses who testify before us
are required to be sworn in. At this time, I would ask you both
to please stand and raise your right hands.
Do you swear that the testimony you are about to give to
this Subcommittee will be the truth, the whole truth, and
nothing but the truth, so help you, God?
Mr. Viniar. I do.
Mr. Broderick. I do.
Senator Levin. The timing system today will give you a red
light in about 5 minutes and a yellow light in about 4 minutes
so that you would have a chance to hopefully give us your oral
testimony in 5 minutes.
Mr. Viniar, we will have you go first, and then Mr.
Broderick, and then we will go to questions. Thank you again
for joining us. Mr. Viniar.
TESTIMONY OF DAVID A. VINIAR,\1\ EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER, THE GOLDMAN SACHS GROUP, INC., NEW
YORK, NEW YORK
Mr. Viniar. Chairman Levin, Ranking Member Coburn, and
Members of the Subcommittee, good afternoon. My name is David
Viniar. I have been Chief Financial Officer of Goldman Sachs
since 1999. I am responsible for risk management, financial
control and reporting, and financing our business, among other
duties. I appreciate the opportunity to appear before the
Subcommittee and I will comment here on our risk philosophy and
our approach to risk management.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Viniar appears in the Appendix on
page 216.
---------------------------------------------------------------------------
As a global investment bank and financial intermediary,
Goldman Sachs integrates advice and capital with its risk
management capabilities to serve a broad range of largely
institutional clients. In doing so, we often take on principal
risk to help clients achieve their objectives. For example, we
may facilitate block offerings, provide structured solutions,
or extend credit. We routinely evaluate, price, and distribute
risk across the spectrum according to the specific risk
appetites of our institutional clients.
We know that we will sometimes incur losses, but as a core
part of our business model, we proactively manage our risk to
minimize these losses. When we commit capital to buy or sell
financial instruments, extend credit, or invest alongside our
clients, we accumulate both long and short positions that give
rise to liquidity, credit, and market risks. We deploy a range
of risk management capabilities to price the risks of each
transaction appropriately, keep the firm's overall exposures
within risk limits, and establish offsetting positions, or sell
and buy positions, as necessary to control overall exposure.
Our approach is to understand the risks we are taking,
analyze and quantify them, and keep a firm grip on their
current market value. We carry virtually our entire inventory
of financial instruments at fair market value, with changes
reflected in our daily P&L. Such daily marking of our positions
was a key reason we decided to start reducing our mortgage risk
as market conditions were deteriorating at the end of 2006.
I would like to give you a sense for how we managed our
risk during the period leading up to the crisis. Through the
end of 2006, we were generally long in exposure to residential
mortgages and mortgage-related products. In that December,
however, we began to experience a pattern of daily losses in
our mortgage-related P&L. P&L can itself be a very valuable
risk metric and I personally read it every day.
I called a meeting to discuss the situation with the key
people involved in running the mortgage business. We went
through our positions and debated views on the mortgage market
in considerable detail. While we came to no definitive
conclusion about how the overall market would develop in the
future, we became collectively concerned about the higher
volatility and recent price declines in our subprime mortgage-
related positions.
As a result, we decided to attempt to reduce our exposure
to these positions. We wanted to get closer to home. We
proceeded to sell certain positions outright and hedge our long
positions in an attempt to achieve these results.
As always, the clients who bought our long positions or
other similar positions had a view that they were attractive
positions to purchase at the price they were offered. As with
our own views, their views sometimes proved to be correct and
sometimes incorrect.
We continued to reduce our positions in these products over
the course of 2007. We were generally successful in reducing
this exposure to the extent that, on occasion, our portfolio
traded short. When that happened, even if these short positions
were profitable, given the ongoing high volatility and
uncertainty in the market, we tended to attempt to then reduce
these short positions to again get closer to home.
This situation reversed itself in 2008, however, when the
portfolio tended to trade long, and as a result, despite the
fact that our franchise enabled the firm to be profitable
overall, we lost money on residential mortgage-related products
in that year. While the tremendous volatility in the mortgage
market caused periodic large losses on long positions and large
gains on offsetting short positions, the net of which could
have appeared to be a substantial gain or loss on any day, in
aggregate, these positions had a comparatively small effect on
our net revenues.
In 2007, total net revenues from residential mortgage-
related products, both longs and shorts together, were less
than $500 million, approximately 1 percent of Goldman Sachs's
overall net revenues. And in 2007 and 2008 combined, our net
revenues in this area were actually negative.
For Goldman Sachs, weathering the mortgage market meltdown
had nothing to do with prescience or betting on or against
anything. More mundanely, it had everything to do with
systematically marking our positions to market, paying
attention to what those marks were telling us, and maintaining
a disciplined approach to risk management.
Thank you, and I am happy to take your questions.
Senator Levin. Thank you very much. Mr. Broderick.
TESTIMONY OF CRAIG W. BRODERICK,\1\ CHIEF RISK OFFICER, THE
GOLDMAN SACHS GROUP, INC., NEW YORK, NEW YORK
Mr. Broderick. Thank you, Chairman Levin, Ranking Member
Coburn, and Members of the Subcommittee. Good afternoon. My
name is Craig Broderick. I have been the Chief Risk Officer of
Goldman Sachs since 2007 and prior to that was the Chief Credit
Officer. I am responsible in this capacity for credit, market,
operational risk, and insurance.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Broderick appears in the Appendix
on page 221.
---------------------------------------------------------------------------
In summarizing my written submissions, I will focus my
remarks on the firm's risk management framework to supplement
David Viniar's comments on the topic and look forward to
addressing your questions in more detail.
As noted by Mr. Viniar, the nature of our role as financial
intermediary requires a willingness to take risk on behalf of
our clients. We seek to do so only within very carefully
calibrated limits which are in line with our overall financial
resources. Our clients expect us to facilitate transactions for
them in all market conditions, and as such, the better that we
understand and can manage risk, the more willing we are to
transact with clients regardless of our views on markets.
Our risk management framework has a number of core
components. The central tenet is our daily discipline of
marking all the firm's financial assets and liabilities to
current market levels. We do so because we believe that it is
one of the most effective tools for assessing and managing
risk, providing the best insights into our positions and
associated exposures. Goldman Sachs, as Mr. Viniar noted, is
one of the few financial institutions in the world that carries
virtually all financial instruments held in its inventory at
current market value, with any changes reflected immediately in
our risk management systems.
The second core component is independence. Professionals in
our risk management and key control functions have complete
independence from their counterparts in the revenue generating
divisions. This uncompromised independence, which exists in
practice as well as in concept, gives teeth to the firm's risk
management approach.
The third is governance. The firm's governance structure
provides the protocol and responsibility for decision making
and implementation on risk management issues.
A fourth component is our use of risk systems. We have
developed and employed robust technology to track a variety of
risk metrics across all the firm's trading businesses.
And finally, our limit structure. The firm applies a
rigorous limits framework to control our risk across multiple
trades, products, businesses, and markets. These limits are
monitored on a daily basis and they serve to maintain and
promote constant dialogue between our traders and our risk
managers, as well as the escalation of risk-related matters.
Taken together, these core elements enable us to make
informed decisions on a real-time basis about the risks we are
taking and to rapidly attempt to make adjustments when
necessary.
We employ a variety of risk metrics and measures. In the
case of market risk, value at risk (VaR), and Credit Spread
Widening are frequently referenced. Both are highly useful, but
both suffer from limitations as, in fact, do all risk metrics,
which is why we apply multiple measures to assess the overall
risk in our portfolio. These limitations can show up especially
acutely during abnormal market conditions, such as
characterized the 2007 through 2008 period.
For example, VaR is highly dependent on market volatility
of the underlying trade or product, and during 2007, volatility
reached unprecedented levels in some products, in particular,
in subprime mortgages. This had the effect of increasing our
mortgage-related VaR by many multiples, despite the underlying
portfolios in many cases actually decreasing.
Between late 2006 and February 2007, daily VaR in the
Mortgage Department increased from $13 million to $85 million.
We estimate that much of this increase was the result of
increases in volatility, as our underlying positions in many
cases declined. Accordingly, an accurate assessment of the
level and direction of risk in our mortgage business was and is
a matter of expert judgment, with the ultimate validation
coming only after the fact when we could see how the actual
portfolio moved in response to market conditions.
While we were relatively successful in flattening our risk,
it involved a process of continual portfolio adjustments and
interpretations. For example, during much of 2007, our VaR
showed that our overall portfolio risk was increasing and
reflecting a short position, whereas our Credit Spread Widening
measures showed the opposite in terms of direction. During such
periods, it was ultimately the experience of our business and
risk management professionals and their appreciation for the
nuances of each of these measures that helped guide the firm in
assessing its exposures and maintaining risk within prudent
levels.
Particularly in light of events in the last 2 years, it is
clear that no approach to risk management was foolproof and we
have all learned valuable lessons from the recent experiences.
However, we do believe the core elements that make up our risk
management framework are broadly effective, despite the
unprecedented turmoil in the markets.
Thank you, and we look forward to answering any questions
you may have.
Senator Levin. Thank you very much, Mr. Broderick.
Mr. Viniar, Goldman Sachs issued a public statement,
Exhibit 161,\1\ this past weekend which said that ``Goldman
Sachs did not take a large directional `bet' against the U.S.
housing market, and the firm was not consistently or
significantly net `short the market' in residential mortgage
products in 2007 and 2008.'' Our investigation focused on 2007,
when the bubble burst, were you significantly net short in the
market in residential-related products in 2007?
---------------------------------------------------------------------------
\1\ See Exhibit No. 161, which appears in the Appendix on page 985.
---------------------------------------------------------------------------
Mr. Viniar. Mr. Chairman, I would answer that by saying,
across 2007, we were primarily, although not consistently
short, and it was not a large short.
Senator Levin. Was it a short that exceeded your permanent
VaR?
Mr. Viniar. Well, limit structures at Goldman Sachs are put
in place and occasionally we will bump up against them. In
2007, unfortunately, with the mortgage business, it was more
than occasionally. And as Mr. Broderick talked about in his
opening statement, the VaR increased quite dramatically early
in the year and then throughout the year, largely based on the
fact that the markets were so volatile that it was almost a
little bit like salmon swimming upstream. No matter how fast we
tried to reduce positions, the volatility increased at a faster
pace, and therefore the VaR kept going up.
Senator Levin. And did your short positions make a lot of
money in 2007?
Mr. Viniar. The short positions themselves made a lot of
money in 2007, but they offset long positions that lost a lot
of money in 2007.
Senator Levin. And those long positions had come to a
significant degree from the inventory, is that correct?
Mr. Viniar. Some of them had come from the inventory we had
coming into the year. Over the course of the year, in our role
as market maker, we also bought more positions.
Senator Levin. Right. But do you know what percentage of
those positions came from the inventory which were at least a
year old?
Mr. Viniar. I do not.
Senator Levin. According to the figures which we got, net
profits from shorts, $3.7 billion. Net losses from longs,
including the inventory pieces, which had been there for some
time, were $2.9 billion. So you would agree that you were in a
net short position for most of the year? Would you agree to
that?
Mr. Viniar. Yes.
Senator Levin. And would you not agree that it was a
significant position, those short positions, since they were
way above your VaR?
Mr. Viniar. I would not agree that it was a significant net
short position----
Senator Levin. No. Was it a significant short position?
Mr. Viniar. Yes, it was a significant short position, but
it offset a significant long position.
Senator Levin. Yes. So you were significantly positioned in
shorts during 2007, is that accurate?
Mr. Viniar. Not net----
Senator Levin. I didn't say net. I said, your short
position in 2007 was significant and consistent. Is that true?
Mr. Viniar. We had large short positions, but they offset
large long positions.
Senator Levin. I understand that. I am not asking you now
about the net. I am asking you about your short positions. You
had a significant short position, significant and consistently
in 2007, is that true?
Mr. Viniar. In the mortgage market?
Senator Levin. Yes.
Mr. Viniar. Just on that side?
Senator Levin. Yes.
Mr. Viniar. Yes.
Senator Levin. Your public statements from the firm, I have
got to tell you, give a totally different impression. That is
my statement----
Mr. Viniar. Can I----
Senator Levin [continuing]. Because you parse words. You
talk about net. Obviously, you lost money from your long
positions, much of which came out of the inventory. But you
also then add 2008 to give yourself a hedge. You guys are good
at hedging, but your words, when you tell the public that you
did not significantly net short the market in residential
mortgage-related products in 2007 and 2008 is misleading,
because you had a significant short position in residential
mortgage-related positions in 2007. That is a fact, which I
think you will agree to.
Mr. Viniar. But I don't believe our words are misleading
because we only had that significant net short because we had a
significant net long. If we had not had the significant net
long, we would not--significant long, we would not have had a
significant short.
Senator Levin. Didn't you make a decision in December 2006
to basically head in a different direction? You were much too
long and you wanted to go short. Is that not true?
Mr. Viniar. No. In December 2006, we made a decision to
reduce risk.
Senator Levin. All right.
Mr. Viniar. That decision was not directional. It did not
say that we should go long or go short.
Senator Levin. All right.
Mr. Viniar. It didn't say we shouldn't, and it didn't say
we should take no risk. But it said that we should reduce risk.
Senator Levin. Now, on October 4, 2007, Exhibit 46,\1\ you
wrote the SEC. Page 3, at the bottom. You say that ``[I]t is
important to note that we are active traders of mortgage
securities and loans and, as with any of the financial
instruments we trade, at any point in time, we may choose to
take a directional view of the market and will express that
view through the use of mortgage securities, loans, and
derivatives.''--We may choose to take a directional view of the
market.--``Therefore although we did have a long balance sheet
exposure''--long balance sheet exposure--``to sub-prime
securities in the past three years, albeit small exposure, our
net risk position was variously either long or short depending
on our changing view of the market.'' You had a changing view
of the market.
---------------------------------------------------------------------------
\1\ See Exhibit No. 46, which appears in the Appendix on page 361.
---------------------------------------------------------------------------
``For example,'' now this is the example of choosing to
take a directional view of the market, ``during most of 2007,
we maintained a net short sub-prime position and therefore
stood to benefit from declining prices in the mortgage
market.'' Was that true when you said it?
Mr. Viniar. Absolutely, and totally consistent with what I
said to you before.
Senator Levin. All right.
Mr. Viniar. We were largely short across 2007----
Senator Levin. Fine----
Mr. Viniar [continuing]. Not consistently, and not large.
Senator Levin. You were consistently short. As a matter of
fact, you were very short. But you were consistently short in
2007. I mean, look at your own numbers. Look at your own chart,
Exhibit 56.\2\ Look at your own chart.
---------------------------------------------------------------------------
\2\ See Exhibit No. 56, which appears in the Appendix on page 455.
---------------------------------------------------------------------------
Mr. Broderick. Is that the VaR chart that you were
referencing earlier, Mr. Chairman?
Senator Levin. Your own VaR chart, not the one we took--you
are looking right at it.
Mr. Viniar. Exhibit 56.
Senator Levin. Yes. Do you see that dark line there? What
is the number you are looking at?
Mr. Viniar. Exhibit 56.
Senator Levin. OK. Do you see that bottom line? That is
adding up a bunch of lines. Do you see that, that dark red line
there?
Mr. Viniar. Yes, sir.
Senator Levin. OK. And that is the total, that is the net
of the various positions. It is way below the line. Do you see
that line in the middle there that looks like a railroad track?
Mr. Viniar. I do.
Senator Levin. That total is consistently below zero, home,
throughout the whole year. Is that true?
Mr. Viniar. It is, but I believe this is the SPG desk only.
Senator Levin. That is the SPG desk. But is it any
different from mortgages?
Mr. Viniar. Sure. It is only part of the Mortgage
Department. And again, this was offsetting many of the other
longs that we had.
Senator Levin. We are talking here--this is net short.
Mr. Viniar. But this is only one department within the
Mortgage Department. This is only one business----
Senator Levin. This is net short. This is all synthetics
across the Mortgage Department, is that correct?
Mr. Viniar. I am looking at----
Senator Levin. Take a look at your own chart.
Mr. Viniar. I know, but I don't know----
Senator Levin. RMBS----
Mr. Viniar. I am just reading it----
Senator Levin [continuing]. Subprime notional history. Do
you see that?
Mr. Viniar. This says, mortgage New York City SPG
portfolio, so I don't know if there are others, but I believe
this is just the SPG portfolio.
Senator Levin. All right. Take a look at Exhibit 56b.\1\
``The attached spreadsheet covers the single name and ABX
positions of the entire Mortgage Department for the fiscal year
2007.''
---------------------------------------------------------------------------
\1\ See Exhibit No. 56b, which appears in the Appendix on page 456.
---------------------------------------------------------------------------
Mr. Viniar. OK.
Senator Levin. And it says, ``Understood. . . . the
portfolio name is confusing. SPG portfolio in fact covers the
entire mortgage department synthetic positions.'' OK?
Mr. Viniar. I see that. Yes.
Senator Levin. Have you got it? That shows you----
Mr. Viniar. But again, this is only the synthetic
positions. It does not include the cash long positions that we
had----
Senator Levin. It does not include any long positions.
Mr. Viniar. Correct. That was significant, and this
offset----
Senator Levin. But this, at least for that big chunk, the
synthetics, showed you net short, is that correct, all year
long?
Mr. Viniar. In synthetics.
Senator Levin. Yes.
Mr. Viniar. Yes.
Senator Levin. OK. And overall, were you short most of the
year, which is what you told the SEC, I believe, did you not?
Mr. Viniar. Yes, and it is consistent with what I told you.
Overall, across the year, our portfolio was short----
Senator Levin. And did you----
Mr. Viniar [continuing]. And that is why we were
profitable. But it just was not very large.
Senator Levin. Well, large is in the eyes of the beholder.
Mr. Viniar. Correct.
Senator Levin. Billions seem large to a lot of folks who
have lost their homes.
Take a look, if you would, at Exhibit 22.\1\ This is a
presentation to the Board of Directors, March 26, 2007. OK?
Have you got it?
---------------------------------------------------------------------------
\1\ See Exhibit No. 22, which appears in the Appendix on page 276.
---------------------------------------------------------------------------
Mr. Viniar. I do.
Senator Levin. OK. Take a look at the ``Time Line of Major
Events.'' If you look at the subprime sector----
Mr. Viniar. Are you on page 4, sir?
Senator Levin. Page 8.
Mr. Viniar. I am sorry. Got it.
Senator Levin. The first and second quarter of 2006, the
long position grows. So you are going long in 2006. Third and
fourth quarter, you scale back purchase of loans. You reduce
your CDO activity. ``First quarter, Goldman Sachs reverses''--
reverses, sounds directional to me--``long market position
through purchases of single name CDSs and reductions of ABX.''
Right? Am I reading that correctly?
Mr. Viniar. Yes, sir.
Senator Levin. That you reversed your long market position?
Mr. Viniar. Yes, sir.
Senator Levin. All right. That is what you told the Board.
Mr. Viniar. Correct.
Senator Levin. Then, keep reading there, you ``effectively
halt new purchases of sub-prime loan pools through conservative
bids.'' In other words, you made bids that were so low that you
weren't going to be able to buy them. Your warehouse lending
business reduced. That is now the direction that you took,
according to what you told the Board. You reversed your long
market position, pretty directional.
Mr. Viniar. I would say, sir, all consistent with what I
said, meant to reduce our risk and----
Senator Levin. I know you are going to talk about reducing
risk. You made billions of dollars going short, not net. You
made billions of dollars going short, so you can talk about
that as reducing risk. I talk about that as making a jell of a
lot of money. But you can characterize it the way you want.
Mr. Viniar. But we only had the short because we had the
long. If we didn't have the long, we never would have put on
the short.
Senator Levin. You blew right by zero.
Mr. Viniar. Not materially so.
Senator Levin. Materially.
Mr. Viniar. If you look across----
Senator Levin. Billions.
Mr. Viniar. If you look across all of--just 2007, leaving
2008 aside, residential mortgages, the net revenues were less
than $500 million.
Senator Levin. So you were able to overcome the long losses
and still make a half-a-billion dollars, is that correct?
Mr. Viniar. That is correct.
Senator Levin. All right. Now, did you hear what Mr.
Birnbaum said about what happened in December 2006? Were you
here when he testified?
Mr. Viniar. I listened to it, but I am not sure what you
are referring to.
Senator Levin. OK. [Exhibit 55c].\1\ ``[P]revailing opinion
within the department was that we should just `get close to
home' and pare down our long.'' That is your argument about
reducing risk as the motivator. Then he lays out here in his
own words why he thought that you should go way beyond that,
and here is what he said. ``I concluded that we should not only
get flat,'' get your risk down to home, get it to zero, ``but
get VERY short.'' He then began sharing that idea with a whole
lot of folks, and then he said, ``[W]e all agreed the plan made
sense.'' The plan he is talking about is to go, as he puts it,
``VERY short,'' not just flat, but ``VERY short.''
---------------------------------------------------------------------------
\1\ See Exhibit No. 55c, which appears in the Appendix on page 447.
---------------------------------------------------------------------------
``[W]e implemented the plan by hitting on almost every
single named CDO protection and buying opportunity in a 2-month
period. Much of the plan began working by February as the
market dropped 25 points and our very profitable year was
underway.'' Do you disagree that plan was to go very short?
Mr. Viniar. That might have been his plan, but that was not
the firm's plan.
Senator Levin. Well, but he also said that the plan was
accepted, did he not?
Mr. Viniar. That might have been his plan within the SPG
desk. I actually don't know, other than what I have read,
because I would look at the firm overall and the firm overall
had what I would call, with hindsight, a small net short.
Senator Levin. An amazing performance with a market that
went under in mortgages. You were able, because of a huge short
position that you took, to overcome what was a previously long
position, is that correct?
Mr. Viniar. We were able to get it very close--as close to
flat as we could.
Senator Levin. And as a matter of fact--well, these shorts
were way above flat. The only way you got to that kind of a
profit was by going way above flat. Look, this is his own
words. It says that the plan was accepted.
Mr. Viniar. That was his plan----
Senator Levin. I understand----
Mr. Viniar [continuing]. On the SPG desk----
Senator Levin. You were just unaware that the department
was doing that.
Mr. Viniar. I would not have looked at what one part of the
mortgage business. I would have looked at what the mortgage
business overall was doing.
Senator Levin. OK. And it was profitable, despite the
mortgage business going south?
Mr. Viniar. It was. As I said----
Senator Levin. You guys were profitable, and you were
profitable because you had invested heavily in shorts.
And let me just read something else that he said. He said
that he was ``able to identify key market dislocations that led
to tremendous profits.'' And you are just saying, that was in
his department.
Mr. Viniar. I think he was just referring to his
department, not to the firm or the Mortgage Department overall.
Senator Levin. In terms of direction, here is what you told
your Board of Directors in September 2007. You said that----
Mr. Viniar. Sir, can you point me to where you are reading
so I can read with you?
Senator Levin. Yes. Exhibit 41.\1\
---------------------------------------------------------------------------
\1\ See Exhibit No. 41, which appears in the Appendix on page 327.
---------------------------------------------------------------------------
Mr. Viniar. Thank you. I think I see it.
Senator Levin. ``[B]usiness has taken proactive steps to
position the firm strategically in the ensuing mortgage credit
and liquidity crisis,'' and this is all the things you did.
Mr. Viniar. Can you just give me a page, please?
Senator Levin. Yes, page 4.
Mr. Viniar. Thank you. OK. I have it.
Senator Levin. You ``shorted synthetics.'' You ``reduced
loan and security purchases.'' You ``shorted CDOs and RMBS.''
You ``increased long correlation position,'' which is also a
shorting operation. And you ``reduced the long inventory.''
That is what you did in quarter two and quarter three of 2007.
That was a strategic positioning for the firm, is that correct?
Mr. Viniar. Yes.
Senator Levin. Am I reading that correct?
Mr. Viniar. You are.
Senator Levin. And if you look at page 5, the year to date,
this is the mortgage business, you are still losing money on
your longs, much of which came from your earlier inventory. You
made a little money on real estate loans. You made money on
non-mortgage asset backed securities. And then look at your
structured products trading, $955 million. So altogether, your
gross revenue is a billion dollars, and that billion dollars
was because you made $955 million, is that not correct,
basically in your structured products trading. Is that fair?
Mr. Viniar. Completely accurate.
Senator Levin. OK. And this was a strategic decision which
you told the Board about----
Mr. Viniar. Correct.
Senator Levin [continuing]. In March, and you also then
told the SEC.
Mr. Viniar. Again, what I have told you consistently, and I
will not--I won't deny, we were short over most of 2007. On a
net basis, it was not that large, which is why about 1 percent
of the firm's revenue came from residential mortgages.
Senator Levin. Goldman did have, then, a big short, is that
correct?
Mr. Viniar. Offsetting a big long, yes, sir.
Senator Levin. And what was the amount of the short, do you
know?
Mr. Viniar. It is very hard to give a number.
Senator Levin. About. Was it over $3 billion?
Mr. Viniar. I wouldn't even know how to quantify it,
because we had so many different securities----
Senator Levin. Have you tried to quantify it?
Mr. Viniar. No, I have not.
Senator Levin. You won't estimate that it was even over $3
billion, which that one department produced?
Mr. Viniar. Are you talking about revenues?
Senator Levin. Yes. Short revenues.
Mr. Viniar. Yes. The short revenues, and I would have to
find the page, but I know the page you were looking at before,
the revenues from the short were over $3 billion.
Senator Levin. All right.
Mr. Viniar. And they offset revenue losses----
Senator Levin. I know.
Mr. Viniar [continuing]. From long that were nearly as big.
Senator Levin. But it was the big short which kept you in
the black that year, wasn't it?
Mr. Viniar. It was the big short offsetting the big long
which helped very much us get through that crisis.
Senator Levin. Well, if it weren't for the big short, you
would have been deeply in the red that year, wouldn't you?
Mr. Viniar. If we had not sold any of the long positions,
yes, that would have been true.
Senator Levin. Yes.
Mr. Viniar. That is why we put it on, to try to offset the
long positions.
Senator Levin. Your Exhibit 26,\1\ where you said the big
short position of yours, in your own words--this is your
words--``Tells you what might be happening to people who don't
have the big short.'' Is that right? Did you say that?
---------------------------------------------------------------------------
\1\ See Exhibit No. 26, which appears in the Appendix on page 306.
---------------------------------------------------------------------------
Mr. Viniar. Those--that is my email.
Senator Levin. And did you mean that?
Mr. Viniar. I meant what I meant, and this is a little bit
of a response to a question I heard Dr. Coburn ask before about
why we always tell people to be careful with emails, because I
didn't give the full thought, which is it tells you what might
happen to people who have the big short--who don't have the big
short when they do have a big long.
Senator Levin. Right.
Mr. Viniar. This came, I believe, shortly after people had
announced their second quarter results. Quite a number of
people had disclosed how big their long inventory positions
were, and without basically balancing those positions, there
would be significant losses, which is what proved to happen
across the industry.
Senator Levin. All right. So the big short saved your rear
end?
Mr. Viniar. The offsetting----
Senator Levin. As we put it in the vernacular, the big
short allowed you to have a year in the black, is that----
Mr. Viniar. What I would say is the----
Senator Levin. We know what you would say, but without that
big short, you would not have been in the black that year. You
would be with a whole bunch of other firms that did not go
short the way you did, is that accurate?
Mr. Viniar. Without managing our risk appropriately to
largely reduce our risk in the mortgage business, we would
certainly have had lower revenues than we had.
Senator Levin. Was your risk bias to be short?
Mr. Viniar. Yes, it was.
Senator Levin. My time is up. Dr. Coburn.
Senator Coburn. Just to be clear, I have a little
difference with the Chairman on the idea of shorts. What would
happen to the financial markets if there was not the ability to
go short against a long position?
Mr. Viniar. I think there would be significantly less
credit in the market because people would not want to take
exposures to various companies, be it in mortgages, be it in
credit products, be it in equities. People would have no
ability to manage their risk, and so I think rather than
reducing risk through offsetting longs with shorts, you just
wouldn't have the longs, and so there would be much less credit
provided.
Senator Coburn. And if a shareholder looked at Goldman and
said, you all had the ability to go short, you had the research
that said you should go short, and that you didn't go short,
could they hold you liable? In other words, could somebody have
a basis for a suit against Goldman if you, through your
research and through managing your risk, you passed up an
opportunity to improve the shareholder value of Goldman?
Mr. Viniar. I think it is, from a risk management point of
view, we actually don't tell desks ever to go short or go long,
but I think our shareholders could be quite disappointed in us
if we didn't use the right tools to manage our risk
appropriately, and when we thought our risk was too big, to not
reduce that risk, either by selling it outright or by putting
on offsetting short positions.
Senator Coburn. Senator Levin asked you a question I was
going to go to and you answered, yes, that you had risk bias
that was short during 2007. Explain to the Subcommittee, if you
would, the difference between your--and I am talking Goldman's
definition of market making and proprietary trading, because
that is what the SEC suit is about. That is what a lot of our
inquiries are about. It is not about going short. Short is a
legitimate market function.
Mr. Viniar. Right.
Senator Coburn. But explain to us the difference between
those two as you see it and as you lead this firm.
Mr. Viniar. OK. Let me try----
Senator Coburn. OK.
Mr. Viniar [continuing]. And it is a little bit
complicated, so stop me if you want me to go in a different
direction. But market making is what the great majority of what
we do in our trading business is. That is, we buy things from
or sell things to our customers. In doing that, we will
accumulate inventories, long inventory and short inventory, and
we might have a bias of what we keep and how long we keep it,
which might tend to make us longer or shorter at any time. But
most of those transactions start and end with our clients.
Now, it might be hard to track that inventory, so we might
buy something from someone and then distribute part of it, but
then buy something else that offsets it and buy something else
that goes into the book, and a year later, we might still have
it. And so someone might argue and say--you still have it a
year later or 6 months later, so it sounds like proprietary
trading, but it is not. It starts with a customer.
I distinguish that from what I would call a purely walled-
off proprietary business that generally has research coverage
from other Wall Street firms and really does not deal with
customers, but just goes long things, short things, offsetting
positions, sometimes capital structure, purely for the account
of the firm, without dealing with our clients.
Senator Coburn. And that is where Mr. Birnbaum worked. He
worked in strictly proprietary trading?
Mr. Viniar. No. He worked more in a market-making
business----
Senator Coburn. That is right----
Mr. Viniar. He was buying and selling things.
Senator Coburn. That is exactly the question that I was
asking him. Did you hear his testimony?
Mr. Viniar. I heard most of it.
Senator Coburn. Does it concern you at all that his
position is that, in his own self-evaluation, which Senator
Levin referred to, that he was taking positions and touting
himself that he was utilizing the strengths of their analysis
to take positions to enhance your return on equity?
Mr. Viniar. It is a little hard for me to comment on what
he meant in his self-evaluation, but what I would view his role
as is market making. So he would be buying and selling things.
But he then did have discretion within the overall limits of
the firm, again, of what he kept, how long he kept it, would he
buy more than he sold, would he tend to keep the long risk and
sell the short risk or vice-versa. So it was within a market
making context, but he had a limit as to--we had an overall
firm limit as to where we would go.
Senator Coburn. Well, let me ask you this, if you would.
Does it make sense to you somebody would tout a philosophy that
says, I am going to take advantage of the knowledge that we as
a firm have and make more money for the firm, yet ignore the
information in terms of the Mortgage Department, what they were
seeing and how you were changing positions? Is that believable
to you?
Mr. Viniar. I don't know what Mr. Birnbaum did know, didn't
know, or why he said what he said.
Senator Coburn. OK. All right. In what year did you all
receive your payment from AIG? What fiscal year? The settlement
on AIG, when we bailed them out. What fiscal year did you
receive----
Mr. Viniar. Are you talking about the Maiden Lane
transaction? I believe that was 2008.
Senator Coburn. And that was $11 billion?
Mr. Viniar. Well, there are several. I am just not sure
which one you are talking about.
Senator Coburn. Well, in total, though, you are saying it
is fiscal year 2008, you received $11 billion----
Mr. Viniar. The number that is, if this is what you are
referring to----
Senator Coburn. You give me the number. I don't care what--
--
Mr. Viniar. Generally talked about is $12.9 billion----
Senator Coburn. OK.
Mr. Viniar [continuing]. The number that he talked about
in----
Senator Coburn. OK, $12.9 billion. I was trained as an
accountant first, before I ever went to medical school, so you
will have to pardon it.
Mr. Viniar. Me, too.
Senator Coburn. All right. That $12.9 billion really
represents revenue from 2006, doesn't it, and 2007? In other
words, when did AIG go belly-up?
Mr. Viniar. Can I describe to you the pieces of the $12.9
billion?
Senator Coburn. Well, you can, and I will give you that
time, but what I am trying to get to is an accurate
representation of what the positions that you bought, the
insurance that you bought--that is really what AIG sold you,
correct?
Mr. Viniar. That was some of that $12.9 billion----
Senator Coburn. Yes.
Mr. Viniar [continuing]. But not all of it.
Senator Coburn. OK. Well, whatever portion it was, in the
year that it should have been paid, it wasn't. It was paid
later. So that would have enhanced your revenues by a certain
number of billions of dollars, is that correct?
Mr. Viniar. No.
Senator Coburn. You didn't recognize that payoff of those
insurance products to you as revenue when you got it from AIG?
Mr. Viniar. No, we did not, because that position is marked
to market. They were just basically paying us the money they
owed us. But because we mark all of our positions to market,
that revenue had come in already, and just so you know, those
positions, again, were largely offsetting positions we had sold
on the other side.
Senator Coburn. Well, I am not disputing. I have no problem
with shorting. I have no problem with buying insurance, or
buying puts, or selling calls. I have no problem with that.
What I am trying to do is match revenues with expenses, and the
point is this was an insurance product that you had marked down
the real product, and when you got paid, you had to show that
as either an offset to that revenue loss in what you were
buying insurance for or you were showing income.
Mr. Viniar. There was very little revenue upon the payment
because all of that had gone through our books already, all of
the markdowns and markups on both sides.
Senator Coburn. That is right.
Mr. Viniar. There was very little----
Senator Coburn. Well, but if it wasn't collectable and AIG
was bankrupt, there had to be a period in time when you had a
material impact on your business that you had to give notice
of, isn't that correct?
Mr. Viniar. We had collateral for almost all of what they
owed us, and what we didn't have collateral for, we had bought
CDS protection for. So although it obviously would have been a
very bad thing for the financial markets, for our direct
exposure to AIG at the time, we had either collateral or CDS
protection, which again was collateralized, for virtually the
entire exposure we had.
Senator Coburn. So you double-insured, basically?
Mr. Viniar. Yes, we did.
Senator Coburn. OK. And I told you I would give you an
opportunity to explain the $12.9 brillion.
Mr. Viniar. If you want me to.
Senator Coburn. Yes, I do.
Mr. Viniar. There were three pieces to the $12.9 billion.
The first and simplest to understand is what is called
securities lending. Basically, they had a portfolio of highly
liquid treasuries and agencies that we had financed. So they
had, I believe, the number was $4.8 billion of our cash and we
had $4.8 billion of their treasuries and agencies. They gave us
the $4.8 billion of cash, but we gave them back the $4.8
billion of securities. So if they had not, we would have just
sold them into the market because they were highly liquid, as I
said, mostly treasuries and agencies.
There was $2.5 billion which was over the course of from
mid-September, when the government put the money into AIG,
until December, additional collateral that they owed us as
markets continued to decline. So that was not a one-time
payment. That came in over time.
And the last roughly $5.6 billion was in settlement of
Maiden Lane, and those were where they wanted to basically tear
up the cash transactions. So they gave us $5.6 billion. We took
most of that. We added to that the collateral they had already
given us, took most of it, gave it to the counterparty on the
other side, who added to it the collateral we had given them.
They gave us back the bonds and we gave the bonds back to AIG.
Senator Coburn. Exhibit 5,\1\ if you would turn to that,
please, this is an email from Mr. Birnbaum to Mr. Lehman.
---------------------------------------------------------------------------
\1\ See Exhibit No. 5, which appears in the Appendix on page 253.
---------------------------------------------------------------------------
Mr. Viniar. Got it.
Senator Coburn. In this email, the implication is that Mr.
Birnbaum felt that we should keep these positions for
ourselves. Do you have any heartburn with the fact that when
those kind of statements are said, that it undercuts your
position on proprietary trading and mortgage-related assets?
Mr. Viniar. Honestly, I don't know what he was referring to
here. This is the first time I am seeing this.
Senator Coburn. Well, let me describe a scenario for you,
and we will make it a matter of fiction rather than fact.
Mr. Viniar. OK.
Senator Coburn. I work for you and I see a good deal, and
rather than sell it to our loyal customers, I am going to keep
it for us.
Mr. Viniar. As a market maker, his responsibility is to buy
and sell things, buy things from customers, sell things to
them. As I said, that doesn't mean we won't keep things for
some period of time and then sell them out, but largely what we
want to do is distribute risk. We keep track of things. We will
call aged item inventory to make sure we don't keep it too
long. So if he kept it for some period of time, would it
trouble me? Not necessarily. If he kept it for a very long
period of time, would it trouble me? Yes, it would, because our
job is to make markets, not to hold onto the inventory.
Senator Coburn. Your job also is to keep customers, isn't
it?
Mr. Viniar. Correct.
Senator Coburn. And if you don't have customers with which
to make markets for, you are not going to do that----
Mr. Viniar. That is correct.
Senator Coburn [continuing]. And that is why I was going
that direction on that.
Mr. Viniar. That is correct.
Senator Coburn. You heard the testimony of Mr. Sparks and
other managers that urged the sales force to sell Goldman's
long positions, and it comes back to the question I raised in
my opening statement, about the ethics of what we are doing
here. Were they selling those long positions for the benefit of
the customer or for the benefit of Goldman? In other words, you
had a position. Your plan was to get back to zero.
Mr. Viniar. As close as possible.
Senator Coburn. Yes, as close as you could, and that is
prudent. How do you control that from an ethical and character
standpoint? How do you define the line for the people that are
selling these products for you, whether it is your inventory or
something you want to lessen? How do you weight off the
balance, the benefit for Goldman versus the detriment for who
is buying it?
Mr. Viniar. Really, in a way, the way you do that is
through pricing, and so we may or may not like the security.
Someone else might like it more, and they certainly might like
it at a certain price. And so it is not a view of good or bad.
It is really a view of, do you think the buyer, do they think
that it will go up----
Senator Coburn. What is the value and what do I think the
chance----
Mr. Viniar. What is the value? And then if we have bought
something and we still have it and we want to sell it and we
just think our risk is too big, we might have to cut the price
and sell it at 80 cents on the dollar and the other purchaser
may not think it is a great security, but they may think it is
worth more than 80 cents. They may think it is worth 83 cents,
which is still not 100 percent, but it is a price at which they
want to buy it.
Senator Coburn. Could you answer this question for me, and
maybe you can't, but I would like for you to try because it
concerns a lot of us. How is it that Goldman got 100 percent
payback on this collateral dispute with AIG?
Mr. Viniar. All I can say is it was what they owed us.
Senator Coburn. Well, but typically--we didn't pay off the
bond holders at GM. So how is it that Goldman got 100 percent
back of what was owed from AIG when everybody else didn't?
Mr. Viniar. I think everybody did from AIG.
Senator Coburn. Well, how is it that you all negotiated
that?
Mr. Viniar. I believe on the Maiden Lane transaction, we
were sent the term sheet, which had the transaction that AIG
wanted to do, which was to basically unwind those transactions
at par, and we agreed to do that.
Senator Coburn. So there wasn't a negotiation between the
Treasury and Goldman on the AIG collateral?
Mr. Viniar. There was not.
Senator Coburn. OK. So they made an offer and you accepted
it?
Mr. Viniar. Correct.
Senator Coburn. All right. Thank you. I am through, Mr.
Chairman.
Senator Levin. Senator Kaufman.
Senator Kaufman. Thank you, Mr. Chairman.
Mr. Viniar, let me just ask you a philosophical question. I
am sitting here looking at the segment operating results and I
see that in 2009----
Mr. Viniar. Senator, can you tell me where you are looking
so I can look with you?
Senator Kaufman. I don't think you need it. Because it is
not----
Mr. Viniar. Sure.
Senator Kaufman. I am not going to get into the details. I
am just asking the questions. I mean, does it concern you? I
mean, here is Goldman Sachs, known to be a great investment
banker, the greatest, and I look at November 2007, November
2008, December 2008, and I see earnings of about $2 billion
each one of those years. I look down at the trading and
principal investments, and $13 billion in earning in 2007. You
lost $3 billion in 2008. And you have made $17 billion in 2009.
Does it concern you that more and more of your business is over
in trading and less and less is in investment banking?
Mr. Viniar. No, I wouldn't say it concerns me. I would say,
first of all, the segment revenues don't reflect the value of
our investment banking business because----
Senator Kaufman. Can you explain that?
Mr. Viniar. Sure. Our trading and principal investing
business is very much of a customer facing business. Part of
that, we do with our customers based on a relationship which
has developed over many years of giving them advice, and just
because a transaction's revenues end up from a trade of some
kind, you are making a market, doesn't mean that a good part of
that value isn't from the investment banking relationship we
have had for a number of years. So I think it understates their
value.
The second thing I would say is the trading or principal
investing business, while it is growing, is growing largely
because of the strength of our customer franchise, the same
type of customer relationships----
Senator Kaufman. No, I understand that part. I have got it.
But let me put it this way. Should it concern the people on
this side of the dais that one of the major engines that has
driven this country for so many years is the investment
banking, the ability to have IPOs, the ability to fund major
corporate enterprises, and the fact that now one of, if not the
biggest investment banker in America is now making money
trading as opposed to doing investment banking?
Mr. Viniar. I don't think it should concern you, because
again, it is based on, largely on making markets for our
clients and helping the capital markets operate, and I think
that is actually a good thing for the growth of the country.
Senator Kaufman. To follow up on Chairman Levin's question,
if you wanted to hedge your long positions, why didn't you just
sell the securities and cancel or sell the CDs?
Mr. Viniar. That is a very good question, and in some cases
we did, and the best way to hedge your risk is always to sell
the position outright.
Senator Kaufman. I mean, that seems to me--I agree with
Senator Coburn. Selling short is good and all the other things,
and I have done it, but what people do to hedge risk is you
reach a point where you decide that your long position is
risky----
Mr. Viniar. Right.
Senator Kaufman [continuing]. And, as someone once said,
smarter than me, the hardest thing is not the decision to buy,
it is the decision to sell.
Mr. Viniar. No question.
Senator Kaufman. So most people--you get into a risky
position, you have a risk meeting, you say, I am in--I mean,
all of us do this in our own personal investing. You say, I
have got invested in Stock A, B, and C. I don't like the new
earnings on it. I sell it.
Mr. Viniar. And it is a risk-reward judgment question at
the time. You look at what price you could sell that position.
You make an assessment of that versus what it would cost you to
put on an offsetting position, and understanding that putting
on an offsetting position is never an exact hedge.
Senator Kaufman. Right.
Mr. Viniar. And you do have additional risk.
Senator Kaufman. Right.
Mr. Viniar. And you make the assessment of--is the price
where you would have to sell that security versus the price you
pay to put on the offsetting? If it is a lower price, is it
enough lower that it is still worth it or not. And you make
that judgment at the time. And markets at the time, if you
remember, for the securities that were long, were quite
illiquid, and so we made judgments that in some cases we did
sell, and I think you see that over the year, we did sell some.
But in some cases, we thought it was more prudent to put it on
offsetting positions.
Senator Kaufman. Right. But illiquid really, in this case,
means you didn't like the prices that things were being sold
for. It is not that you couldn't go into a market. I mean,
illiquid to me means I go into the market and nobody is--like
happened on certain days, bad dice, in our history, we just
couldn't sell it at any price. You are basically saying, I
didn't want to sell it because the price was so low----
Mr. Viniar. Correct.
Senator Kaufman. Right.
Mr. Viniar. Correct, which means----
Senator Kaufman. And I have got that. I am just trying to
figure out, but you mark to market, right?
Mr. Viniar. Correct. So we would have marked it down, but
again, that is just an assessment which sometimes proves to be
right and sometimes proves to be wrong, of what the value of
holding that security would be----
Senator Kaufman. Right.
Mr. Viniar [continuing]. In the future, where we think it
was going to go, versus what the price would be of buying an
offsetting security.
Senator Kaufman. But you can understand why some people
would be concerned. At the same time that a number of people in
your business, in Goldman Sachs, were saying, this market is
going south, which I think was--I happen to be one of those not
Monday morning quarterbacking, but just at the time, the way I
felt, and I am not--but just looking at where the housing
market was in terms of where it had been historically, looking
at the rental market and seeing the rental market wasn't
growing, classic sign of a bubble, that--so there was
incentive, kind of. I know you keep--there is an incentive here
to go short. I mean, based on--especially, you get to 2007.
Let me put it this way. I personally have a hard time
believing that folks as smart as you guys didn't see the
housing market was having a bubble and that the idea of going
short was a good decision based on prudent managers looking at
a market that was clearly falling apart.
Mr. Viniar. What I would say, again, as I have said
repeatedly, is over the course of 2007, we were, for the most
part, somewhat short----
Senator Kaufman. Yes.
Mr. Viniar [continuing]. And that was a decision. We wanted
to be more on the short side than the long side.
Senator Kaufman. Right.
Mr. Viniar. But it was not large, and we didn't know where
the market was going----
Senator Kaufman. No one ever knows where the market is
going. I am just saying, at that particular point in time----
Mr. Viniar. The other thing to remember back to 2007, it is
hard to remember back then, but there was a very strong point
of view, which didn't turn out to be correct, but it was very
strong, that the decline was isolated to the subprime mortgage
market. Again, that turned out not to be correct and different
people had different views, but that was a fairly commonly held
view through much of 2007, that the decline was just subprime
mortgages. The rest of the mortgage market actually had not
declined very much. It did later in the year. And if you
remember, the equity markets actually peaked in October 2007.
Senator Kaufman. Yes. No, I agree with that.
Mr. Viniar. For most of that year, there was a lot of
bullishness still in the market----
Senator Kaufman. Right.
Mr. Viniar [continuing]. Other than the subprime mortgage
market.
Senator Kaufman. Right. But you could have sold the long,
dealt with it that way, without going short. And the reason I
think we all keep coming back to this is because it really is
hard for me to see--I mean, there is a clear conflict of
interest, right, when you have a client out there in a position
that you put him in and you are at the same time selling that
position short. I am not saying it is bad. I am just saying it
is a conflict of interest, isn't it?
Mr. Viniar. Not necessarily.
Senator Kaufman. No, I am not saying necessarily. I am just
saying, in general, if you are selling a client something long,
you are saying to the client--it is still time to buy RMBSs and
we are selling them to you. And at the same time, you are going
short. I think that just causes concern. I am not saying it is
bad. I am not saying it is illegal. I am not saying anything
else. I am just saying it just seems to me that it is a tough
conflict of interest that you probably have to deal with every
day, and that is----
Mr. Viniar. I actually don't view it as a conflict because
we change--when we sell someone a security, their investment
horizon is generally a fairly long time.
Senator Kaufman. Right.
Mr. Viniar. We make decisions on a bias on where we want
our risk to be, that could be a very short-term decision. It
could change in the next day.
Senator Kaufman. Right.
Mr. Viniar. And so what we do when we sell someone a
security is we make sure we fully disclose to them what they
are buying, what the risks are, and then they make their
investment decisions over whatever time----
Senator Kaufman. But you were selling these mortgage-backed
securities during this whole period. I am not talking about
just buy and hold. I am talking about the day after you sold
something short, you then were selling something long.
Mr. Viniar. I am not sure I----
Senator Kaufman. I mean, to clients, not for your own
account.
Mr. Viniar. I am not sure I know, individual securities,
what we bought, what we sold.
Senator Kaufman. So you just stopped selling these
mortgage-backed securities when you started to go short?
Mr. Viniar. No. We were still selling things, but again, as
I said to Dr. Coburn, that just depends on the prices you sell
it----
Senator Kaufman. I have got it----
Mr. Viniar [continuing]. And if somebody thinks it is a
good investment.
Senator Kaufman. I am not saying there is anything wrong. I
am just saying, just to me, if I am selling things short and
the same day or the next day I am selling a client a long, that
just seems to me there is a conflict in there. Whether it is
resolved or not, or how it is resolved, but it just seems to me
that is a tough call in terms of what is your--which we got
into in the earlier panel. What is my responsibility to my
client?
And I know you used--and everyone does--this kind of, well,
they are all big boys and they all are investing long and they
know what they are doing. But that, to me, doesn't--and while I
think that is true in many cases, that still doesn't rule out
the fact that you are doing one thing for yourself at the same
time you are doing something to one of your clients.
Mr. Viniar. I don't view it that way----
Senator Kaufman. OK.
Mr. Viniar [continuing]. Because our positions change quite
often.
Senator Kaufman. We can just agree to disagree.
Mr. Viniar. OK.
Senator Kaufman. Have you heard about the Lehman Brothers
use of so-called Repo 105s?
Mr. Viniar. I have heard about it, yes. I have read about
it.
Senator Kaufman. And what is your understanding of these
transactions?
Mr. Viniar. Only from what I read in the newspaper----
Senator Kaufman. Right.
Mr. Viniar [continuing]. That they treated things as sells
that were going to come back on the balance sheet. I don't know
the details----
Senator Kaufman. Right. And why would they be doing that?
Mr. Viniar. I don't----
Senator Kaufman. You don't know. OK. I think the best way
to explain it, there was Lehman structures repo agreements to
mask its true net leverage ratio through an accounting device
known as Repo 105s, whereby it raised cash and repo
transactions by selling assets that were 105 percent or more of
the cash received, allowing it to treat them as a sale rather
than financing. As explained by the New York Times Deal Book,
that meant there were a few days, and by the fourth quarter of
2007, that meant end-of-the-quarter, Lehman could shuffle off
tens of billions of dollars in assets to appear more
financially healthy than it really was. What do you think about
that? Not from Lehman Brothers, what do you think about the
concept as reported by Deal Book?
Mr. Viniar. I think as far as Lehman Brothers, it is a
better question for them----
Senator Kaufman. OK. Suppose there was a firm out there,
and we are not talking about Lehman Brothers--or let me put it
this way. Would Goldman Sachs ever do something like this?
Mr. Viniar. No. We did none of those transactions.
Senator Kaufman. So you can say here that Goldman Sachs
never engaged in a transaction near a quarter's end to improve
its balance sheet?
Mr. Viniar. We never engaged in Repo 105 transactions.
Senator Kaufman. No. I am asking----
Mr. Viniar. Anything we did near quarter end, if we took
something off our balance sheet, it was because we sold it.
Senator Kaufman. But I am just saying, you never--so,
therefore, you never engaged in a transaction near the
quarter's end to improve its balance sheet for investor
reporting purposes?
Mr. Viniar. We would do transactions at quarter end where
we would sell things.
Senator Kaufman. Right.
Mr. Viniar. Then we had risk. We couldn't buy them back. We
would do other transactions in other quarters where we would
buy things.
Senator Kaufman. And do you know how many transactions that
you did at the end of the quarter that at the beginning of the
next quarter you bought them back again or sold them again?
Mr. Viniar. I am sure we had transactions that we sold and
bought back and then sold again.
Senator Kaufman. No, but I mean----
Mr. Viniar. I am sure we had both.
Senator Kaufman [continuing]. In order to make the
quarterly report----
Mr. Viniar. Everything was disclosed. Everything we did, we
disclosed. End of quarter, we disclosed quarterly average. We
disclosed all of those numbers. So anyone can see what we have
at any point in time.
Senator Kaufman. So essentially you never moved things on
or off the balance sheet----
Mr. Viniar. In order to dress up our balance sheet? No.
Senator Kaufman. OK. Thank you, Mr. Chairman.
Senator Levin. Thank you, Senator Kaufman. Senator Ensign.
Senator Ensign. Thank you, Mr. Chairman.
Just how well do you understand all of the various
financial instruments that Goldman Sachs was offering, the
CDOs, CDSs, all of those things?
Mr. Viniar. I am far from an expert in all of the
individual transactions.
Senator Ensign. But you understand basically how they work?
Mr. Viniar. At the highest levels. You had the experts here
this morning.
Senator Ensign. OK. Do you feel at all that--we asked this
question of the panel this morning--whether Goldman Sachs was
partially responsible, largely responsible, or had no
responsibility in the financial collapse of the United States?
Mr. Viniar. I think Goldman Sachs is a major player in the
world financial markets. The financial markets, I believe, got
over-levered. I think lending standards declined.
Senator Ensign. Do you feel that Goldman Sachs has any
responsibility, not blame----
Mr. Viniar. Yes, I----
Senator Ensign [continuing]. I am talking about blame in
the financial collapse of the United States.
Mr. Viniar. I believe that we share responsibility because
we are a major player in those markets and we participated in
those----
Senator Ensign. I appreciate you taking the responsibility,
because this morning's panel would not.
Mr. Viniar. No, I believe----
Senator Ensign. I want to follow along the lines of
questioning I asked this morning. And this gets to the rating
agencies and what they were doing. Do you understanding the
modeling that they were taking these, not necessarily exact
modeling, but do you understand that they were taking, for
instance, these BBB tranches, repackaging, and then re-rating
them as AAAs?
Mr. Viniar. No. I know nothing about----
Senator Ensign. Are you aware of anybody at Goldman Sachs
who was talking? Were you aware of your folks talking to the
credit rating agencies to try to convince them and basically
kind of sell them, here is why it shouldn't be a BBB, here is
why it should be a AAA?
Mr. Viniar. I know that the transactions were rated. I
wouldn't know who had those conversations, what they said. My
only conversation with the rating agencies concerned the
ratings of Goldman Sachs itself.
Senator Ensign. And so you had no knowledge of anybody at
Goldman Sachs doing that type of, basically, lobbying with the
credit rating agencies?
Mr. Viniar. I did not.
Senator Ensign. Are you familiar with who Steve Eisman is?
Mr. Viniar. Yes.
Senator Ensign. Or have you ever perused through the book,
``The Big Short,'' by Michael Lewis?
Mr. Viniar. I have not.
Senator Ensign. Are you familiar with it?
Mr. Viniar. I am familiar with it----
Senator Ensign. I just want to----
Mr. Viniar. I have not read any of it.
Senator Ensign. Because I think this goes to one of the--
when you said you had responsibility, I am glad you said that
Goldman Sachs actually does have some responsibility. This is
kind of an explanation of some of what was happening in the
financial markets. According to Steve Eisman, Goldman Sachs and
Deutsche Bank, on the fate of the BBB tranche of subprime
mortgage-backed bonds without fully understanding why those
firms were so eager to accept them. He didn't know at the time.
Later, he figured, at least he thinks he figured it out.
The credit default swaps filtered through the CDOs were
used to replicate bonds backed by actual home loans. ``There
weren't enough Americans,'' and I am quoting here, so excuse
the language, ``there weren't enough Americans with shi**y
credit ratings taking out loans to satisfy investors' appetite
for the end product. Wall Street needed his bets in order to
synthesize more of them. `They weren't satisfied getting lots
of unqualified borrowers to borrow money to buy a house they
couldn't afford,' said Eisman. They were creating them out of
whole cloth, 100 times over. That is why the losses in the
financial system are so much greater than the subprime loans.''
The premise that, or at least what his analysis was of the
reason that it became--even though the subprime market itself
was bad, the collapse of that market wouldn't have been nearly
as bad for the entire rest of the economy if it wasn't for a
lot of the synthetic instruments that were created by firms
like Goldman Sachs and others. Would you agree with that
statement?
Mr. Viniar. I don't know what he meant or anything, but----
Senator Ensign. The statement that I made, would you agree
with that statement?
Mr. Viniar. Just the math is, anytime you have something
that declines in value that is levered, it adds to more losses.
So that would be the case for anything that declines in value
if it has leverage to it.
Senator Ensign. We are dealing with financial regulatory
reform right now, and obviously it is a hot political debate up
here. From the inside, what would you do as far as the changes
in regulation, not that addresses out there in Main Street, but
just address Wall Street. What would some of your big
recommendations be to the U.S. Congress?
Mr. Viniar. Well, some of the things, and I am an internal
guy. I mean, I worried about Goldman Sachs and its finances,
and I----
Senator Ensign. But at the same time, you said you took
responsibility, Goldman Sachs.
Mr. Viniar. Absolutely.
Senator Ensign. You don't want to be part of the next
financial collapse.
Mr. Viniar. Correct.
Senator Ensign. Being an insider, help us with at least
your advice. We don't have to take it, but we can at least
evaluate it, what we are doing right now. Because the one thing
I do know is the Congress doesn't have enough expertise to
draft this law right now.
Mr. Viniar. What I would say is that a couple of places
that I think are important to focus on, I think that if you
look around financial institutions, the thing that tends to
cause more problems than anything are liquidity problems within
the institutions, and I think more stringent liquidity
requirements for financial institutions would be important.
And the second thing, I think it is pretty clear that we
need higher capital charges for less-liquid assets, because I
think holding less-liquid assets was one of the things that got
firms in trouble. They didn't have enough capital against them.
So those would be two things that I would tell you should be
part of any regulation.
Senator Ensign. What about the relationship between the
credit rating agencies and those of you on Wall Street as far
as how cozy it seems to have been, because you guys pay their
bills and----
Mr. Viniar. I don't have a view on that.
Senator Ensign. OK. Thank you, Mr. Chairman.
Senator Levin. Thank you very much, Senator Ensign.
Mr. Broderick, the Subcommittee staff prepared a chart on
VaR.\1\ [Exhibit 164]. And between December 2006 and 2007, the
VaR, the measure of risk, was almost continuously over the
Mortgage Department's permanent limit. Do you remember that?
---------------------------------------------------------------------------
\1\ See Exhibit No. 164, which appears in the Appendix on page
1010.
---------------------------------------------------------------------------
Mr. Broderick. Yes, I do.
Senator Levin. And it peaks at or near 100 VaR, above the
limit. Is that something that you approved?
Mr. Broderick. It is something that the firm-wide risk
committee approved on an exception basis, on an ongoing basis,
yes.
Senator Levin. Well, all year, they were over your
permanent limit. They were hugely over it. At one point, they
had the majority of your risk tied up just in that one
department, did they not? Were they at 56 percent of your VaR
at one point?
Mr. Broderick. I would have to look at the figures
precisely, but----
Senator Levin. Well, approximately. Were they at a huge
percentage of your total firm VaR at one point?
Mr. Broderick. They were a large percent, but Mr. Chairman,
let me just make one point, which is that the numbers may well
not include the effect diversification, which is to say when
you add the individual product by product areas, you get a
number that is in excess of the total firm-wide VaR because
firm-wide VaR gives effect to diversification. So that would
tend to understate the--or, rather, overstate the impact of
mortgage VaR specifically. But the general point you are making
is entirely right, which is this was a large percent of the
firm's VaR, certainly much larger than it had been
historically.
Senator Levin. And the short positions that they were
taking during that year were the major contribution to that, is
that correct?
Mr. Broderick. To the mortgage VaR, yes.
Senator Levin. To the high mortgage VaR, is that what you
said?
Mr. Broderick. Yes, that is correct.
Senator Levin. The Mortgage Department's contribution to
that firm-wide VaR is shown over here. Take a look at Exhibit
35,\1\ if you would.
---------------------------------------------------------------------------
\1\ See Exhibit No. 35, which appears in the Appendix on page 320.
---------------------------------------------------------------------------
Mr. Broderick. OK.
Senator Levin. Do you see it?
Mr. Broderick. Yes.
Senator Levin. OK. The percentage of contribution to the
firm-wide VaR was shown in that exhibit at 53.8 percent for
mortgage structured products, is that correct?
Mr. Broderick. Yes. I believe that is the--I am not
positive about this, but I think this relates to the entire
mortgage group at the time this report was presented.
Senator Levin. Well, this report was a Goldman report,
right?
Mr. Broderick. Yes.
Senator Levin. It says, mortgage structured products, 53.8
percent of the firm-wide VaR.
Mr. Broderick. Right.
Senator Levin. And that, you agreed already, was a result
of their significant short position, is that correct?
Mr. Broderick. The mortgage VaR was being driven primarily
by the short positions at this time, yes.
Senator Levin. All right. Now, if you look at Exhibit
48,\2\ this is a presentation which I believe you gave to the
Goldman Tax Department in October 2007. Does that look familiar
to you?
---------------------------------------------------------------------------
\2\ See Exhibit No. 48, which appears in the Appendix on page 376.
---------------------------------------------------------------------------
Mr. Broderick. Yes, it does.
Senator Levin. OK. Take a look at page 2, the fourth full
paragraph. I am going to read it to you. ``So what happened to
us? A quick word on our own market and credit risk performance
in this regard. In market risk - you saw in our 2nd and 3rd qtr
results that we made money despite our inherently long cash
positions. - because starting early in '07 our mortgage trading
desk started putting on big short positions,''--big short
positions--``mostly using the ABX index, which is a family of
indicies designed to replicate cash bonds. And did so in enough
quantity that we were net short, and made money (substantial $$
in the 3rd quarter) as the subprime market weakened. (This
remains our position today)'' Was that accurate when you wrote
it?
Mr. Broderick. Yes, it was accurate.
Senator Levin. OK. I think that is a pretty good
description of what happened.
Now let me go back to you, Mr. Viniar. I do have a problem
with taking a short position on a security that you are selling
to your customer. You can say, and I am sure it is true, that
positions change all the time. That is your answer about the
conflict of interest. You are selling a security--you are
holding out a security to a customer, and at the same time have
decided and are in a short position, and you are going to take
the opposite position from your own customer.
Now, you can say that your position might change. I am
talking about at the time you are selling that security to that
customer. Do you think that a customer has a right to believe
that you want that security to succeed?
Mr. Viniar. I think that a customer has a right to believe
that we--it is not a question of succeeding or not succeeding--
--
Senator Levin. Yes, that is my question. You can say it is
not the question. I am saying, from a customer's perspective,
when you hold out securities to sell to a customer, do you
think that a customer has a right to believe that you, Goldman
Sachs, would like to see that security succeed?
Mr. Viniar. I am not sure what succeed actually means,
because when customers----
Senator Levin. That it would be a good security for them to
invest in.
Mr. Viniar. That customer thinks that the----
Senator Levin. No, not the customer thinks----
Mr. Viniar [continuing]. Value of the security will go up.
Senator Levin. No.
Mr. Viniar. I don't think----
Senator Levin. I am asking, does that customer have a right
to believe that you, Goldman Sachs, when you are selling
something, believe that that is a solid security?
Mr. Viniar. Does that customer have a right to believe
that----
Senator Levin. To assume----
Mr. Viniar [continuing]. We think the value will go up----
Senator Levin. No.
Mr. Viniar [continuing]. In that security?
Senator Levin. No.
Mr. Viniar. Because that is----
Senator Levin. No. I am asking you whether or not--you put
your name on that security. You have got Goldman Sachs. You are
selling it.
Mr. Viniar. Yes.
Senator Levin. Do you think that a customer has a right to
assume that you would like to see that security succeed? That
is my question. Look, put yourself in the customer's mind. Do
you think that the customer has a right to assume that when you
put your imprimatur on a security, that you, Goldman Sachs,
would like to see that security pay off?
Mr. Viniar. I think when we sell securities to customers,
we don't necessarily have a view that they are going to go up
or down in value----
Senator Levin. I am not asking you that.
Mr. Viniar. So I am not sure what succeed--I am sorry,
Senator. I am not trying to not answer your question.
Senator Levin. That you----
Mr. Viniar. I am not sure what you mean by succeed.
Senator Levin. That you are holding out something to them
because you think this would be something good, that it is
good, it is secure. It is not insecure, it is secure.
Mr. Viniar. When we sell to them----
Senator Levin. I am going to keep using that word, because
I want you to understand what is in the customers' minds, that
you don't think it is junk. You don't think it is crap. You
don't think it is shi**y.
Mr. Viniar. Well, it depends on how you mean that. We
might----
Senator Levin. How I mean it? These are your employees who
believe it.
Mr. Viniar. Can I explain? If we sell something to a
client, a customer, let us just say we have owned it and we
sell it to them at 20 cents on the dollar. They buy it at 20
cents. It doesn't mean we think it is a terrific piece of
paper, but they think it is worth more than 20 cents. Clearly,
we think----
Senator Levin. If your employee thinks that it is crap,
that it is a shi**y deal, do you think that Goldman Sachs ought
to be selling that to customers, and when you were on the short
side betting against it? I think it is a very clear conflict of
interest and I think we have got to deal with it. Now, you
don't, apparently.
Mr. Viniar. I do not necessarily think that is----
Senator Levin. And when you heard that your employees in
these emails and looking at these deals said, ``God, what a
shi**y deal,'' ``God, what a piece of crap,'' when you hear
your own employees or read about those in emails, do you feel
anything?
Mr. Viniar. I think that is very unfortunate to have on
email. [Laughter].
Senator Levin. On email?
Mr. Viniar. Please don't take that the wrong way.
Senator Levin. How about feeling that way?
Mr. Viniar. I think it is very unfortunate for anyone to
have said that in any form.
Senator Levin. How about to believe that and sell it?
Mr. Viniar. I think that is unfortunate, as well.
Senator Levin. No, that is what you should have started
with.
Mr. Viniar. You are correct. It is.
Senator Levin. We are going to stand adjourned for 10
minutes because we have a vote on.
[Recess.]
Senator Coburn [presiding]. Our hearing will resume.
Senator Levin will be back and I will yield back to him when he
comes.
Mr. Viniar, I am reading a risk factor sheet on the Gray
Wolf prospectus and I would just like for you--this is Exhibit
99a.\1\ It is page 23. It is probably standard boilerplate, but
I want to read it to you and get your reaction in light of
Monday morning quarterbacking, all right? And I am all the way
down to the next-to-last paragraph.
---------------------------------------------------------------------------
\1\ See Exhibit No. 99a, which appears in the Appendix on page 614.
---------------------------------------------------------------------------
``The obligations of the Collateral Manager to the issuer
are not exclusive. The Collateral Manager and its affiliates
may have other clients--''
Mr. Viniar. Excuse me, Dr. Coburn. I am sorry. Which page
of this again?
Senator Coburn. It is page 23.
Mr. Viniar. Thank you.
Senator Coburn. ``The Collateral Manager and its affiliates
may have other clients, including certain holders of any class
of notes, which may invest, directly or indirectly, in the same
or similar securities or financial instruments as those in
which the issuer invests or that would be appropriate for the
inclusion in the issuer's holdings.''
And then the final paragraph, ``The Collateral Manager may
make investment decisions for other clients and for affiliates
that may be different from those made by the Collateral Manager
on behalf of the issuer.''
Are you telling people by that disclaimer that you may sell
them something long and then go short against it?
Mr. Viniar. I mean----
Senator Coburn. What is the purpose of that disclaimer?
Mr. Viniar. I am just not familiar with this document or
this disclaimer.
Senator Coburn. It is pretty well covered in almost
everything you all have written, that same disclaimer. What
does it say to you? You are an accountant, not a lawyer, and
neither am I, but what does that say to you? Because you are
telling people in this prospectus that you may sell to other
clients or affiliates, which means your own business, that you
may take a position opposite of that, correct?
Mr. Viniar. That is what it says.
Senator Coburn. That is what it says. OK. I just wanted to
clarify that.
Now, I want to go back to something I asked the young man
on panel one, which was associated with is there a policy at
Goldman about directing conversations through corporate email
and limiting those to things that should not be put in email?
Is there a policy?
Mr. Viniar. There is no policy that I am aware of.
Senator Coburn. All right. Thank you.
Mr. Broderick, I want to spend some time with you, if I
may. Would you go to Exhibit 63, please.\1\ I will just read
it, if you have found it. This is from Patrick Welch to you,
Mike Dinias, Robert Berry, Lee Hemphill, Wildermuth, and I
guess that is Rapfogel.
---------------------------------------------------------------------------
\1\ See Exhibit No. 63, which appears in the Appendix on page 477.
---------------------------------------------------------------------------
``Craig, I realize this may be too late, but two comments:
Just fyi not for the memo, my understanding is that the desk is
no longer buying subprime. (We are low balling on bids.)'' Why
would this be excluded from the memo?
Mr. Broderick. I don't think that it implies that it was
excluded from the memo. He just is referencing the fact that
his comments may be too late for inclusion in the memo, but it
doesn't actually say whether it was in the memo or not.
Senator Coburn. OK, but the point is the desk was no longer
buying subprime, and you knew that.
Mr. Broderick. It says the desk is bidding lower than it
would otherwise do with the effect of not certainly being
aggressive as they were.
Senator Coburn. OK. Which desk does that email refer to?
Who are they talking about?
Mr. Broderick. It does not specify, but it was one of the
desks within the mortgage----
Senator Coburn. One of the desks that would buy subprime
mortgages, correct?
Mr. Broderick. Yes.
Senator Coburn. And who is Patrick Welch?
Mr. Broderick. He is a gentleman in our credit function.
Senator Coburn. Does he work within the mortgage----
Mr. Broderick. No. He works in the----
Senator Coburn. He works within the risk management----
Mr. Broderick. He works within the risk management group.
Senator Coburn. OK. Who do you think they were lowballing
on bids, clients or customers?
Mr. Broderick. These would have been clients from whom we
buy mortgage product, subprime----
Senator Coburn. And then packaged and--OK.
Mr. Broderick. Right. But lowballing in this case is not a
bidding less than fair or anything----
Senator Coburn. No. It is just saying you are going low so
it is not as attractive for them to bring them to you and they
will bring them to somebody else.
Mr. Broderick. And they will bring them to someone else.
Senator Coburn. Understand. I have no criticism for that
and I am not making any judgment on it.
What happened, in your opinion, in the March time frame for
your company to make the determination to no longer buy
subprime? You are a risk manager. You are involved in that
thought and decision making and research. What happened?
Mr. Broderick. This was entirely consistent with the
strategy that--with the direction provided by David Viniar and
other senior managers of the firm that we be less long in our
mortgage business generally.
Senator Coburn. OK. But as a risk manager, what are the
inciting events for them to do that? You are sitting there
looking at it as a risk manager. What caused them to make that
turn? Was it, as testified in the first panel, we started
seeing a deceleration and an increase in housing prices, or we
started seeing subprimes not performing? What was it that led
to that conclusion within your firm?
Mr. Broderick. Well, the meeting itself was chaired, and in
fact initiated, by Mr. Viniar, so----
Senator Coburn. He was seeing daily losses, I know from his
testimony----
Mr. Broderick. I mean, that is the feedback that we had, as
well, which was that this was a business that had long been, a
small but relatively stable part of the Goldman portfolio of
businesses. We went into it willingly on the basis of low risk
and comparatively low return. We thought we understood the
risks pretty well. And therefore, when we started seeing, as
Mr. Viniar has talked about in his opening remarks, when we
started seeing profit volatility in excess of that which we
would normally expect to see, it just raised in our mind the
question that maybe we didn't thoroughly understand what was
going on in the market and therefore maybe we should start
getting shorter, and----
Senator Coburn. Can you give me, and for the benefit of
those listening, can you give me another scenario in the past 5
years where Goldman has seen the same kind of thing happen in
some other product that they handled, where you are looking
like you are going to have to mark to market and you are seeing
this decline? Can either of you give another example so that
people can see that this is not a single event, that it is a
multiple event?
Mr. Viniar. Sure. The same thing happened with leveraged
loans in 2008. We were long in many leveraged loans,
unfortunately, and the market clearly started to decline. We
were marking things to market. We were marking them down and we
sold them. We sold some at prices that people who bought them
that continued to go down, and we sold some at distressed
prices and since then they have recovered and they have made
money on them. But we just felt our risk was just too big and
our instructions were that we should reduce our risk, because
that market was in very--ended up in severe distress.
Senator Coburn. Now, there are some significant risk
factors going on in commercial real estate. Do you all have big
holdings in commercial real estate mortgages?
Mr. Viniar. They are not that big anymore. We have either
marked them----
Senator Coburn. You have gotten close to home on that?
Mr. Viniar. Not as close as we would have liked, but a lot
closer than we were.
Senator Coburn. OK. And were there collateralized debt
obligations on these, and were there mortgage-backed securities
on these, as well?
Mr. Broderick. Yes, there were.
Senator Coburn. Was it to the same extent that you had
involvement in those as you had in the residential mortgage?
Mr. Broderick. I don't know precisely what the numbers are,
but we were active in----
Senator Coburn. In both markets?
Mr. Broderick. We were active in both markets.
Senator Coburn. OK. Thank you.
Mr. Broderick. Multi-small sector CDOs were very often
included commercial mortgage-backed securities.
Senator Coburn. Mr. Broderick, do you think, or do feel any
of the CDOs or the Abacus transaction had any reputational risk
for Goldman?
Mr. Broderick. Do I think that Abacus had any reputational
risk for Goldman? With the benefit of hindsight, one version
certainly did.
Senator Coburn. The last----
Mr. Broderick. The ACA 2007, yes.
Senator Coburn. All right. How about any of the CDOs?
Mr. Broderick. We structured these products very carefully.
We structured them with the best of intent. They accurately, I
think, reflected in terms of disclosure and so forth, the
underlying assets in the portfolios. They were purchased by
sophisticated investors who had a great deal of detail on the
underlying securities that went into them, the underlying
assets that went into them. I think they performed in a manner
consistent with that which the market itself performed.
Senator Coburn. OK. Earlier, Senator Ensign asked the first
panel about whether or not they thought the motivational system
of payment based on year-end bonuses, production, etc., led to
a less than ethical--or compromised an ethical position. I
would just like for you to comment for a minute, what is the
ethical creed of Goldman Sachs? How is it manifested? How does
the Board look at ethics? Do they have an Ethics Department? Is
there an Ethics Department that actually manifests those
standards among the Goldman employees, and if not, why not?
Mr. Viniar. You asked a lot of questions there, Senator,
but we care very much about ethics at Goldman Sachs and we
don't believe in any way, shape, or form that our compensation
is not consistent with people having good ethical standards. In
fact, just the opposite, and I think some people on our panel
said that this morning.
When we look at people's reviews, our year-end review--you
looked at just a self-evaluation, but if you looked at the
evaluation of our people, what we call a 360-degree review that
everybody at Goldman Sachs has, it is not just commercial
production. There are questions in there that are asked to
people in their department, outside their department, senior
and junior, about leadership, culture, values, diversity, their
ethical standards, etc. And if people do not do well there,
something would happen between their compensation being reduced
and them no longer being at Goldman Sachs. So we pay a lot of
attention to that and we care very deeply about it.
Senator Coburn. Is there a Board process that leads on
that? What are the standards? If I go to work for Goldman
Sachs, what am I going to hear about ethics when I am hired?
Mr. Viniar. You will get the Goldman Sachs Business
Principles, which everybody gets, which are 14 business
principles that we live by. You will have training. You will
have orientation. You will have many different venues in which
we will talk about what is expected of you, and that will not
just happen when you join Goldman Sachs. That will happen when
you get promoted. If you are a managing director, there will be
training where that is discussed. So it happens throughout your
career at Goldman Sachs.
Senator Coburn. Looking backwards at Abacus, would you feel
that the system worked for Abacus? Do you think there is any
ethical question that can be raised on Abacus? Could a non-
biased person look at the facts and raise an ethical question
about that deal?
Mr. Viniar. I am not sure I am non-biased.
Senator Coburn. Well, I am not saying you are. You should
be biased for Goldman. I understand it. But could a non-biased
look at the facts as you see them and say there is a question
of unethical behavior here?
Mr. Viniar. I don't believe so.
Senator Coburn. You don't think so?
Mr. Viniar. I don't believe so.
Senator Coburn. Do you think it was ethical for Goldman to
release all the personal emails of Mr. Tourre?
Mr. Viniar. I have no view. I don't think it was unethical.
Senator Coburn. You don't think it is unethical?
Mr. Viniar. No.
Senator Coburn. OK. Did you release any of the other
personal emails on any of the other people who have testified
before this Subcommittee?
Mr. Viniar. I don't know.
Senator Coburn. I haven't seen them.
I will yield to the Chairman, because I am fine. I am doing
well.
Mr. Viniar. Chairman Levin, can I just address the answer
to the last question you asked before you left----
Senator Levin [presiding]. Sure.
Mr. Viniar [continuing]. Because I want to just make clear
what I said to you at the end, which is that I think you were
100 percent correct in what you said to me, how I should have
phrased that, that I should have started with, yes, I feel bad
that anyone would have thought that at all, not just whether
they wrote it or put it on email. So I just want to clarify
that and repeat it again, because once again, you were 100
percent correct.
Senator Levin. I would have hoped you would have said you
were appalled as your first reaction. I would have just hoped
that you would have said, as someone who holds yourself out to
customers, that it was appalling when you heard about that.
The only other question that I have for you, and this goes
to something which my friend, Dr. Coburn, said about short
sales, there is a place for short sales. I happen to agree with
that. My problem comes particularly where you are selling a
security to someone, particularly when it is described as your
employees described it, and we have gone into that as to their
description of some of those sales, and at the same time, you
are betting against it. You are going short. That does seem to
me to be a very clear conflict, where it is your intention to
hold a short position on a security where you are selling it to
a customer. That is not a temporary position, and I know
positions change. I understand that.
The second thing which I am troubled by in this area the
big picture is that I have difficulty when a firm such as
yours, has a strategic position to basically invest against the
market, to bet against the market, and to be selling securities
that are long in the same market. I have a problem with that,
but that is a hard issue to resolve.
But if it comes to specific securities, particularly
described as your employees describe some of these that they
were selling, going short and intending to keep a short
position, to bet against the securities that you are selling,
does, to me, create a conflict unless you disclose to your
customer that you are, in fact, taking a short position, not
temporarily, not as a market maker, but that is your
proprietary position.
But there is another area where I think there has been a
real difficulty displayed today and that is when I went into
the subject with the first panel about a customer saying on the
phone to you, you are holding out a security to a customer to
buy and the customer says, how can you get comfortable with
that deal given the fact that New Century, which was known as a
very dubious supplier of these mortgages, it has all the New
Century collateral?
Now, in that case, there was a big problem because your
people were asked a question, a direct question. How can you
get comfortable? The answer to that question is, you weren't
comfortable because you were going short. Instead, they kept
trying to sell that security. That seems to me to be
misleading, as well.
Senator Coburn. Can I jump in here?
Senator Levin. Yes.
Senator Coburn. I have a couple of questions for you. We
have a proposed fix-it bill for financial regulation, and based
on what you have heard and seen, do you have an opinion on
whether that will solve some of the problems that led to the
financial situation that this country has faced over the last
2\1/2\ years?
Mr. Viniar. We, as a firm, are generally supportive of
financial regulation and I think there are some things in the
bill that will fix some of the problems, but I don't think it
addresses some of the other problems.
Senator Coburn. Do you think that the Federal Government
ought to fix the problems with Fannie Mae and Freddie Mac?
Mr. Viniar. I don't know enough to answer that.
Senator Coburn. They have got about a trillion dollars
worth of taxpayer money right now, all of it at risk, and one
of the leading causes for over-speculation in the housing
market, and you don't have an opinion on it? I mean, I don't
want to get you in trouble with whoever your friends are around
here, but the point is, we need to fix the real problems, not
the symptoms, and you don't have an opinion on whether we ought
to address the issues with Fannie Mae and Freddie Mac?
Mr. Viniar. Not really.
Senator Coburn. OK. Thank you.
Senator Levin. I have one more question. The firm claims
that your clients come first, and we have seen many, too many
instances today where that has not been the case, where you put
Goldman's interest ahead of your clients, selling securities
that you had real doubts about, betting against those same
securities, taking a short position which your client wanted
but you said, we will save that for ourselves.
Your first business principle, according to your Exhibit
58,\1\ is, ``Our clients' interests always come first,'' and
they don't. There is a conflict of interest in many cases where
you put your own interests first. You are selling stuff out of
your inventory which you call cats and dogs and you call bad
lemons. So the conflict of interest issue and the fact that you
don't always put your client first, you put your own firm's
proprietary interests first in many cases, kind of goes to the
heart of the conflict.
---------------------------------------------------------------------------
\1\ See Exhibit No. 58, which appears in the Appendix on page 466.
---------------------------------------------------------------------------
It is similar to the conflict which exists with those
credit rating agencies. We can kind of talk about examples of
the conflict, but at the heart of it is the problem that they
are paid to give credit ratings by the people whose securities
they are rating, and that means there is pressure on them to
put AAA ratings on them. We went into that at our third
hearing. And there is an inherent conflict of interest there,
as well.
So that is the area that I am most interested in in terms
of the legislation, to strengthen it in the conflicts of
interest area, where I think there is room to be strengthened.
I now want to yield to Senator Pryor before we excuse this
panel.
Senator Pryor. Thank you, Mr. Chairman, and I would like to
really follow up with where you left off, and that is on the
conflict of interest question. I guess really the question for
Goldman Sachs is, are there times in which you recognize a
conflict?
Mr. Viniar. I am not sure what you mean by recognize a
conflict.
Senator Pryor. Well, I think for most Americans, when they
understand that you create a market and then you also are
playing in that market and you have clients that you are
enticing into that market, it seems to me that is an area that
is rife for conflicts of interest, because you want the market
to be successful. You are charging fees. You may be advising
clients. But your interests may be different than the clients'
interest because you may be in a different position, like the
previous panel said. So do you recognize that as a conflict of
interest?
Mr. Viniar. I am not sure I am answering your question, but
we try to resolve conflicts all the time at Goldman Sachs. We,
for example, could have two clients who want to buy the same
company and they will both ask us to represent them. That is a
conflict. We will have to resolve it. We could have a seller
and a buyer who ask us. That is a conflict. We could have a
situation where there is a company--a client who wants to buy
something and our merchant bank wants to buy it, as well. We
will have to decide principal versus franchise, and almost
every time we will choose the franchise over the principal.
So we wrestle with these all the time. We try our best to
resolve them and make the right judgment, putting our clients
first.
Senator Pryor. But when it comes to doing something like
selling CDOs, do you see any conflict there, or do you just see
that as a function of the market?
Mr. Viniar. We generally try to create products that our
customers want to buy and sell them to them at prices that they
think are attractive and that they think will be profitable for
them.
Senator Pryor. So, in other words, in the CDO market, you
didn't see any conflicts there?
Mr. Viniar. Not that I am aware of.
Senator Pryor. OK. We haven't really talked a whole lot
about credit rating agency reform. I know Senator Levin just
mentioned the fact that I think the credit rating agencies,
they played a role in all this, as well. I have actually had a
bill here in the Senate to reform them. But regardless of that,
do you think that there are reforms that should be made with
the credit rating business?
Mr. Viniar. My interaction with credit rating agencies is
basically limited to when they rate Goldman Sachs, and I think
that process works pretty well. So I am just not close enough
to the rest of it.
Senator Pryor. And, in general terms, what is Goldman
Sachs' relationship with credit rating agencies?
Mr. Viniar. We have a multi-faceted relationship. We have,
of course, the relationship where they rate us.
Senator Pryor. Right.
Mr. Viniar. So they rate Goldman Sachs. They will rate
securities, as we have talked about this morning, that we
create and structure. And they also rate securities of our
clients. So we will work with our clients to help individual
corporations get ratings on the securities. Sometimes, clients
who have not been rated before need help and advice in going to
rating agencies and so we will help them and advise them, as
well. So it is multi-faceted.
Senator Pryor. And as part of your multi-faceted
relationship with them, are there circumstances in which you
pay them fees?
Mr. Viniar. Well, I know we pay them for sure when they
rate our own securities, so if Goldman Sachs issues debt, we
have to pay a fee for the rating on that. And, Craig, I believe
there are some other circumstances where, if they are rating a
security we create, sometimes it comes out of the transaction.
Sometimes we as structurer will pay them.
Senator Pryor. And does that present any conflicts of
interest in your mind?
Mr. Viniar. I am not sure.
Senator Pryor. Tell me what you mean, you are not sure.
Mr. Viniar. There is an argument you are making that if the
issuer of securities is paying the rating agencies, then there
could be a conflict, as opposed to the purchaser of securities.
So there is an argument on both sides of that.
Senator Pryor. Mr. Broderick, did you want to comment on
any potential conflicts of interest with the credit rating
agencies?
Mr. Broderick. No. I think Mr. Viniar addressed it exactly
as I would have.
Senator Pryor. Let me ask, if I may, and I am not sure
which one, but I will go ahead and ask this to Mr. Broderick.
What is Goldman Sachs' policy on employees shorting asset-
backed securities, CDOs, CDLs, and credit default swaps in
which Goldman Sachs acted as a market maker or owned for its
own account? Do you have a policy about that?
Mr. Broderick. We have very rigorous compliance policies
which address the securities trading activities of all of our
employees. I don't know the details of it specifically as
relates to the instruments that you specifically noted, but our
compliance group has access to all the securities trading
activities of our employees and monitor it carefully and ensure
compliance with these strict policies that I mentioned.
Senator Pryor. And when you have compliance, are you
talking about compliance with SEC and other rules and
regulations, or are you talking about compliance with your own
company policy?
Mr. Broderick. Both.
Senator Pryor. OK. And you are not aware if you have any
company policy about how you treat shorts when you are a market
maker?
Mr. Broderick. Not beyond what I articulated initially. Mr.
Viniar, I don't know if you have any more detail.
Mr. Viniar. I don't know, Senator.
Senator Pryor. OK. Mr. Chairman, thank you. That is all I
have.
Senator Levin. Thank you, Senator Pryor. Senator Coburn.
Senator Coburn. I just had two follow-up questions. You are
generally supportive of the Dodd bill, was your testimony. Are
you supportive of reinstallation of Glass-Steagall?
Mr. Viniar. I think it would be very difficult to reinstate
Glass-Steagall.
Senator Coburn. Very difficult to what?
Mr. Viniar. To reinstate Glass-Steagall.
Senator Coburn. All right. Are you supportive of something
similar to or the Volcker Rule?
Mr. Viniar. I think there are issues with the Volcker Rule.
I think there are issues with what it would do to the
competitiveness of the U.S. financial institutions, because I
suspect nothing like that will be instituted anywhere outside
the United States, and so I think you will find U.S. financial
institutions----
Senator Coburn. The export of the derivatives market
outside of the United States?
Mr. Viniar. I also think you will find non-U.S. financial
institutions able to be stronger than U.S. financial
institutions.
Senator Coburn. All right. Thank you.
Senator Levin. Thank you both. You are both excused.
[Pause.]
Senator Levin. We now will call our final witness for
today's hearing, Lloyd Blankfein, the Chairman and Chief
Executive Officer of Goldman Sachs. Mr. Blankfein, we
appreciate your being with us today.
Pursuant to Rule 6, all witnesses who testify before the
Subcommittee are required to be sworn, so we would ask you to
stand and raise your right hand.
Do you solemnly swear that the testimony you are about to
give will be the truth, the whole truth, and nothing but the
truth, so help you, God?
Mr. Blankfein. Yes, I do. Thank you.
Senator Levin. Thank you very much. I don't know if you
have heard the earlier testimony or not, but we use a timing
system which will give you a red light in 5 minutes. The light
will turn yellow after 4 minutes so that you can try to give us
your testimony, if possible, in 5 minutes.
TESTIMONY OF LLOYD C. BLANKFEIN,\1\ CHAIRMAN AND CHIEF
EXECUTIVE OFFICER, THE GOLDMAN SACHS GROUP, INC., NEW YORK, NEW
YORK
Mr. Blankfein. Thank you, Chairman Levin, Ranking Member
Coburn, and Members of the Subcommittee, thank you for the
invitation to appear before you today as you examine some of
the causes and consequences of the financial crisis.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Blankfein appears in the Appendix
on page 225.
---------------------------------------------------------------------------
Today, the financial system is fragile, but it is largely
stable. This stability is the result of decisive and necessary
government action during the fall of 2008. Like other financial
institutions, Goldman Sachs received an investment from the
government as a part of its various efforts to fortify our
markets and the economy during a very difficult time. I want to
express my gratitude and the gratitude of our entire firm. We
held the government's investment for approximately 8 months and
repaid it in full, along with a 23 percent annualized return
for taxpayers.
Until recently, most Americans had never heard of Goldman
Sachs or weren't sure what it did. We don't have banking
branches. We provide very few mortgages and don't issue credit
cards or loans to consumers. Instead, we generally work with
companies, governments, pension funds, mutual funds, and other
investing institutions. These clients usually come to Goldman
Sachs for one or more of the following reasons: They want
financial advice; they need financing; they want to buy or sell
a stock, bond, or other financial instrument; or they want help
in managing and growing their financial assets.
The nearly 35,000 people who work at Goldman Sachs, the
majority of whom work in the United States, are hard working,
diligent, and thoughtful. Through them, we help governments
raise capital to fund schools and roads. We advise companies
and provide them funds to invest in their growth. We work with
pension funds, labor unions, and university endowments to help
build and secure their assets for generations to come. And we
connect buyers and sellers in the securities markets,
contributing to the liquidity and vitality of our financial
system. These functions are important to economic growth and
job creation.
I recognize, however, that many Americans are skeptical
about the contribution of investment banking to our economy and
understandably angry about how Wall Street contributed to the
financial crisis. As a firm, we are trying to deal with the
implications of the crisis for ourselves and for the system.
What we and other banks, rating agencies, and regulators failed
to do was sound the alarm that there was too much lending and
too much leverage in the system, that credit had become too
cheap.
One consequence of the growth of the housing market was
that instruments that pooled mortgages and their risk became
overly complex. That complexity and the fact that some
instruments couldn't be easily bought or sold compounded the
effects of the crisis. While derivatives are an important tool
to help companies and financial institutions manage their risk,
we need more transparency for the public and regulators as well
as safeguards in the system for their use.
That is why Goldman Sachs, in supporting regulatory reform,
has made it clear that it supports clearinghouses for eligible
derivatives and higher capital requirements for non-standard
instruments.
As you know, 10 days ago, the SEC announced a civil action
against Goldman Sachs in connection with a specific
transaction. It was one of the worst days of my professional
life, as I know it was for every person at our firm. We believe
deeply in a culture that prizes teamwork, depends on honesty,
and rewards saying no as much as saying yes. We have been a
client-centered firm for 140 years, and if our clients believe
that we don't deserve their trust, we cannot survive.
While we strongly disagree with the SEC's complaint, I also
recognize how such a complicated transaction may look to many
people. To them, it is confirmation of how out of control they
believe Wall Street has become, no matter how sophisticated the
parties or what disclosures were made. We have to do a better
job of striking the balance between what an informed client
believes is important to his or her investing goals and what
the public believes is overly complex and risky.
Finally, Mr. Chairman, the Subcommittee is focused on the
more specific issues revolving around the mortgage
securitization market. I think it is important to consider
these issues in the context of risk management. We believe that
strong, conservative risk management is fundamental and helps
define Goldman Sachs. Our risk management processes did not and
could not provide for absolute clarity. They highlighted
uncertainty about evolving conditions in the housing market.
That uncertainty dictated our decision to attempt to reduce the
firm's overall risk.
Much has been said about the supposedly massive short
Goldman Sachs had on the U.S. housing market. The fact is, we
were not consistently or significantly net short the market in
residential mortgage-related products in 2007 and 2008. Our
performance in our residential market-related business confirms
this. During the 2 years of the financial crisis, while
profitable overall, Goldman Sachs lost approximately $1.2
billion from our activities in the residential housing market.
We didn't have a massive short against the housing market and
we certainly did not bet against our clients. Rather, we
believe that we managed our risk as our shareholders and our
regulators would expect.
Mr. Chairman, thank you for the opportunity to address
these issues. I look forward to your questions.
Senator Levin. Thank you very much, Mr. Blankfein.
We have heard in earlier panels today example after example
where Goldman was selling securities to people and not telling
them that they were taking and intended to maintain a short
position against those same securities. I am deeply troubled by
that, and it is made worse when your own employees believe that
those securities are junk or a piece of crap or a shi**y deal,
words that those emails show your employees believed about a
number of those deals.
Billion-dollar Timberwolf: A synthetic CDO-squared--CDOs
get squared now--a senior executive called it a ``shi**y''
transaction, but the Goldman sales force was told that it was a
priority item for 2 straight months. Goldman sold $600 million
in Timberwolf securities to clients while at the same
timeholding a short position, in other words, betting against
it. The CDO went to junk status in about 7 months. Your
investors lost big time, but Goldman won on that deal; you
profited on that deal.
In the $500 million Long Beach RMBS deal, Goldman shorted
it at the same time that it was selling it to clients. The
securities defaulted within a few years with a 65 percent
delinquency rate. The bad news, in your own words, was that
your clients lost money, but the good news is that Goldman
Sachs made money on that deal.
The next one, the $700 million Fremont deal. This was a
RMBS of subprime loans from a notoriously bad lender. Your
folks knew it. One of your clients talks to your sales force
about it, and your sales force among themselves call it ``crap
loans.'' They go out and sell them anyway. At the same time
that your sales people are selling those items, they are
shorting the deal. So you short them so that Goldman makes
money when this security fails, which it did in 10 months.
On the $300 million Anderson synthetic CDO, the CDO is
stuffed with New Century loans. These are known to be shoddy
loans. I think it was one or two on the list of bad loan
producers. A client of yours asked, how did Goldman Sachs get
comfortable with this deal? In other words, pointing out that
it was New Century. Goldman Sachs didn't respond and did not
say, we are not comfortable, we are shorting it. We are betting
against this deal. Asked a direct question, how can you guys
get comfortable with a deal involving those loans, and instead
of responding honestly, we have got problems, too, we are not
taking any chances on this deal, we may be selling it, but we
are also betting against it, that is not what happened.
Instead, the client was told that Goldman was an equity holder,
which it was at the same time, but that was a half-truth
because it was also betting against that same security. That
CDO failed within 7 months. Your clients lost. Goldman
profited.
The $2 billion Hudson synthetic CDO: Goldman Sachs was the
sole protection buyer on this CDO with a $2 billion short. In
other words, they were betting against it. A Goldman sales
person described it as junk, not to the buyer, of course, but
inside. The CDO imploded within 2 years. Your clients lost.
Goldman profited.
Now, there is such a fundamental conflict, it seems to me,
when Goldman is selling securities which--particularly when its
own people believe they are bad items, described in the way
these emails show that they were described and what your own
sales people believed about them--to go out and sell these
securities to people and then bet against those same
securities, it seems to me, is a fundamental conflict of
interest and raises a real ethical issue.
I would like to ask you whether or not you believe that
Goldman, in fact, treated those clients properly. As you say,
if clients believe we don't deserve their trust, you are not
going to survive. Those are the ringing words you give us in
your opening statement. Given that kind of a history here,
going heavily short in a market, which you did--you made a
strategic decision to do that--but then on these specific
examples to be betting against the very securities which you
are selling to your clients, and internally your own people
believe that these are crappy securities, how do you expect to
deserve the trust of your clients, and is there not an inherent
conflict here?
Mr. Blankfein. Well, Senator, there is a lot in your
question and I am sure we are going to spend a lot of time on
different parts of it. Our clients' trust is not only important
to us, it is essential to us. It is why we are as successful a
firm as we are and have been for 140 years. We are one of the
largest client franchises in market making in these kinds of
activities we are talking about now, and our client base is a
critical client base for us and they know our activities and
they understand what market making is.
Senator Levin. Do you think they know that you think
something is a piece of crap when you sell it to them and then
bet against it? Do you think they know that?
Mr. Blankfein. Again, I don't know who the ``they'' is
and----
Senator Levin. We went through it today.
Mr. Blankfein. No, I know. I know, Senator, and there were
individual emails that were picked out and some people thought
something. But I will tell you----
Senator Levin. I am just asking you a question. Do you
think if your people think something is a piece of crap and go
out and sell that, and then your company bets against it, do
you think that deserves your trust?
Mr. Blankfein. Senator, I want to make one thing clear.
When you say we sell something and then our customer bets
against it----
Senator Levin. No. You bet against it.
Mr. Blankfein [continuing]. We bet against it, we are
principals. The act of selling something is what gives us the
opposite position of what the client has. If the client asks us
for a bid and we buy it from them, the next minute, we own it.
They don't. If they ask to buy it from us, the next minute,
they own it and we don't. We could cover that risk. But the
nature of the principal business and market making is that we
are the other side of what our clients want to do.
Senator Levin. When you sell something to a client, they
think, presumably, you are rid of it. It is no longer in your
inventory.
Mr. Blankfein. Not necessarily.
Senator Levin. Not necessarily, but they have at least a
right to believe that you want that security to work for them.
That is a belief which I would think most customers would have.
In example after example, it is not just that you sold
something, which obviously meant someone was buying it. There
is a seller and a buyer. That is not what we are talking about.
We are talking about betting against the very thing that you
are selling, betting against it, going short against it without
disclosing that to that client.
Do you think people would buy securities from you if you
said, we want you to know this. We are going to sell you this,
but we are going out and buying insurance against this security
succeeding. We are taking a short position. We are getting this
thing out of our inventory. We are betting against this very
thing we are selling to you. That is a totally different thing
from selling a security and no longer having an interest in it.
Is there not a conflict when you sell something to somebody
and then are determined to bet against that same security and
you don't disclose that to the person you are selling it to? Do
you see a problem?
Mr. Blankfein. In the context of market making, that is not
a conflict. What clients are buying, or customers are buying,
is they are buying an exposure. The thing that we are selling
to them is supposed to give them the risk they want. They are
not coming to us to represent what our views are. They
probably--the institutional clients we have wouldn't care what
our views are. They shouldn't care. We do other things at the
firm. We are advisors. We manage their money. There are parts
of the business where we are fiduciaries.
Senator Levin. Yes, and that is the part that is very
confusing to folks, they think you----
Mr. Blankfein. I know.
Senator Levin. They think you are fiduciaries, and then----
Mr. Blankfein. Not in the market making context.
Senator Levin. Yes, but they are not told that not only are
you not a fiduciary, you are betting against the very security
that you are selling to them. You don't disclose that. That is
worse than not being a fiduciary.
Mr. Blankfein. Senator Levin.
Senator Levin. That is being in a conflict of interest
situation.
Mr. Blankfein. I don't think our clients care or they
should care what our positions are----
Senator Levin. That you are betting against the security
you are selling to them? They don't care?
Mr. Blankfein. You say betting against----
Senator Levin. Yes. You are betting. You are going short
against the very security. You are holding a short position
against the very security. I read you over and over and over
again, you are selling securities, many of which are described
as crap by your own sales force internally.
Putting that aside just for a moment--we will come back to
that. That makes it worse. But there is an inherent conflict
when you don't disclose to your client that this security you
are buying from us has obviously a short side, but we are the
people who are keeping the short on this one. We are betting
against this security succeeding, and you don't think that is
relevant to a client?
Mr. Blankfein. We live in different contexts and this is a
professional--this is a market----
Senator Levin. I am just calling it in an inhuman context.
Mr. Blankfein. In a human context, the markets work on
transparency with respect to what the item is. It doesn't carry
representations just of what a position a seller has. Just
think of buying from a stock exchange or a futures market. You
are not even supposed to know who is on the other side. You
could have the biggest mutual fund in the world selling all its
position in something. They could hate it. You would never know
that if you were the buyer of a stock, who was selling it or
why they were selling it. Liquidity in the market demands
transparency, that the thing is supposed to do what it is
supposed to do.
The people who are coming to us for risk in the housing
market wanted to have a security that gave them exposure to the
housing market and that is what they got. The unfortunate
thing, and it is unfortunate but it doesn't--is that the
housing market went south very quickly after some of the
securities--not all of them, because some of them were done
early--but they went south, and so people lost money in it. But
the security itself delivered the specific exposure that the
client wanted to have.
Senator Levin. You don't believe it is relevant to a
customer of yours that you are selling a security to that you
are betting against that same security. You just don't think it
is relevant and needs to be disclosed. Is that the bottom line?
Mr. Blankfein. Yes, and the people who are selling it in
our firm wouldn't even know what the firm's position is and----
Senator Levin. Oh, yes, they did.
Mr. Blankfein. Senator, we have 35,000 people and thousands
of traders making markets throughout our firm. They might have
an idea, but they might not have an idea.
Senator Levin. Oh. Now you are saying they might know.
Mr. Blankfein. And the next day, it might be different.
Senator Levin. They have an idea, more than an idea in
these cases. But putting that aside, what do you think about
selling securities which your own people think are crap? Does
that bother you?
Mr. Blankfein. I think they would--again, as a
hypothetical----
Senator Levin. No, this is real.
Mr. Blankfein. Well, then I don't----
Senator Levin. We heard it today. This is a shi**y deal.
This is crap.
Mr. Blankfein. Well, Senator----
Senator Levin. Four or five examples. What is your reaction
to that?
Mr. Blankfein. I think there are a lot of opinions about
how a security will perform against the market it is in.
Senator Levin. How about the sales person?
Mr. Blankfein. I think that the investors that we are
dealing with, on the long side or on the short side, know what
they want to acquire and probably if they asked a sales person
his or her opinion, that sales person owes a duty of honesty.
But otherwise, the sales person is representing what that
security is and what the position in that security will
accomplish.
And as far as whether something is a weak security or going
bad, we are selling securities all the time that are weak, that
we ourselves don't like. It is just a function of the price in
the market. I bet some of those securities, and I don't know
specifically, which are the subject of those comments can be
bought today for a willing buyer and a seller at cents on the
dollar. As long as people know--I think there are people who
are making rational decisions today to buy securities for
pennies on the dollar because they think it will go up, and the
sellers of those securities are happy to get the pennies
because they think they will go down.
Senator Levin. I understand that. We are talking where you
were the seller of the security and you, Goldman Sachs--believe
it is a piece of crap, where you----
Mr. Blankfein. We were sellers----
Senator Levin [continuing]. Where you, as part of the
deal--I am talking about this. I am not talking about where you
are selling securities out of your inventory. I understand
that. People come to you, you buy securities. I am talking
about where the deal is that you are selling as you in the
short position and intending to keep that position. That is the
deal, and whether there is not an obligation then to disclose
to the people you are selling to in that deal--Goldman, we may
be selling it to you, but we believe that this thing is going
the other direction. We are taking the short position. You
don't see any conflict in that?
Mr. Blankfein. I think in those transactions in which we
underwrote, I believe, and I am not looking at specific--in
fact, my understanding is that is disclosed, that we can have a
short or a long position in those securities.
Senator Levin. And where you take a short position, do you
think that should be disclosed? Where you are betting against
that same security you are selling--yes or no, do you think
that ought to be disclosed or not?
Mr. Blankfein. Senator, you keep using the word ``betting
against''----
Senator Levin. Yes. You are taking the short position and
you are staying. You intend to keep it. That is a bet against
that security----
Mr. Blankfein. If somebody bought----
Senator Levin [continuing]. Succeeding.
Mr. Blankfein. As a market maker----
Senator Levin. No, just try my question.
Mr. Blankfein. I have to be able to----
Senator Levin. No, just try my question. In a deal where
you are selling securities and you are intending to keep the
short side of that deal, which is what happened here in a lot
of these deals, do you think you have an obligation to tell the
person that you are selling that security to in that deal that
you are keeping the short position in that deal?
Mr. Blankfein. That we are not going to cover it in the
market?
Senator Levin. That is----
Mr. Blankfein. Well, no----
Senator Levin. That you intend to keep that short position.
Not forever. It is your intention to keep that short position.
Mr. Blankfein. No, I don't think we would have to tell
them. I don't even know that we would know ourselves what we
were going to do. Even if we intended----
Senator Levin. I said, where you intend to keep a short
position.
Mr. Blankfein. I don't think we would--I don't think we
would disclose that, and I don't know--again, intention for a
market maker is a very----
Senator Levin. How about you are investing in these
securities. This isn't a market making deal. This is where you
have a decision to bet against, to take the short side of a
security that you are selling, and you don't think that there
is any moral obligation here? Put aside the legal obligation.
You don't think there is an obligation to tell the person that
you are selling this to that you are betting against that
security by maintaining a short position in it? It is a very
straightforward question.
Mr. Blankfein. I don't think so. I am trying to answer it.
Or, for that matter, if a client came to us and asked us to buy
something from him and we intended to hold the long position, I
don't think we have an obligation of telling him that our
intention is to hold it. In half of every----
Senator Levin. That is not the opposite side from that
client. That is the same side.
Mr. Blankfein. No, it is not. It is the opposite side.
Senator Levin. No. You said a client comes to you and wants
to sell you something. You decide whether to buy it or not.
Mr. Blankfein. Every transaction, Senator, and this is--and
I think it is important, and again, I am not trying to be
resistant but to make sure your terminology--when as a market
maker, we are buying from sellers and selling to buyers----
Senator Levin. But I am saying where you are not selling to
anyone else, you are selling to somebody and you are taking the
opposite position. You are betting. You are going out and
getting a default swap, however it is done. You are betting
against the very security that you are selling to that person.
You don't see any problem? You don't see that you have to
disclose, when you have put together a deal and you go looking
for people to buy those securities, it just adds insult to
injury when your people think it is a pile of junk. But the
underlying injury is that you have determined that you are
going to keep the opposite position from the security that you
are selling to someone. You just don't see any obligation to
disclose that. That is what seems to be coming through here.
Mr. Blankfein. I don't believe there is a disclosure
obligation, but as a market maker, I am not sure how a market
would work if it was premised on the assumption that the other
side of the market cared what your opinion was about the
position they were taking.
Senator Levin. Do they have a belief that you, at least
when you are going out peddling securities, that you want that
security to succeed? Don't they have that right to assume that
if you are going out selling securities, that you have a belief
that is something which would be good for that client?
Mr. Blankfein. I think we have to have a belief, and we do
have a belief that if somebody wants an exposure to housing----
Senator Levin. They don't want--you are out there selling
it to them. You are out there selling these securities. This
isn't someone walking in the door.
Mr. Blankfein. Again, I want----
Senator Levin. You are picking up the phone. You are
calling all these people. You don't tell them that you think it
is a piece of junk. You don't tell them that this is a security
which incorporates or which in some way references a whole lot
of bad stuff in your own inventory--bad lemons, they were
called. Over and over again, we have emails. You are out there
looking around for buyers of stuff, whether it is junk or not
junk, where you are betting against what you are selling. You
are intending to keep the opposite side. This isn't where you
are just selling something from your inventory. This is where
you are betting against the very product you are selling, and
you are just not troubled by it. That is the bottom line. There
is no trouble in your mind----
Mr. Blankfein. Senator, I am sorry. I can't endorse your
characterization.
Senator Levin. It is a question, not a characterization. I
am saying, you are not troubled.
Mr. Blankfein. I am not troubled by the fact that we market
make as principal and that we are the opposite--when somebody
sells, they sell to us, or when they buy, they buy from us.
Senator Levin. And where you are betting, keeping a betting
interest against the security. It is not just they are buying
from you. That is not my issue. They are buying something from
you where you solicit them to buy and then you are betting
against. You are keeping the short side. You are going out and
getting a default swap. Or you are selling the ABX. Whatever it
is, you are taking a position against the very security that
you are selling and you are not troubled.
Mr. Blankfein. Senator, as I--again----
Senator Levin. And you want people to trust you.
Mr. Blankfein. Senator, I think people----
Senator Levin. Why would people----
Mr. Blankfein [continuing]. Do trust us.
Senator Levin. I wouldn't trust you. If you came to me and
wanted to sell me securities and you didn't tell me that you
have a bet against that same security----
Mr. Blankfein. Senator----
Senator Levin. You don't think that affects my thinking?
Mr. Blankfein. Senator, we could do a public issue of an
oil company tomorrow, an IPO of an oil company that goes out
and searches for oil. It is not--when we sell that company, and
as an underwriter, we make sure there is due diligence because
our obligations of an underwriter are disclosure and due
diligence and that is very well established. But we can tell
our investors, if they want an exposure to an oil company and
they understand the risks and we do a good job in diligence and
we do all the disclosures that are required by ourselves and
all the regulators, we can sell that security and we will not
necessarily disclose and won't even know--and the buyer won't
care--we could be negative on the equity market and negative on
the oil market. It still won't matter----
Senator Levin. Speaking about that security----
Mr. Blankfein [continuing]. To that buyer of the security.
Senator Levin. Mr. Blankfein, stick to the point. I am
talking about that security that you are selling out there. You
go out and sell that security, oil security, I don't care what
kind it is----
Mr. Blankfein. Right.
Senator Levin [continuing]. And that you are betting
against that same security you are out selling. I have just got
to keep repeating this. I am not talking about generally in the
market. I am saying you have got a short bet against that
security. You don't think the client would care?
Mr. Blankfein. I don't--Senator, I can't speak to what
people would care. I would say that the obligations of a market
maker are to make sure your clients are suitable and to make
sure they understand it. But we are a part of a market process.
We do hundreds of thousands, if not millions of transactions a
day as a market maker.
Senator Levin. This is much more than a market maker. You
are keeping a proprietary interest in a position that is
exactly the opposite of what you are selling.
Mr. Blankfein. I think----
Senator Levin. We are going around and around on this and I
don't think we are going to get an answer from you, basically--
--
Mr. Blankfein. Sorry.
Senator Levin [continuing]. That you have any concern about
that kind of a situation.
Senator McCain.
Senator McCain. Thank you for being here, Mr. Blankfein.
Would you agree that the financial crisis that brought on the
greatest recession since the Great Depression was due to a
collapse of the housing market?
Mr. Blankfein. I think it was a number of factors. I don't
know whether that was the initial factor, but that certainly
was a major, major episode in the collapse.
Senator McCain. And your involvement in the housing market
is not in the direct mortgage business?
Mr. Blankfein. Correct.
Senator McCain. And you received $10 billion as part of
TARP?
Mr. Blankfein. An investment was made in Goldman Sachs,
yes.
Senator McCain. And why did you think you needed that
money?
Mr. Blankfein. I think we were part of a group of banks
that were brought in, and at the same time had an investment
made in by the government in order to stabilize what was a--
maybe it is too strong a word, maybe not--a panic of sorts that
caused a lack of confidence in----
Senator McCain. But you didn't make any direct home loan
mortgages.
Mr. Blankfein. De minimis.
Senator McCain. But since it was the housing market that
collapsed, you needed $10 billion, and you recovered rather
nicely, I guess. I guess you declared earnings for 2009 of some
$13 billion, is that correct? Roughly?
Mr. Blankfein. I don't know the exact number, but that
would be in the ballpark.
Senator McCain. And your bonus was?
Mr. Blankfein. About $9 million.
Senator McCain. About $9 million. And you are doing pretty
well this year, too, according to your earnings and your stock
price. You are doing pretty well this year?
Mr. Blankfein. Financially, yes.
Senator McCain. How do you think the community banks are
doing, Mr. Blankfein? I think they are doing pretty poorly.
They are being closed all the time. They are the ones that make
the loans for the mortgages. Do you think they are doing OK,
the community banks?
Mr. Blankfein. I think there is a--the recession--well,
whether or not the recession has ended, and I think most people
believe it has ended, the consequences of it still grinds on
and is creating a substantial hardship.
Senator McCain. But Goldman is doing pretty well.
Mr. Blankfein. Yes.
Senator McCain. And one of the reasons, obviously, why
Goldman is doing pretty well, before they got the $10 billion
of TARP money, of taxpayers' money, there was a November 2007
email from you that stated, ``Of course we didn't dodge the
mortgage mess. We lost money, then made more than we lost
because of shorts.'' That is a quote from your email that you
wrote. How much did you make more than you lost because of
shorts?
Mr. Blankfein. In this market, in residential housing, we
made, for the entire year of 2007, less than $500 million of
revenue, and in the succeeding year of the housing crisis,
2008, we lost $1.7 billion. We did not make big money. What I
was referring to in my email was that--and this was on the back
of a message that was looking at a part of our business and
saying they made a lot of money on shorts when I knew that we
had a lot of longs and a lot of shorts that netted to a very
small position, as our goal during this period was just to
manage our risk down.
Senator McCain. Mr. Blankfein, there is a lot of animosity
out there. I am sure you have seen that. We find in my State,
for example, 48 percent of the homes are still underwater. In
other words, they are worth less, as you know, than the
payments that are being made. And the community banks continue
to struggle and have great difficulties. You received $10
billion in TARP money and the community banks are the ones that
are going under. Maybe you could--do you think that, in the
minds of a lot of Americans, that there is a real contradiction
there?
You are doing fine. You are paid millions of dollars in
bonuses. Perhaps you earned them. I am not qualified to say
that. Meanwhile, community banks, the ones who were the direct
lenders in the housing market, who had direct involvement, the
ones that--not you, but that the homeowners relied on are the
ones that are struggling and still having enormous difficulty,
including my home State of Arizona. Do you see? Do you
understand why people might think there is a dichotomy there,
Mr. Blankfein, or even unfairness there? And I understand that
life isn't fair, but a lot of Americans don't quite understand
what went on there. They don't understand what hit them.
Mr. Blankfein. Absolutely. I think community banks play a
very important role. They are not necessarily--again, not
knowing--I am not speaking in general or specifically--maybe
some helped author their own situation by over-lending or
making imprudent judgments. But I am sure for many, they just
conducted their social purpose and lent out money against
housing, that people who owe them the money can't pay it back,
and the housing that they would have as collateral goes down in
value, they may very well be victims of the recession and I can
understand--and I share your concern for the situation.
Senator McCain. And I know you are not a charitable
organization. I know why you are in business. But has Goldman
Sachs done anything to try to help these community banks and
these homeowners who are struggling to make their mortgage
payments?
Mr. Blankfein. Senator, we have----
Senator McCain. I mean, you did get $10 billion of the
taxpayers' money.
Mr. Blankfein. Yes, we did, and I mentioned in my opening
statement the disposition of that, the return, and the return
with a high rate of return for the taxpayer, but we understand
our obligations don't end there. We have always been a
philanthropic organization. We don't tend to--again, we
sometimes are invisible, but I would say in the last year,
2009, we allocated, and I don't mean just accrued, we delivered
a billion dollars of the firm's funds to philanthropy,
including $500 million to a program to support small businesses
by giving education to small businesses through the medium and
delivery mechanism of community colleges and with a view to
providing finance for some of the graduates of the programs
that we have for those small businessmen in order to make them
bigger businessmen and to involve our people with it.
Are any of these things enough? Not for the suffering
existing in the world, but again, we are trying to do our part.
We think in the main conduct of our business, we are also doing
important things for the capital markets, but we do take
account of communities and institutions that we normally don't
reach as Goldman Sachs.
Senator McCain. What about community banks? Any involvement
with them?
Mr. Blankfein. We may help find--I just don't know.
Senator McCain. Explain, perhaps for the benefit of the
Subcommittee and for the record, what is a synthetic CDO?
Mr. Blankfein. A CDO----
Senator McCain. A synthetic CDO.
Mr. Blankfein. I was going to build to it.
Senator McCain. Sorry.
Mr. Blankfein. A CDO is a pool of assets, in this case,
mortgage assets, so mortgages that are pooled together and then
can be sliced in a way that will yield a particular credit
exposure. The reason why one would want to pool mortgages is it
gives diversification so that you can pool mortgages not just
from one community, but distribute it over the whole country.
The reason why one would want to slice it is so you could pick
your place on the credit spectrum and say, I would like the
more senior mortgages. I would like the more junior risks.
In a synthetic, you don't pool the actual mortgages per se.
You pool reference securities that are indexed to specific
pools of mortgages.
Senator McCain. In other words, in a synthetic CDO, you
don't really have any ownership. You are just betting on the
fortunes of that CDO, is that correct?
Mr. Blankfein. Yes. You are doing it in a way to get a
specific risk in a specific place at a specific level of the
spectrum without necessarily having to assemble the particular
securities, and so you can do it more quickly and you can do it
more precisely.
Senator McCain. How does that differ from going out to
Caesar's Palace to the sports book and making a wager on the
outcome of an athletic event?
Mr. Blankfein. Well, I think the people who are
participating in the synthetic CDO market are specifically
trying to take particular risks with respect to the housing
market, short or long, and presumably they want to take that to
either initiate that exposure or to use that exposure to help
hedge themselves or to adjust their risk profile, in the case
of somebody who already has accumulated risk.
Senator McCain. It has been alleged in the case of the
Abacus----
Mr. Blankfein. Abacus.
Senator McCain [continuing]. Transaction that the credit
rating agency was not informed that a hedge fund client was
taking a short position. Is that true?
Mr. Blankfein. I think the specific complaint was a lack of
disclosure that a short--someone who was taking the short side
of the position had an influence on the selection agent and
that should have been disclosed.
Senator McCain. Should it have been disclosed?
Mr. Blankfein. We don't think so, no, and that is in
dispute.
Senator McCain. The credit rating agency, the one that----
Mr. Blankfein. Again, it is complicated, because in the
alternative, and again, this is a case, and in the
alternative--and there is also some--and again, this is a
litigation and obviously one side thinks one thing and another
side thinks another--there is also a belief on our side that
the selection agent did know, so----
Senator McCain. Let us assume that the agency didn't know.
Is that--well, you would know whether you informed the rating
agency or not, wouldn't you?
Mr. Blankfein. I personally would not. The person, and he
was here testifying, asserted that he believed the other side
of the transaction did know and therein lies a factual dispute.
Senator McCain. The rating agency would know whether they
were told or not.
Mr. Blankfein. I am sorry, are we talking about the
selection agent?
Senator McCain. The rating agency--the hedge fund--so there
is a difference of opinion between the hedge fund client and
Goldman?
Mr. Blankfein. I don't think there is a difference of
opinion between the hedge fund client and Goldman.
Senator McCain. Well, the rating agency rates the CDO,
right?
Mr. Blankfein. A rating agency, yes, rates a CDO.
Senator McCain. And it is alleged that the rating agency
was not told that a hedge fund client was taking a short
position.
Mr. Blankfein. Senator, this may be a different point. This
is not the subject of the legal proceeding, to the best of my
knowledge.
Senator McCain. Well, a lot of these things are fairly
complicated, Mr. Blankfein, and a lot of Americans don't
understand what happened, but they do understand that they are
still hurting very badly, many of them across this country, and
they believe that your handling and other financial
institutions handling of the housing market and these
complicated transactions were a direct contributor to the
meltdown that America experienced and they haven't recovered.
You have done pretty well. I don't think that is the vision
that most Americans have of how this Nation and its economy
should function.
I thank you, Mr. Chairman.
Senator Levin. Thank you very much, Senator McCain.
Senator Kaufman.
Senator Kaufman. Good afternoon.
Mr. Blankfein. Good afternoon.
Senator Kaufman. In your testimony, you say that Goldman
has been ``a client-centered firm for 140 years.'' Clients come
to the firm because, you say, ``one, they want financial
advice; two, they need financing; three, they want to buy or
sell a stock, bond, or other financial instrument; or four,
they want the help in managing and growing their financial
assets.''
Mr. Blankfein. Yes, sir.
Senator Kaufman. Is it fair to say in the last 30 years
that Goldman has focused more and more of its resources and
gained more and more of its revenue from trading in its own
account without the need for clients?
Mr. Blankfein. We have focused more and more in trading as
a principal----
Senator Kaufman. Right.
Mr. Blankfein [continuing]. But that is the way the client
business has evolved, sir.
Senator Kaufman. Right. But it has evolved away from the
classic investment banking and gotten more and more to trading?
Mr. Blankfein. Well, I would say that, increasingly, and
this is a change in the sociology of the business that took
place over the last 15 or 20 years, I am not sure it was
precipitated by the fall of Glass-Steagall or it caused Glass-
Steagall to fall as U.S. institutions had to become more
competitive with global institutions, but somewhere along the
line, clients used to ask you for advice--if you were an
investment bank and then went to other institutions and asked
them for financing----
Senator Kaufman. Right.
Mr. Blankfein [continuing]. And to take principal risk.
Senator Kaufman. Right.
Mr. Blankfein. Somewhere along the line, they stopped
asking necessarily to do things for them, but to do things with
them, in other words, to be the other side. And today in the
world, and this evolved over a long period of time, to be
effective for your clients, you not only had to give them
advice, but you had to have the financial wherewithal, in other
words, the balance sheet to be able to accomplish their
objectives, not just advise them on their objectives.
And so Goldman Sachs, 12 or 13 years ago, actually had to
reverse many years of being a private partnership and become a
public partnership, public company, so we could, frankly,
survive in the evolving world of needing to be a principal to
accomplish our clients' objectives.
Senator Kaufman. But also, it was very profitable. I mean,
Goldman Sachs has clearly been one of the most profitable
institutions on the face of this earth. So also, I mean, it
wasn't just kind of the move of society. It was also a way,
when you sat down and you had your meetings and everything
else, you said, look, this is the way to go. And I am not
saying that from a negative.
Mr. Blankfein. I know, Senator, and I know you are not
saying it negative, but just for the history of it----
Senator Kaufman. Sure.
Mr. Blankfein [continuing]. It was a very observed decision
by the world of what Goldman Sachs was doing, done very
reluctantly----
Senator Kaufman. Right.
Mr. Blankfein [continuing]. Not so much to--and the real
rationale for it was not because to make incremental profits.
It was done in order for us to survive as a leading financial
institution. Had we not done it, had we not grown, if we were
not effective for our clients in order to allow them to
accomplish those objectives, I don't think--Goldman Sachs would
be around, but it wouldn't be an important company today.
Senator Kaufman. OK. We will just agree that--I think that
you were one of the leaders in doing this. I mean, I am not
saying it from a negative standpoint----
Mr. Blankfein. We were the last of the firms to do this.
Senator Kaufman. Yes. And does proprietary trading activity
ever run counter to the interest of your clients, do you think?
Do you ever feel like it is a conflict of interest? I just
think it is a conflict of interest, because one of the things
that bothers me most about our society today is it is like when
you say someone has a conflict of interest, it is like----
Mr. Blankfein. No, I understand.
Senator Kaufman [continuing]. You are accusing them of
being crooked. I am not saying that. I am saying, but it seems
to me that--does proprietary trading activity ever run counter
to the interest of your clients, or present a conflict of
interest, let me put it that way?
Mr. Blankfein. The fact that we are a principal--in other
words, when you say proprietary, it means a business that is
totally separate from our client business----
Senator Kaufman. Right.
Mr. Blankfein [continuing]. In which no client is engaged.
Senator Kaufman. Right.
Mr. Blankfein. No, I don't think so. We keep those--when we
do proprietary trading, it is separate.
Senator Kaufman. Oh, no, I know it is separate. I am not
saying that----
Mr. Blankfein. Separate, and separate people----
Senator Kaufman. No. I know it is separate people. But your
firm--I am not saying anybody is doing anything wrong----
Mr. Blankfein. No, I know you are not----
Senator Kaufman. I am saying that Jones over in Department
A is talking to Smith over in Department B. But if Jones is
doing one thing and Smith is doing something else, there is
potential for a conflict of interest. Now, you say, I resolve
that conflict of interest by saying, Jones, you can't talk to
Smith. But when you are doing out of one firm these kind of
transactions, there is a conflict of interest. Whether you
handle it well, whether you have a wall down through the middle
of Goldman Sachs or not, it just seems to me that it is just--
when you are trading for your own account, the potential for
conflict of interest, as opposed to your clients, is just
great.
Mr. Blankfein. I think there are a lot--I think in our
principal activities, which is more than our proprietary
activities----
Senator Kaufman. Sure.
Mr. Blankfein. For example, I think there is always that
potential we have to manage. I think David Viniar said we
always have to manage conflicts----
Senator Kaufman. Right.
Mr. Blankfein [continuing]. Because necessarily, if you are
a principal----
Senator Kaufman. Right.
Mr. Blankfein [continuing]. You are on the other side. I
think our proprietary businesses actually have much less,
although the perception of it--obviously, if you are asking the
question, the perception of conflicts, but we keep those very
separate.
Senator Kaufman. Right. And all I am trying to do is get at
the fact that this is a business where there is conflict of
interest where there didn't used to be. I mean, when you were
100 percent behind your clients, you weren't involved in much
proprietary trading for your own account. You could just worry
about your client. But inherent in this is risk of conflict.
How you deal with it, I am not saying, but just the fact the
conflict exists.
Now, to go back to what Chairman Levin does, just to go
through it one more time, in the first half of 2007, Goldman
Sachs sold long positions in CDOs to its clients, right?
Mr. Blankfein. Two-thousand-seven----
Senator Kaufman. The first half of 2007.
Mr. Blankfein. We sold--we reduced our risk, which since
the risk largely started out as long, it means we sold some of
our long positions and put on other short positions.
Senator Kaufman. Right. So you sold positions, and while--
CDOs that Goldman itself had created and marketed while
simultaneously taking short positions in the CDOs in order to
limit your risk.
Mr. Blankfein. I am sorry. You said that quickly.
Senator Kaufman. You were selling CDOs at the same time you
were taking short positions on the same CDOs. There is a thing
called the Hudson Mezzanine 2006-1, supposedly where
specifically you were selling CDOs in the marketplace and at
the same time, for your own account, you were selling the same
CDOs short.
Mr. Blankfein. Yes. I don't have any knowledge of that----
Senator Kaufman. But you believe that could happen?
Mr. Blankfein. I believe that we can have--that some people
can own--look, on the first day, somebody could buy a CDO from
us----
Senator Kaufman. Right, and then you could sell it short.
Mr. Blankfein. And, yes, we could. On the first day, we
could sell more--if people came to us for a market the day
after we sold our whole inventory and wanted to buy it, we
would short----
Senator Kaufman. No, but I think in this case, I mean, just
to get back to specifics, you were selling CDOs as part of a
marketing plan, you had bundled together these mortgages and
you were selling them as CDOs and you were doing that on a
regular basis through 2006, 2007. And then at some point, as
Mr. Viniar pointed out, you decided that--in this whole area
that you had risk and therefore you started selling CDOs short
in order to solve this risk.
Mr. Blankfein. Yes. I can't answer--I am not--I know that
we reduced our risk as per the instruction. The risk started
out long. I just don't know to what extent, how much was it
selling length, which was some of it, for sure, selling certain
securities, shorting certain securities, but I can't tell you,
because some of it was, I think, the new ABX index, also. I
just don't know.
Senator Kaufman. Well----
Mr. Blankfein. But I know the----
Senator Kaufman. But you don't think--I mean, we
established with Senator Levin, you don't think there is
anything wrong with that.
Mr. Blankfein. I don't.
Senator Kaufman. No.
Mr. Blankfein. But I am also, to the extent you are asking
me about whether we were long or short a specific security and
in what proportion, I just don't know.
Senator Kaufman. But you don't rule out the possibility
that could have happened?
Mr. Blankfein. I can't rule it out. I just don't know.
Senator Kaufman. So to get back to--and I am not going to
ask you 20 times. I am just going to ask you once. Does that
have the appearance of a conflict of interest?
Mr. Blankfein. That we were short----
Senator Kaufman. That you were selling CDOs--trust me,
according to this Mezzanine, you were doing it. Hudson
Mezzanine 2006-1, you basically packaged CDOs, sold them, and
then at some point, I think, based on what Mr. Viniar said, you
were concerned about this and you decided to short, in other
words, in order to offset it, the risk, to cut back your risk.
And I am just saying, don't you think that has the appearance
of a conflict?
Mr. Blankfein. Again, I don't know. If we have pools of
securities in our inventory----
Senator Kaufman. Right.
Mr. Blankfein [continuing]. And we are trying to reduce our
risk----
Senator Kaufman. Right.
Mr. Blankfein [continuing]. We are going to be selling
those----
Senator Kaufman. Right.
Mr. Blankfein. Some combination of selling those, selling
indexes, or selling other----
Senator Kaufman. No, but we talked about this with the last
panel. You weren't here, but the last panel, we talked about
this, and we decided that you did not want to sell those. We
said, look, what most people do who aren't as sophisticated as
Goldman Sachs, if they are in a position where you have a lot
of stock or CDOs or bonds that you now think may be risky, you
don't short something. People do short things, and there is
nothing wrong with shorting things.
Mr. Blankfein. Sure.
Senator Kaufman. But most people cut back on their long,
right? I mean, if they have 500 shares of stock they are
starting to get concerned about, maybe they sell 100 shares.
But the previous panel said that it was illiquid, that you
didn't want to do that because of that. So what you did is you
went out and Goldman Sachs actually sold short.
Mr. Blankfein. May I speak generally----
Senator Kaufman. Sure.
Mr. Blankfein [continuing]. Not knowing about the specific
security? The best way of reducing your risk is to sell what
you have.
Senator Kaufman. That is what I just said.
Mr. Blankfein. Sometimes, as you said, you can't because it
is illiquid.
Senator Kaufman. Or you don't want to because of the
liquid----
Mr. Blankfein. Or sometimes it is unattractive. But
sometimes what people are doing is, gee, I am short something
in this part of the capital structure----
Senator Kaufman. Right.
Mr. Blankfein [continuing]. What I will do is I will sell
something similar to it----
Senator Kaufman. Right.
Mr. Blankfein [continuing]. But a little lower in quality--
--
Senator Kaufman. Right.
Mr. Blankfein [continuing]. Because I think that will
underperform against what I have.
Senator Kaufman. No, I have got it. That is----
Mr. Blankfein. But that is what they are doing.
Senator Kaufman. No, but that is not--I am talking about
where you are actually out selling it, and this is what the
concern is. I mean, in every other business--I think this is
what the Chairman is getting at--in every other business for
most Americans, if you were coming to me and saying--buy this
car from me, and at the same time these are good cars, these
things are great, but I just sold mine because I know it is a
clunker--that is what the concern is, and let me tell you why
this is so important and why your oil analogy really doesn't
work.
Because what is really at the heart of this is at what
point did Goldman Sachs decide the housing market is going
south and we want to get out of it? That is really at the
heart. This isn't like you were carrying this oil deal that you
talked about there. This is specifically we are now in 2007 and
people were starting to see this market is bad, and guess what,
Goldman Sachs sells a lot of stuff short, and guess what, they
make a lot of money on it, but it is just a business deal. Do
you see where the concern is?
Mr. Blankfein. Yes.
Senator Kaufman. It is like, at what point do--it is like
the old Watergate thing. What did you know and when did you
know it?
Mr. Blankfein. Senator----
Senator Kaufman. I mean, the key thing to this thing is, if
you were still selling securities, mortgage-backed securities,
RMBSs, residential mortgage-backed securities, after you really
had decided that this was a down market and were evidenced by
selling short, I think that is what people are wondering about.
Mr. Blankfein. No, Senator, I realize that, and we are very
much informed and we wouldn't be here but for the fact that
there was such a collapse in the housing market. To go back to
that oil analogy that I gave you, if we were sitting here and
we had underwritten a new security like that, what we described
to you instead of housing, and after we put it in the market, 3
months later----
Senator Kaufman. Right.
Mr. Blankfein [continuing]. We were short that security in
connection with our market making----
Senator Kaufman. That is OK because you are not continuing
to sell those securities at the same time and you may be in a
legitimate position.
Mr. Blankfein. But it was the same security that we had
underwritten----
Senator Kaufman. No, I understand that, but----
Mr. Blankfein [continuing]. Three months earlier.
Senator Kaufman [continuing]. You had underwritten it, but
the world has changed. I don't think people have a problem with
you actually selling--I sell a series of securities, and then
later on I see--let us say I sold out every one of them, and
then 6 months later, I sell them short. I don't think anybody
has a problem with that. That is it. Things happen. You sold it
at the best time you knew what was going on. There is nothing
inherently wrong with that.
What is inherently wrong is if you start selling
securities, a series of securities, and then at some point you
decide, these are really bombs. I mean, we heard earlier about
the fact that you were selling Washington Mutual, Long Beach
securities, 90 percent of which were stated income loans.
Ninety percent were stated income loans, home equity loans were
stated income loans, and they all went bad. So, I mean, at some
point somebody looks up and says--I just found out. We have
been selling Long Beach securities. They are in our originator
things and they have got all these stated income loans. We had
better get out of this business. That is where the concern is.
At what point did you know that?
And here is the thing. Can I ask you really a----
Mr. Blankfein. May I ask----
Senator Kaufman. Sure.
Mr. Blankfein. You asked me what we knew----
Senator Kaufman. Yes. What did you know when?
Mr. Blankfein. We did not know what subsequently occurred--
--
Senator Kaufman. Sure.
Mr. Blankfein [continuing]. In the housing market.
Senator Kaufman. Right.
Mr. Blankfein. We did not know. By the way, we didn't
behave like we knew it. In other words, there are emails going
around where this one was nervous and this one really--and we
are talking about relatively junior people in managing
positions on desks----
Senator Kaufman. Right.
Mr. Blankfein [continuing]. And then there are other emails
where people were excited and thought the market would rebound.
Senator Kaufman. Sure.
Mr. Blankfein. We did not know that the housing market was
going to happen like that.
Senator Kaufman. At what point--I guess this is the----
Mr. Blankfein. And by the way, our positions reflect that,
because had we known----
Senator Kaufman. Right.
Mr. Blankfein [continuing]. We would have been massively
short the market instead of just getting short----
Senator Kaufman. Can you tell me--I guess this is the real
question----
Mr. Blankfein [continuing]. About equal to what our longs
were, and maybe a bit more.
Senator Kaufman. We have heard from everybody, and I think
it is totally credible until you ask the question, at what
point--can you remember--I think it would be a pretty important
day--that you decided to pull together the management of
Goldman Sachs and say, what? This housing market is a bad place
to be in. When was that day?
Mr. Blankfein. I never did.
Senator Kaufman. You mean, right up until the end, nobody--
you didn't have as corporate policy that we should reduce our
holdings in mortgage-backed securities and----
Mr. Blankfein. Oh, no----
Senator Kaufman [continuing]. We should stop selling
mortgage- backed securities. These things are just literally--
the whole market is coming apart. I mean, there had to be a
time. I mean, it wasn't last week.
Mr. Blankfein. I don't know that we--again, we are dealing
with the same information. I think tomorrow--if tomorrow----
Senator Kaufman. Right.
Mr. Blankfein [continuing]. Tomorrow, I think there needs
to be a--I think it would serve the public interest for a
securities market in housing--again, learning from the
mistakes----
Senator Kaufman. Right.
Mr. Blankfein [continuing]. Revealed, in other words, if
you assume with me that we learned from all the mistakes, I
think securitizing home mortgages is not inherently a bad
activity.
Senator Kaufman. No. I mean, at which point did you decide
that this specific, that Goldman Sachs had to do everything it
could to get out of this business, reduce your----
Mr. Blankfein. We never decided to get out of the business.
Senator Kaufman. Well, how about the second quarter of
2007. You shut down your CDO warehouses. You took significant
mark to market losses. You reduced loan purchase and reduced
counterparty exposure. That sounds to me like you wanted to get
out of that business.
Mr. Blankfein. Again, to the best of my knowledge--again,
and I am not close to that decision. There were other people. I
don't know that a decision was made to leave that business as
opposed to reduce the risks of the business----
Senator Kaufman. Shut down CDO warehouses? That wasn't an
indication you wanted to get out of that business?
Mr. Blankfein. When you tell me, get out of the business,
Senator, I don't know if--I don't know what that means.
Senator Kaufman. But you can see why people were concerned
about what went on in the second quarter of 2007, what was
going on at this time. At what point did it reach a point where
you are saying, I just can't sell this stuff anymore. It is
just not right to continue to originate these loans. I mean, I
just find it incredibly hard to believe. I mean, there is this
illusion in this country, I guess, about how smart people are
on Wall Street, and the people on Wall Street, and I know
people going to Wall Street are really smart. And it is just
hard for me to believe, and it is hard for the American people
to believe that people this smart really never kind of decided
that this thing was going south in a big way.
Mr. Blankfein. Senator, I heard your earlier remarks, as
well. I think we are not that smart at--and maybe there were
people who knew--and, by the way, even the people who with
hindsight knew it, I think they thought it and then they turned
out to be right.
Senator Kaufman. Right.
Mr. Blankfein. I could tell you from my own self----
Senator Kaufman. Sure.
Mr. Blankfein [continuing]. At 20 percent down in the
housing market, I didn't know whether it would go down 30
percent or rebound up 10 percent.
Senator Kaufman. Well, even now is a different story. I
believe----
Mr. Blankfein. But now----
Senator Kaufman. Because everybody--the problem is--the
reason this is a problem is because one of the defenses you use
is that these are all big boys, that we are dealing with the
big boys and therefore, caveat emptor really doesn't apply. So
big boys knew. And I am just saying, at what point--right now,
big boys know that the housing market is a bad deal. You can
get into the housing market now, but you are going to ask for
one heck of a lot better documentation on what you are getting.
You are going to ask for higher returns. You are going to ask
for all kinds of things because you know that this is a very
risky business.
But the real question is that we have talked to Washington
Mutual. We went through what they went through. They were just
pushing stuff out the door as fast as they could get it. It
didn't matter, stated income loans. We talked to the
regulators. The regulators just basically--the head of Office
of Thrift Supervision said he had no idea that Washington
Mutual, 90 percent of their equity loans were stated income
loans and 53 percent of the Option ARMs and so on. He had no
idea of that, which he had previously said stated income loans
are an anathema to the business.
Then we go to the rating agencies. In 2003 to 2005, they
were still saying, there is no problem--there is a problem.
They were saying, there is a problem here. And you ask them,
well, why in the thousands of RMBSs that they rated during 2006
and 2007 they rated 50 percent of them AAA and they are all now
junk.
So nobody knew? People were still doing things long after
they knew there was a problem.
Mr. Blankfein. Senator, there were a lot of business
judgments, and maybe--I wish I had known, but if you just look
at all the big Wall Street firms that lost tens of billions of
dollars even after this period, in 2008----
Senator Kaufman. Sure.
Mr. Blankfein [continuing]. Holding on to these securities.
I did not know. All we know is the discipline of mark to market
and reducing our risk when the markets are nervous and when
P&Ls are moving.
Senator Kaufman. Let me just finish with this thought. This
is the worst thing to happen to this country economically since
the Great Depression. Millions of people were put out of work.
Millions of people lost their homes. Millions of people are
really hurting. And I think what really bothers people the
most, at least the people I talk to, is not, the bailouts,
although that bothers people a lot. I think what bothers them a
lot is the incredible compensation. That bothers them, the
bonuses to people that during 2006, 2007 made horrible
decisions but still received gigantic performance bonuses,
especially from CEOs and executives who said this should be
based on performance, and the performance was lousy and still
they made billions of dollars.
But I think what really kind of gets them the most is here
we are after this terrible travail and there is only one
section of our entire economy that has to worry what it is
going to do with billions of dollars for bonuses. That is the
part. The fact that--and it may be totally a chance. It may be
totally something beyond our control. But the idea that Wall
Street came out of this thing just fine, thank you, is just
something that just grates on people. And I think they think
that you didn't just come out fine because it was luck. They
think that you guys just really gamed this thing real, real
well. Not that you caused the whole thing, although I would say
you were a big part of the cause, but just that you came out of
this thing fine. I think that is what disturbs them. So I think
that is basically the point I was making.
Thank you, Mr. Chairman.
Senator Levin. Thank you very much, Senator Kaufman. Dr.
Coburn.
Senator Coburn. Thank you, Mr. Blankfein, for being here. I
have to disagree a little bit with Senator Kaufman. I think 90
percent of the problems associated with the meltdown in our
mortgage system and the financial crisis sits on the lap of
Congress. I have been adamant in my view on that because you
can't record the last time we had an oversight hearing until
the problems came up. We don't do oversight in advance to see
whether things are working.
Having said that, I have a few questions for you, Mr.
Blankfein. The activities that you and your employees have been
called here today to testify about, is it your understanding
that your competitors were engaged in similar activities?
Mr. Blankfein. Yes, and to a greater extent than us in most
cases.
Senator Coburn. Some of them aren't here anymore, are they?
Mr. Blankfein. That is correct.
Senator Coburn. All right. Did you at any time have
concerns--legal, ethical, or reputational--about any of the
activities undertaken by Goldman employees about which we have
heard today?
Mr. Blankfein. I did not.
Senator Coburn. So you have not heard anything today----
Mr. Blankfein. Oh, I am sorry----
Senator Coburn [continuing]. That has concerned you about
actions or statements by Goldman or former Goldman employees?
Mr. Blankfein. I think as I heard it, everything sounds
correct. But when you say concerns, I mean, I am in the
business--in my role, I will look deeply into everything that
has surfaced here. What is going on in this hearing today is,
of course, fact finding for you, but it is fact finding for
everyone. So I heard nothing today that makes me think anything
went wrong, but I won't--you raised transactions that I never
heard of before and I will have people look deeply into them.
Senator Coburn. Thank you. On Sunday, September 21, you
made the following public statement about Goldman Sachs----
Mr. Blankfein. I am sorry, what date?
Senator Coburn. Sunday, September 21, 2008, about Goldman
Sachs becoming a bank holding company. ``While accelerated by
market sentiment, our decision to be regulated by the Federal
Reserve is based on recognition that such regulation provides
its members with full prudential supervision and access to
permanent liquidity and funding. We believe that Goldman Sachs
under Federal Reserve supervision will be regarded as an even
more secure institution with an exceptionally clean balance
sheet and a greater diversity of funding sources.''
Prior to September 2008, did you or anyone at Goldman Sachs
have plans to convert the firm to a bank holding company?
Mr. Blankfein. Prior to September 21?
Senator Coburn. Yes.
Mr. Blankfein. We had--yes. We didn't resolve to do it, but
it was something that we were very much looking at.
Senator Coburn. Was this something that was discussed at a
Board meeting?
Mr. Blankfein. Yes, it was.
Senator Coburn. All right. And there are records of that
Board meeting?
Mr. Blankfein. There must be. I haven't reviewed the
records.
Senator Coburn. Would you have your staff provide that to
us?
Mr. Blankfein. Sure.
Senator Coburn. If you would, please.
Mr. Blankfein. It was decided at that Board meeting not to
do it.
Senator Coburn. Looking back today, would you rather be an
investment bank?
Mr. Blankfein. You mean outside----
Senator Coburn. And not----
Mr. Blankfein. You mean not a bank holding----
Senator Coburn [continuing]. Rather not be under the
Federal Reserve today?
Mr. Blankfein. I am not sure how realistic--we will have to
wait and see how the legislation unfolds. I am really not sure,
and I will say it this way, how realistic that will be. The
reason why we were looking at it at the time was it was hard
to--we originally started with a whole regime for investment
banks and then post-Bear Stearns and certainly post-Lehman, I
think there was, at that point, it was clear there was not
going to be a whole regime for----
Senator Coburn. For the classical investment bank.
Mr. Blankfein [continuing]. For the classical investment
bank at that point, because there weren't that many.
Senator Coburn. I think in your September 21, 2008
statement, you talked about access to permanent liquidity and a
greater diversity of funding sources. Were you, in fact,
referring to Goldman Sachs would be able to obtain access to
the discount window at the Federal Reserve?
Mr. Blankfein. I am not sure. I think possibly. I am just
not sure.
Senator Coburn. Well, that would make sense to you?
Mr. Blankfein. It would make sense to me, but I am just not
sure. I know there were a lot of facilities that were in place
already, and I am not sure--I am just not sure.
Senator Coburn. Let me ask a follow-up question. Prior to
September 22, 2008, is it accurate to say that Goldman Sachs
had temporary access to the discount window?
Mr. Blankfein. There are people, other people, even people
here who might know that answer better than me. I know that we
had access to certain funding facilities. I am not sure it was
the discount window per se. I don't think so, but I am not
sure.
Senator Coburn. Well, that would be something that I would
be interested in having----
Mr. Blankfein. Yes, sir.
Senator Coburn [continuing]. Whether you did or didn't.
Have you since becoming a bank holding company accessed the
discount window?
Mr. Blankfein. To the best of my belief, other than to test
it shortly after we became it, just to see if it would work, I
would say no. But as you will notice, I am looking for
confirmation from my CFO----
Senator Coburn. I understand. That is fair.
Mr. Blankfein [continuing]. And I feel much better having
gotten it. No.
Senator Coburn. Let me ask you a few questions about the
bill that is being proposed. Your Executive Vice President and
Chief Financial Officer said you embrace it. You are generally
supportive of the Dodd bill. You have been fairly high profile
in your support for it. Do you still maintain that support for
this bill? Do you think it solves the problems that caused the
problems that we got into?
Mr. Blankfein. I think execution--well, first of all, some
aspects of the bill, I think, have morphed over the last--maybe
even over the last few days. I am not sure----
Senator Coburn. I don't think so. The vote was turned down.
Mr. Blankfein. I see.
Senator Coburn. I don't think we have gotten there.
Mr. Blankfein. Right. I am generally supportive, and to be
sure, there are details of it that I think I am less sure of.
But I think, on the whole, financial reform is essential and I
will say that last week in New York, I listened to a speech by
Barack Obama at Wall Street and one of the points he made
resonated with me because I had said it myself. He said that
the biggest beneficiaries of reform will be Wall Street itself,
because proper reform will make the markets safer, and then I
will add my own piece, the biggest risks that financial
institutions have are with each other. And so to the extent
that is all made safer, I think America will be a big
beneficiary, but specifically we will, as well.
Senator Coburn. What do you think will happen to loan
origination from the community banks and smaller regional banks
if they are required to maintain 5 percent of every mortgage
that they write? What do you think is going to happen to
mortgage volume? Let us say the housing industry comes back. Do
you think the small banks are going to be writing mortgages
anymore in the future?
Mr. Blankfein. I am not--I think I should give a
qualification to my--there are parts of that bill that we
will--that affect us and that we have particular expertise and
experience in, and that is really what I was addressing. There
are other big parts of that bill that are just remote from our
experience. How it affects community banks, how it affects
mortgage originators, since we are only in that business in a
de minimis way, and how it affects consumer banks, consumer
legislation being a major part of it, is really remote from our
experience because we don't engage in those activities. So I
should give you that qualification.
Senator Coburn. Do you have any thoughts on the fact that
this bill doesn't address underlying core problems like Fannie
Mae and Freddie Mac?
Mr. Blankfein. I think----
Senator Coburn. I mean, you would agree that there was an
incentive to make loans through the implicit guarantee of the
Federal Government to people were less qualified than what we
had seen prior to the onset of Fannie Mae and Freddie Mac.
Mr. Blankfein. I can't speak to the qualifications or
standards of Fannie Mae or Freddie Mac. I can say that they
were an instrument of policy to attract more money into home
ownership, which is--I am not suggesting that is--but that is
what they accomplished.
Senator Coburn. But you would agree with an implicit
Federal guarantee on a mortgage, that would make it more
available to more people, because the cost of capital would go
down----
Mr. Blankfein. Yes.
Senator Coburn [continuing]. Because of an implicit Federal
guarantee behind it.
Mr. Blankfein. I would say there are two, and there may be
a lot more, but coming to mind, there are two big policy facts
that tend to draw more money into housing, at least two, one of
which is that through the government-sponsored entities,
money--the government implicitly--those entities were able to
draw in money because they were perceived to be quasi-
government credits. That is one. And the other is, of course,
the fact that the tax code allows you to deduct mortgage
interest. And so those two things would cause--would favor more
money, all other things being equal, to flow into those
sectors.
Senator Coburn. Have you personally spoken with anybody at
Treasury about the regulatory reform effort?
Mr. Blankfein. Since the beginning?
Senator Coburn. Have you had----
Mr. Blankfein. I might have.
Senator Coburn. Let me rephrase the question. Have you in
the last 6 to 9 months had conversations with people at
Treasury about the regulatory reform effort?
Mr. Blankfein. I might have, but they were--they would be
at a very general and high level, not specific, frankly, along
the lines in which I am--the same way I am talking about it to
you, at the same----
Senator Coburn. OK. That is fair. Do you know who you
talked to?
Mr. Blankfein. I call, as part of what I do in my role, I
try to see senior people in Treasury and at the White House
and, frankly, in the legislature and introduce myself, offer to
discuss things on their mind and offer them things, if they are
interested in hearing it that are on my mind. But they are
generally--but I wasn't involved in any kind of roll-up-your-
sleeve effort on specific points.
Senator Coburn. Let me change course for a minute. I just
really want to pick your brain and your judgment.
Mr. Blankfein. Sure.
Senator Coburn. Systemic risk and the fact that it was
there created the necessary program for us to eliminate that
systemic risk. The option in the Dodd bill is to tax you so
that we can have a fund, and I have real problems with how that
fund is managed, but the idea is, is so that the government
doesn't ever loan it again, i.e., the taxpayer, but, in fact,
the taxpayer will, because if you are taxed, it is going to
cost more to the people you do business with.
So what are the other ways to handle systemic risk, in your
opinion, that are different than creating a taxpayer-funded
fund again that would limit this country's exposure to
significant systemic risk, knowing that as we lessen that risk,
we probably also lessen some of our competitive capability
worldwide in terms of financial and capital markets?
Mr. Blankfein. Well, I think for sure we need the
apparatus--it could very well be the apparatus proposed--for
systemic risk regulation and observing systems and people who
can look across all the different institutions and potential
sources of systemic risk. I think that is very important.
Second, and I think possibly the most important thing that
is being discussed, is to recognize that despite every good
intention, despite trying to see around every corner, you just
will miss stuff, and to make sure that the system is better
able to absorb the consequence of missing something. And so
making financial institutions, including institutions like
ourselves, have appropriate levels of capital and liquidity,
which by and large means more of both----
Senator Coburn. Which means we would limit your leverage
ratio to 10 to 12?
Mr. Blankfein. You might limit our leverage ratio. You
might have us have certain kinds of contingent securities that
cause people to have to give us money at times we need it.
There are a number of proposals out to do it, but in general,
the system would be made safer if financial institutions had
more capital. There is, of course, a cost for this, because to
the extent that you have more capital and lower leverage, loans
will be more expensive. There will be less credit granted, but
that is a tradeoff that after the experience of the last few
years policy makers may well be interested in making, and it is
a question of degree that----
Senator Coburn. Well, it is about a $10 trillion cost of
what we have absorbed already, so----
Mr. Blankfein. Right.
Senator Coburn [continuing]. That may be cheap in
comparison to what we have swallowed.
Mr. Blankfein. And I think at least a third level, after
you try to avoid all the problems and after you try to have
more capital to absorb the problems, you have to have a
resolution authority to make sure if No. 1 and No. 2 don't
work, that an individual institution that was poorly run or
undercapitalized doesn't bring down the system, and so no
institution should be too big to fail or have to burden the
public with the cost of its failure or being saved.
Senator Coburn. Which brings to mind, do you think that the
FDIC presently has the capable staff that would be able to come
in and run Goldman Sachs if you got into trouble?
Mr. Blankfein. My answer----
Senator Coburn. The answer to that is absolutely no. Nobody
is going to believe they have the capability to do that. But
that is what we are setting up in this bill. We are going to
give them broad power to come in. They will pick winners and
losers. They will make the decisions. They have none of the
expertise to do that, but that is who we are going to put this
with.
Mr. Blankfein. I can't answer your question. My experience
with the FDIC, while limited, because as we started out in the
beginning of this conversation, we have only been a bank for a
short period of time, has been--makes me respect them to quite
a great degree, but it has been in connection with their
existing functions.
Senator Coburn. Yes, but their existing function is they
take over and immediately sell the assets and they don't run
things, correct? And this bill is going to have them running
things, a big difference. There is no question they do a good
job when they close and sell the assets and open it up--close
it on Friday and open it on Monday. But there are experienced
people in the banking business that are making the decisions on
that, not FDIC----
Mr. Blankfein. Yes.
Senator Coburn [continuing]. And they have nobody near the
capability of people inside Goldman to take over Goldman and
run it, yet that is what we are writing into the bill. And you
think that is a wise position?
Mr. Blankfein. I am not sure of the interaction of that.
Senator, one thing I would say----
Senator Coburn. Well, no, the interaction is we are going
to give a Federal bureaucracy the ability--who has never had
any experience--to come in and run a company like Goldman
Sachs, one of the most sophisticated financial institutions the
world has ever known, they have no experience, no knowledge
with how to do that, and we are going to write law and then
they are going to write regulations that they are going to be
able to do that, if you become too big to fail or you become a
systemic risk for the rest of the financial institution. Do you
all embrace that?
I mean, that is totally different than anything we have
heard from Goldman Sachs' business philosophy here today and
what we have studied.
Mr. Blankfein. Again, I don't know how that interacts and I
don't know the rules and I don't know how they will be applied
in the details of the regulations, and the devil, of course, is
always in the details----
Senator Coburn. But yet you all embrace the bill?
Mr. Blankfein. I said we support the direction of the bill,
but with respect to this, I think it is very important for
Goldman Sachs and I think it is very important for taxpayers,
but let me come back and say this first--it is important for
Goldman Sachs that we take away the notion that this is a very
big burden on us if people think we are too big to fail. We
don't think we are too big to fail. We don't want to be too big
to fail. But a lot of the negativity that is associated with us
is because people think we are getting the benefit of being too
big to fail, and I don't think it is good for the country or
for us to be in that place.
Senator Coburn. Well, you would agree that $700 billion got
allocated of taxpayer money to solve systemic risk problems, of
which you were the beneficiary both directly and indirectly of
a portion of that.
Mr. Blankfein. Yes.
Senator Coburn. So somebody thought you were too big to
fail.
Mr. Blankfein. Certainly at that time--the answer is, yes.
At that time, even a small institution might have been too big
to fail, just because of the fragility. There was so much
tinder----
Senator Coburn. That is a legitimate point.
Mr. Blankfein. So I would think----
Senator Coburn. What about the idea of taking the six
largest banks that do similar things to you and make them into
60 with specialization in this over here, and this over here--
--
Mr. Blankfein. I thought about that----
Senator Coburn [continuing]. Where we divide up systemic
risk so we don't have systemic risk?
Mr. Blankfein. I thought of that. I don't think that would
be a good idea, and I am speaking, Senator, from a position of
not being really one of those big banks. In other words, our
balance sheet of something over $800 billion, I think is about
a third or 40 percent of where the big banks are. So even
though we are a big investment bank, because we don't do all
those--we are not----
Senator Coburn. You don't do the commercial side, and you
don't do----
Mr. Blankfein. We are not as big as those and don't have
the balance sheet. But notwithstanding that we are one of the
smaller ones, I would say there is a lot of--obviously, if
someone is going to get to that position of failing, the fact
that they are big makes it worse. But the fact that banks are
bigger and more diverse and more activities in more places in
the world probably makes them safer.
And second, when you think of the big financing purposes in
the world and what the United States needs to maintain its
competitiveness, having financial institutions too small to
conduct financing and a competitive basis as the rest of the
world, I think will be a competitive disadvantage to the United
States.
Senator Coburn. OK. I have one final question. You are the
leader of Goldman Sachs. There is no question about that,
right?
Mr. Blankfein. Yes, sir.
Senator Coburn. All right. And you set the tone?
Mr. Blankfein. I do, sir.
Senator Coburn. I have asked a lot of questions about
ethics today throughout the period. I have a question for you.
Why did Goldman Sachs decide to release the personal emails of
Mr. Tourre and not everybody else in this hearing? It had no
investigative purpose. We didn't expose any of that. We had
deleted all of it. We weren't exposing it. Was that a right
decision? And, is it fair to your employee? Is that a political
ploy or a defense ploy, or why would you do that to one of your
own employees?
Mr. Blankfein. I wasn't close to the decision, but can I
give you--I wasn't specific about that, but I think what we
have been--we wanted to get, and I wasn't thinking about that
because we also put--we also provided some information from
emails with respect to the business and these--there were
elements here that were--spoke badly of the firm and we just
wanted to come abreast of all the issues about which were bad
to the firm. There was nothing in anything, to my
understanding, about Mr. Tourre's subsequent emails that
weren't evidenced by the emails that had already been out. And
so I didn't think we were adding anything to distress----
Senator Coburn. Well, this Subcommittee had never released
any of that information on him, anything that would get into
his personal life or his personal thoughts. To me, I go back to
the original question. The tone set by that, if I worked for
Goldman Sachs, I would be real worried that somebody has made a
decision that he is going to be a whipping boy. He is the guy
that is getting hung out to dry, because nobody else had their
personal emails released. You all made a very distinct,
discriminatory decision that one of your employees is going to
be made to look bad, because we didn't release those emails.
Mr. Blankfein. Senator, I don't know what it was, but there
were emails that were extant and--again, this is all to the
best of my knowledge----
Senator Coburn. I understand that. And maybe you weren't
involved in it----
Mr. Blankfein [continuing]. And I think what we wanted to
do with respect to some of the issues was to just get
information--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 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 emails which our employee addressed, and
I think needed to address.
Senator Coburn. Thank you. I have gone over my time, Mr.
Chairman. I apologize. Mr. Blankfein, thank you for your
cooperation.
Senator Levin. Thank you. Senator McCaskill.
Senator McCaskill. Thank you, Mr. Chairman, and thank you,
Mr. Blankfein for being here today.
Mr. Blankfein. Thank you, Senator.
Senator McCaskill. I want to start by saying that in many
ways, the focus on just your firm is tremendously unfair. The
activities that are being talked about, and I am sure we could
compile the same kind of documents, the same kind of emails
from all of your competitors on Wall Street. I mean, the
conduct that we are looking at was not exclusive to Goldman
Sachs and I think it is important to acknowledge that on the
record. In fairness, there probably ought to be another four or
five CEOs sitting up there with you, as we discussed----
Mr. Blankfein. I would welcome the company.
Senator McCaskill. I am sure you would.
And I know it seems like we are harping, but it is because
so many of the cultural realities of what you all do is jarring
to most Americans. This notion of selling a product that you
are betting against is hard for people to understand that just
have a basic sense of right and wrong and common sense. And we
spent a lot of time going over that today. I want to talk about
several details as it relates to that.
One is that it is clear to me that you all had--there was
kind of an orphan document in the documents that we got, and
one of the orphan documents we got was from a woman named
Manisha Nanik to a person named Loren Morris. And what it was
was a summary of an analysis of mortgages that you all were
going to slice and dice and do all the tranches. And it is a
fairly detailed finding, and it is important, the date on this
document is March 13, 2007. This is Exhibit 77.\1\
---------------------------------------------------------------------------
\1\ See Exhibit No. 77, which appears in the Appendix on page 504.
---------------------------------------------------------------------------
This document says that 7 percent of the mortgages that the
Goldman employee looked at had material occupancy
misrepresentations, where borrowers took anywhere from 4 to 14
loans at a time and defaulted on all. You risk in the loan
performance and difficulty foreclosing on the second liens
would be potentially unsecured.
Another 20 percent of the pool had material compliance
issues. They are mainly missing final HUDs. We cannot put these
loans back. We will need to consider option of our service or
fixing the errors via refinance, refund, or disclosure.
Mr. Blankfein. I am sorry. Could you give me the number
again?
Senator McCaskill. It is Exhibit 77.
Mr. Blankfein. I am sorry. I apologize.
Senator McCaskill. She goes on to say, approximately 10
percent of the pool is flagged as potential REO or potential
unsecured or second lien.
Another 5 percent of the pool was originally fraudulently
based on the DD results. Main findings, possible ID theft,
broker misrepresentation, straw buyer, falsification of
information origination documents. And then she says, there is
a reputation headline risk, as well.
Now, I am not sure if these--you did issue a bunch of New
Century mortgages at or around that time in a CDO, in one of
these instruments. I can't say that these are the ones that you
issued, but what it tells me is you had internal analysis on
these mortgages.
Mr. Blankfein. Senator, I don't know whether--I am reading
the words. I don't know who these people are. It sounds like,
just looking at it, it sounds like somebody is complaining and
asking--recommending that we not do some of these things, from
what I can see on this page.
Senator McCaskill. Well, I think it is plain on its face
that this is a Goldman Sachs employee that has analyzed a group
of mortgages that you all were considering packaging up----
Mr. Blankfein. But I don't know----
Senator McCaskill [continuing]. Either for somebody to bet
on or bet against.
Mr. Blankfein. But I don't know whether any of this was--I
don't know who these people are and I don't know whether any of
this was done.
Senator McCaskill. Well, here is what I----
Mr. Blankfein. Are you saying that we did these?
Senator McCaskill. This is your document. This came from
you----
Mr. Blankfein. No, I know it is a document----
Senator McCaskill. It is a Goldman Sachs document.
I don't know whether you did these or not. The point I am
trying to make is it shows that an analysis was going on on the
mortgages that went into your instruments internally.
Mr. Blankfein. There better have been. I think we are
supposed to analyze and do due diligence with respect to
securities and instruments that are created.
Senator McCaskill. OK. Well, if that is the case, then when
you issued all the documents that you did when you did all
the--what is the name of the company that had all of the
problems--Long Beach Mortgage. When you did all the Long Beach
Mortgage, do you think you did this same analysis on all the
Long Beach mortgages?
Mr. Blankfein. I don't know specifically about Long Beach.
I know we have, in all our businesses, due diligence processes
that are appropriate for the business. So I would say as a
matter of process, I would assume appropriate due diligence was
done on it, based on our standards and our protocols.
Senator McCaskill. Well, in May 2006, you were the co-lead
underwriter with WaMu to securitize about 532 in subprime
second lien fixed rate mortgages originated by Long Beach. Now,
keep in mind that this is the same Long Beach that had to buy
back hundreds of millions of dollars of mortgages because of
problems. At one point in time a few years earlier, they had
been shut down because of problems. And I guess I would like to
request, on behalf of the Subcommittee, that we see the
analysis, first of all, that we figure out what mortgages these
were that were analyzed, where you found fraud and you found 5
percent fraud, 7 percent material occupancy misrepresentation,
20 percent material compliance issues. I think it would be
important for us to see those documents on the instruments you
created for folks to take a side on.
Mr. Blankfein. OK. I am not sure whether an instrument was
created out of this, but I get the point and will look for it.
Senator McCaskill. Yes. I mean, I think the point is that
it is hard for us to believe that if you all were doing the due
diligence that you have stated a couple of times in your
testimony, now we know that these things were full of this kind
of stuff. We know that. And you obviously knew it on one
instance because we have a document from somebody in your
employ that 38 percent of the loans are out of tolerance. I
recommend putting back 26 percent of the pool, if possible.
It doesn't make me comfortable that you all, after doing
the due diligence, actually disclosed as much as you maybe
should have disclosed about some of the problematic paper that
you were packaging up for investors, and so I would like to
follow that trail and get the same kind of documents on the
instruments that you did put out in the market, both in 2006,
2007----
Mr. Blankfein. Sure.
Senator McCaskill. OK. Let me ask you this. And by the way,
in May 2006, right about when you did that, Office of Thrift
Supervision just did a scoop at Long Beach and found all kinds
of problems with their mortgages, almost at the exact time you
were putting your instrument out. So that is why I question
what kind of due diligence was actually going on and how much
due diligence you were actually using in telling the buying
public what was in these various transactions.
In your testimony, you expressed regret that Goldman missed
the signs of a system where credit was too easy, and you have
said nobody could know when the housing market would crash or
how bad it would crash. Looking back, do you think that you all
did enough to look at what were in these instruments and how
strong they were on their face? Do you think you exposed the
kind of problems that these loans, the vast majority of these
loans, represented?
Mr. Blankfein. Given that things didn't work out well, in
hindsight, I wish we had done more. I think we thought at the
time, and again, I don't have contemporaneous knowledge of it
and I am not an expert on that area, I believe we believed we
were doing appropriate due diligence and appropriate
disclosure. Things went much further and got much worse than
people realized. I don't know that we would have--I wish we had
done--I don't know what due diligence would have picked that
up, but I wish we had done more to get there.
Senator McCaskill. Would more disclosure, in fact, harm
your business model?
Mr. Blankfein. I don't----
Senator McCaskill. If you truly are just the house, if you
truly are just trying to manage transactions on both sides of a
proposition?
Mr. Blankfein. I don't think so.
Senator McCaskill. And it is interesting to me that the
investment banks that have created all these exotic
instruments, that there has not been more effort to push for
more disclosure, that it appears that we are dragging you along
kicking and screaming. Is that an unfair characterization?
Mr. Blankfein. I don't know. I am not sure what----
Senator McCaskill. There is no question that sometime in
early 2007, you realized that there was a lot of--you had a lot
of residual positions, equity residual positions on these CDOs
and that you wanted those books cleaned up as quickly as
possible.
Mr. Blankfein. I am thinking in terms of risk. I am not
sure they were equity residual--I am not sure. I don't know
that I had formed a view of equity residual positions, per se.
Senator McCaskill. Well, in Exhibit 130,\1\ there is an
email from you to Tom Montag, and the email reads as follows.
``Tom, you refer to losses stemming from residual positions in
old deals. Could/should we have cleaned up these books before
and are we doing enough right now to sell off cats and dogs in
other books throughout the division.'' That was in February
2007.
---------------------------------------------------------------------------
\1\ See Exhibit No. 130, which appears in the Appendix on page 853.
---------------------------------------------------------------------------
Mr. Blankfein. I got to the page.
Senator McCaskill. That would seem to be indicating that in
early 2007, before you all had, in fact, marketed more of these
synthetic CDOs, that you were basically saying, let us clean up
the residual positions we have, the cats and dogs, and push
them to traders.
Mr. Blankfein. Senator, I don't remember typing this, but I
could tell you clearly how I used those words and what I meant.
I hope I have this right, but when I use the expression ``cats
and dogs,'' I mean miscellaneous stuff. I hope everybody thinks
of it that way. That is how I use the words.
Senator McCaskill. OK.
Mr. Blankfein. And I am referring--this is just my normal
rant about aged inventory, just as a matter of risk management.
When somebody tells me they are losing money on old stuff, my
reaction is, why do you--part of the discipline of our business
is to manage risk and sell inventory, and so here, I am not
even thinking about the particular asset class he is talking
about. I am saying, could/should we have cleaned up these
books--in other words, I am yelling at him--before, and are we
doing enough right now to sell off cats and dogs in other books
throughout the division?
I am basically saying that you are head of the division.
You are supposed to be managing an aged inventory--we have
something called aged inventory, which is just as a matter of
discipline, let us not accumulate residuals, parts of other
deals. Sometimes we have little pieces left over, but those
little pieces, if you don't pay--they are not big enough to pay
attention to, but in the aggregate can hurt you. So I am
saying, I am just being----
Senator McCaskill. Well, I will just tell you, I won't take
the time to read through the whole email chain, but it is clear
if you read through the whole email chain, this whole email
chain was about risk in the whole loan trading business, and it
is clear that what was going on here is there was a lot of
internal noise about the fact that you had long positions,
equity positions in a lot of this stuff as you guys were
moving--I think we have beaten this horse until it is almost
dead--into some major short positions throughout 2007.
As the Chairman said, in earlier questioning of other
witnesses, as you all keep talking about your net for 2007, no
one has been able to delineate specifically how much of the
long position that you were suffering in 2007 is this really
old stuff as opposed to any notion that you guys were actually
participating in long purchases through 2007.
Mr. Blankfein. Senator, it wouldn't matter to me one bit.
If we had risk on our book, it wouldn't matter to me whether it
was there for a long time or a short time. Risk is risk----
Senator McCaskill. Right.
Mr. Blankfein [continuing]. And I would want them--if we
would ask people to manage their risk down, they would manage
their risk down.
By the way, I found on the front page--I am sure I didn't
look at this whole document--the fellow who wrote to me said,
most of the risk is in old residual positions from deals done
over the last few years, and that is what I was responding to.
Senator McCaskill. OK.
Mr. Blankfein. In other words, a person--it is
undisciplined to hold stuff because it is small for years. It
just is probably because it was too small to pay attention to,
and that is not the way you are supposed to be.
Senator McCaskill. Well, I am not sure when you look at all
the documents that the older long positions you had would be
considered small by most people's standards, but maybe it would
within the context of your organization.
Mr. Blankfein. Well, I am referring to most of the risk is
in old residual positions. Anyway, that is what----
Senator McCaskill. And I guess what I am trying to get at
is the point we have been trying to make, and this is where I
think--this notion that you guys are market makers and you also
are sometimes taking positions outside of your just market
making, that is what is hard for many of us to kind of get our
arms around.
I guess, I have been talking sports analogies today because
I think there is a lot about this that relates to gambling on a
sporting event, because the synthetic CDOs didn't represent
anything but gambling. It was folks taking one side or the
other. It wasn't real mortgages in there. It was just stuff
saying, take a bet, just like you bet on a football game.
Is there anything that you would not create a market for if
a client came to you to create a market? I understand that some
people are trying to create a derivative market now in how
movies are going to do.
Mr. Blankfein. I haven't heard about or been involved in
it. And I am sure there is, but if there is somebody who has--
and if somebody whose business depends on--would be able to do
their business better if they were able to hedge or eliminate a
financial risk and they came to us and asked us to eliminate
that risk and it was legitimate, proper, and honest and
susceptible to being understood, I think we would--they would
come to us and ask to do it.
Senator McCaskill. But didn't Mr. Paulson just want to make
money because he thought the market was going to tank? He
didn't have a--he just was looking for a place to score on a
bet, wasn't he?
Mr. Blankfein. I can't say what Mr. Paulson is thinking,
but there is nothing wrong--speculating--if he was, which I
don't know what he was thinking, if he was just a speculator,
there are people who speculate in corn and speculate in all
sorts of commodities----
Senator McCaskill. I understand.
Mr. Blankfein [continuing]. That allow the professional
users of those markets to complete their hedges. That is a
socially acceptable----
Senator McCaskill. Mr. Blankfein, there is a big difference
between finding the opposite side of a certainty in a commodity
hedge for a farmer that needs certainty or an airline company
that needs to figure out what jet fuel is going to cost and two
sides of a deal that are both just betting. There is nothing in
a synthetic CDO that is essential to certainty to anybody's
business other than somebody just deciding they want to take
one side of a deal and the other side of a deal. That is what a
synthetic CDO is.
Mr. Blankfein. Every futures contract on oil or anything
consists of you could characterize it as a bet, but not the
underlying commodity. Some of these things just don't even
settle in physical form, but they provide the liquidity and the
opportunity for people who want to hedge themselves to get in
and take that position.
Senator McCaskill. And we can't take this too far.
Mr. Blankfein. Oh, for sure.
Senator McCaskill. I mean, you don't think that there is a
point where we make up stuff to bet on and you guys are
securitizing it and tranching it, and especially the situation
in this instance.
Mr. Blankfein. Let me be clear----
Senator McCaskill. You put one side of the bet in the room
with the people who are picking the product, which is, I think,
bizarre. I guess your representatives this morning acted like
it wasn't any big deal----
Mr. Blankfein. I am sorry, that what wasn't a big deal?
Senator McCaskill. That the person who came to you that
wanted to bet against the deal, you put them in the room with
the people who were going to pick the stuff in the deal. In
other words, you didn't put both sides in there. You put one
side of the bet in with the people who were picking the product
that was going to be gambled on. That seems weird.
You know what it reminds me of? It reminds me of this
notion--I think most Americans think it would be really wrong
for one of the football players to be able to be in the room
with the bookie trying to influence what the line was going to
be, and then they turn around and bet on the game they are
playing in.
Mr. Blankfein. Well, Senator----
Senator McCaskill. That is what this feels like. It feels
like that you guys are betting on the game you are playing in
and that maybe it is not a level playing field.
Mr. Blankfein. Senator, on these transactions, and I feel
it--I know there is an inherent distaste for the short side of
things as opposed to the long side of things. But for every
transaction, there is a buyer and a seller and there is nothing
immoral about somebody structuring a position--and by the way,
some of the people who are taking the short position may just
be wanting to restructure their portfolios, as well.
Senator McCaskill. I understand that. But you understand
that----
Mr. Blankfein. I do.
Senator McCaskill [continuing]. It feels like you guys were
pushing a product that you were betting against at the same
time you were letting somebody who wanted one side of the deal
in the room with the people who were picking the product, not
the other side of the deal. None of that seems like even-
steven. None of that seems like you are an honest bookie who is
trying to manage risk on both sides and just get it down to the
vig.
Mr. Blankfein. In that transaction, ACA, the selection
agent, I think, was the buyer itself of something like 80 or 90
percent of the transaction. The biggest buyer, the biggest long
in that whole transaction was ACA itself. I think it took a
position of a total deal of around $1.1 billion. I think it
took over $900 million of the transaction itself. So the
biggest buyer of that transaction was very well represented. It
was the selection agent itself.
Senator McCaskill. Well, that also seems weird. I mean, it
seems like to me that if you--and it is hard for me to believe
that the selection agent was excited about that deal if they
really knew the person who was helping them pick all the deals
wanted to bet against it.
Mr. Blankfein. The selection agent had engaged in a lot of
these portfolios and was one of the biggest portfolio managers
in that asset class. When we talk about investors and deals, it
sounds like this is a broad distribution. There were only three
professional investors engaged in the whole transaction. This
was--in effect, there was no transaction--this was not a
transaction that had to be done. This was a transaction that
only worked if the longs and the shorts agreed on what the
portfolio was. And I realize that is not intuitive, but those
professional investors wanted those exposures.
Senator McCaskill. And I am not sure that, frankly, it is a
thing of value that most Americans would be comfortable that we
would be backing up and providing taxpayer bailouts to
companies that were engaging in that, especially if you weren't
actually really dealing with a commodity or dealing with a
product at the base of the transaction, that you were making up
securitizations for people to, in fact, take positions on only
for that reasons. It seems like hamsters in a cage trying to
get to compensation as opposed to societal value that
investment banks in this country, I think, have represented for
many years.
I really appreciate you being here today. I hope you stay
at the table with us as we work on this legislation. I think,
clearly, this hearing has shown in the work this Subcommittee
has done, and the staff has done amazing work here, that we
have conflict of interest issues, we have disclosure issues,
and we have transparency issues, and we need to get all of
those fixed to make sure we don't have a repeat of this
debacle.
Thank you, Mr. Chairman.
Senator Levin. Thank you, Senator McCaskill. Senator Pryor.
Senator Pryor. Thank you, Mr. Chairman.
I would like to start, if I can, with the topic of asking
you about credit rating agencies. In retrospect, how accurate
were the credit rating agencies in rating the various tranches
of CDOs?
Mr. Blankfein. In retrospect, they were inaccurate.
Senator Pryor. And so, these got rated as AAA, and I know
they were downgraded later, but why do you think that they
missed the rating so bad?
Mr. Blankfein. I think they never anticipated that the
market could fall as much as the market fell. Again, this is
not contemporaneous knowledge. This is not anything in depth; I
know about the--I mean, I read articles, too, but it just--and
that is where I get some of this from. But it just seems that
they never contemplated--they never worked into their models
the kind of move that occurred in the market, and I think that
is why they didn't work.
Senator Pryor. From your standpoint, what ability, if any,
do investment banks have to influence a rating by a credit
rating agency? Can you kind of, as lawyers say, forum shop and
try to find a better rating with a different agency?
Mr. Blankfein. I don't know. The first panel that you had
today included people who execute deals in connection with
obtaining ratings. In my entire career at Goldman Sachs, I
never dealt directly with a rating agency other than with the
rating of Goldman Sachs.
Senator Pryor. OK.
Mr. Blankfein. And I have been very--and I am not sure that
I have been able to influence them.
Senator Pryor. OK. That is fair enough. Let me ask a
question I am not sure anyone has asked you on a topic that no
one has touched on yet, and that is the use of off balance
sheet limited and special investment partnerships. I have a
concern about those and----
Mr. Blankfein. SIVs?
Senator Pryor. What is that?
Mr. Blankfein. Go ahead. I am sorry.
Senator Pryor. The off balance sheet limited and special
investment partnerships. Why would your company ever want to
use an off balance sheet investment vehicle? Why would you all
ever do that? What is the motivation to move it off balance
sheet?
Mr. Blankfein. I am not sure that we do.
Senator Pryor. But Goldman does that, right?
Mr. Blankfein. I am not sure. I think some deal trusts may
be--I am just not sure.
Senator Pryor. OK.
Mr. Blankfein. I could tell you that as a matter of our
policy, we mark to market all the risks of the firm, whether
they are on balance sheet or off balance sheet, so there would
be no P&L consequence to us----
Senator Pryor. So they are disclosed? The off balance sheet
is disclosed?
Mr. Blankfein. I don't know.
Senator Pryor. OK. Well, we may follow up in another
context on that.
I would like to ask you about the Securities and Exchange
Commission case, if you are comfortable answering these
questions, and if your lawyer says you are not, I understand
why you wouldn't be, but I do have some questions based on the
press release that the SEC sent out back on April 16. If you
will answer, I would just like to get a feel for what you think
really happened, and I guess I would like to give you a chance
to explain some of this.
It says, ``Goldman Sachs failed to disclose to investors
vital information about the CDO, in particular the role that a
major hedge fund played in the portfolio selection process and
the fact that the hedge fund had taken a short position against
the CDO.'' Is that true, that you failed to disclose that?
Mr. Blankfein. Again, well, you obviously know I wasn't
there----
Senator Pryor. Right.
Mr. Blankfein [continuing]. But I think our person who
testified in the first panel, Fabrice Tourre, maintained that
he believed that they did know, and I think that--look, some of
these things, it is not a question--you give me license in the
sense that you know I wasn't there and I don't know. I am doing
the best I can. I think there is a lot of elements of the
transaction and reputations and things that suggest they should
know and must have known, and then there is also a lot of
opinions that are floating out in which some people say they
did know. But I think it is not a question of not wanting to
tell you. I can't tell you more. I know that one of the
contested facts in the case is whether the selection agent knew
or didn't know.
Senator Pryor. Let me ask the follow-up question about your
standard of behavior, I guess we can say. Should that
information have been disclosed to investors?
Mr. Blankfein. Again, I am not sure. In other words, the
legal--the complaint is whether the--I mean, at least part of
the complaint is whether the influence had an undue--of that
person had an undue effect. I don't think there would be
anybody--I am not sure that anybody--there is any duty on us to
disclose the existence of that short position. This is a
synthetic, so there had to have been a short position. If it
wasn't them, it would be us. So everybody in the transaction
knew, to the extent there was a long, there had to have been a
short.
The issue is not whether there was a short and whether we
were disclosing it. It just has to be a short. The question
was, did that short have undue influence on the placement--on
the selection agent, and then you get to the situation where
our person says--thinks--believes they knew. I think Paulson
may have--person may have been quoted as having an opinion on
that. And then there is the issue with, well, how could you not
know, that kind of element to it.
So you get a factual thing, and obviously it is a legal
case, so there are people on one side and people on the other,
and I don't want to diminish it, but that is the best I can do.
That is what the case is. That is the factual issue over which
the case is.
Senator Pryor. Right, and let me go to the next paragraph.
It says, ``Goldman wrongly permitted a client that was betting
against the mortgage market to heavily influence which mortgage
securities to include in an investment portfolio while telling
other investors that the securities were selected by an
independent, objective third party.'' So the first question is,
is that allegation true, and if it is----
Mr. Blankfein. Again, I will do the best I can----
Senator Pryor. Right.
Mr. Blankfein [continuing]. Not knowing any of these facts
firsthand. But one of the facts, and I think it is in the SEC's
complaint, was that the portfolio that was initially proposed,
in which the hedge fund at least participated, and maybe, for
all I know, gave--I am not sure, maybe proposed all the names--
more than half those securities were thrown out by the
selection agent. Now, in throwing out more than half, they are
obviously looking and making a judgment about all of them. They
just turned back more than half of them, but that doesn't mean
they only looked at that half. They looked at all of them and
asked that more than half of them be eliminated.
Then Paulson, I guess, proposed others. Some of those were
accepted. Some of those were turned back. And then IKB also
proposed, I think, some. So there was a healthy back-and-forth
over--so it looks like they were--and so every decision that
was made, people may have been--there is no deal unless the
long and the short agree to it. So there was no doubt because
it is part of the record there were conversations between
them--but whether the selection agent that had the
responsibility and duty to pick that portfolio picked that
portfolio. They did. That is our point of view. The SEC, I
think, has its point of view.
Now, I hope I am doing a good job representing both sides
of this because I am really trying to be cooperative and not
resort--and not not answering, but that is my best
understanding that I have.
Senator Pryor. This press release also says, ``The
marketing materials for the CDO known as Abacus 07 AC-1, all
represented that the RMBS portfolio underlying the CDO was
selected by ACA Management, LLC, a third party with expertise
in analyzing credit risk in RMBS.'' The SEC alleges that
``undisclosed in the marketing materials and unbeknownst to the
investors, the Paulson and Company hedge fund, which was poised
to benefit if the RMBS defaulted, played a significant role in
selecting which RMBS should make up the portfolio.'' Is that
true, that all the materials represented--that the RMBS
portfolio was selected--underlying the CDO was selected by ACA
Management? Is that true?
Mr. Blankfein. Well, on the basis of what--that is
consistent with what I just said and that is consistent, in my
view, that they did select the portfolio. We have an
independent auditor. It doesn't mean we don't interact with
them. It doesn't mean that we don't give them our views if they
have an opinion of how they should treat an accounting item at
Goldman Sachs. But at the end of the day, they are the
independent auditor and they make the judgment.
Senator Pryor. And do you have documentation there at your
company about what was disclosed to whom and when?
Mr. Blankfein. I don't know, but if there is a disclosure
document, which I assume there is--I mean, there were
disclosure materials, yes.
Senator Pryor. And so on these type transactions, there are
documented disclosure materials that pass among all the
parties?
Mr. Blankfein. There are disclosure materials, yes.
Senator Pryor. OK. In the past 25 years, America has seen
an increasing number and severity of financial crises. You have
the savings and loan crisis, Enron, the dot-com bubble, the
housing bubble. What steps will Wall Street take to assure that
there is not another financial crisis?
Mr. Blankfein. Listen, I think the financial reform is a
good step----
Senator Pryor. That we are working on now?
Mr. Blankfein. That we are working on. There will be gives
and takes in it, and I am not sure myself where it would--
nobody is--where it would come out, so the need for reform. I
mentioned earlier the need for higher capital standards,
systemic risk regulation. That is general. And obviously every
firm needs to manage its risks very well and better than they
have been doing in most cases. And I think in our case,
particularly, you have to look also through every aspect of
your business practices to make sure, and to not be defensive,
which there is a tendency to be, but to learn from prior
situations, including the one we are in now, and make sure that
you do a better job.
Senator Pryor. Well, that was one of my questions that I
was going to follow up with, is what are the lessons learned
from this most recent financial crisis and what is Goldman
doing differently internally now that you have had to go
through the bailout and all the other strains and difficulties
that we have all gone through the last year and a half?
Mr. Blankfein. Senator, even as I am explaining what we did
and why I thought it was adequate at the time, there is not a
thing that will arise here and elsewhere that won't be the
subject of some big soul search and some tightening up of some
standards. We have a high level committee in our firm going
over every--we call it Business Practices Committee chaired by
our vice chairman, one of our named executive officers, that
involves the seniormost people in the firm, and it is not with
reference to legal requirements, law, whether we can win a
lawsuit or lose a lawsuit, what happened, what the standards of
the day were, and we are going over everything.
Now, we always do things--it is a little bit like painting
a bridge. You get to the end of the bridge, you go back, and
you paint the beginning because things are evolving. But if we
have to--everybody has to tighten up and ratchet their
standards up and learn from these elements.
You asked me--we were just talking about the standards in
that particular transaction that is the subject of the lawsuit.
We have the position that we do, and we believe everything is
adequate, but given the criticism that we are going under and
given the position that the SEC has taken with our duties, we
wouldn't do it that way--guess what. We would tighten that up
now. Of course, everything that has been the subject of
criticism will be tightened up.
Senator Pryor. There is a company that is based in Little
Rock named Stevens, Incorporated. I don't know if you know
Stevens, Inc.
Mr. Blankfein. I don't know them well, but I have heard of
the company, of course.
Senator Pryor. And Jack Stevens, one of the founding
brothers of that--there were two Stevens brothers that founded
that company--he always said that he had the philosophy of, we
want to be in business tomorrow, and what he meant by that, and
apparently the way Stevens still operates is they want to
service their customers, do an excellent job there, and also
they want to be prudent and jealously guard the trust of their
investors. So Stevens, as far as I know, has never gotten into
some of these 20-1, 30-1, 40-1 type leveraged deals. They just
don't do that. And I am sure they haven't made as much money as
some in the industry have, but also, I think that they have
remained very sound through this process.
Is Goldman Sachs and/or the industry changing those really
high leverage ratios and going back to something that I think
is more appropriate, and you may say more conservative, but
that is based more on reality rather than just how much money
you can make off one transaction?
Mr. Blankfein. Yes. I think the industry is substantially
less leveraged. I will tell you, we thought we weren't
leveraged going into the crisis as much--and we weren't as much
as other investment banks like ourselves. With the benefit of
hindsight, we were too leveraged even at what we thought at the
time was fine and we are substantially--we are less than half
as leveraged as we were then.
The recency of this crisis is going to reverberate with me
for the rest of my career and my life. So I will be--the image
of it and the fear and the anxiety that we all had.
And so I agree, I think the firm--all firms will be run
much more conservatively and I hope for a long time, and I tell
you that society will not rely on the good will and the memory
of financial firms. I think Congress and regulators will impose
tighter-higher capital requirements and liquidity requirements,
and I think that is appropriate, because as we also found out
in the crisis, we all have interrelated obligations to each
other and it wouldn't suit me to have Goldman Sachs be
conservative if everybody else is going to take too much risk
and put the system at risk, which is why, again, I echo making
the world safer and ending too big to fail, I think, is
something that is a substantial interest of society at large
and also of the industry and Goldman Sachs.
Senator Pryor. Thank you.
Mr. Chairman, thank you for your diligence on this matter.
Like I said, this didn't start with you 2 weeks ago. This has
been going on for a year and a half and you have just done
yeoman's work on this. Thank you.
Senator Levin. Thank you so much, Senator Pryor. Senator
Tester.
Senator Tester. Yes. Thank you, Mr. Chairman.
I want to echo Senator Pryor's remarks, and Mr. Blankfein,
I appreciate you being here. I am going to get into some
questions here that I have prepared, but is Goldman too big to
fail?
Mr. Blankfein. I don't believe so.
Senator Tester. OK. So if Goldman went down, the financial
markets wouldn't go into a tailspin that wouldn't be recovered?
Mr. Blankfein. If we went into a tailspin in a normal
world, one in which everybody else wasn't doing the same thing,
which is another issue and, by the way, one you can't rely on
because it is very--I said this before. A lot of institutions
would have been too big to fail if you were afraid that one
spark would set off the whole forest. But I think that,
generally, if people's credit is eroding, the market starts to
move funds away, stops credit, so firms start to shrink when
they get into trouble. But I do think some additional
legislation with respect to too big to fail is warranted. I
think that, for sure.
Senator Tester. All right. I really want to follow up on
some questions on the first panel and drill down some of the
specifics of the Abacus deal, and hopefully you can help me on
that.
I think we have pretty well established that Goldman and
Paulson and Company both played a role in selecting the assets
in the Abacus deal. We know that Paulson wanted to short the
mortgage market and he picked securities, 84 percent of which
were ultimately downgraded within 6 months. We also know from
some of the emails included in the exhibits that Goldman was
eager to complete the deal.
So, Mr. Blankfein, we know you wanted to get the deal done.
Goldman wanted to get the deal done. And we know that at least
in the previous Abacus deals, of which there were about 15 in
total, you did not use an independent portfolio management
agent. Why did you ultimately decide to use an independent
portfolio management agent in the Abacus 2001 deal and why
would you use a manager if the assets had already been
selected?
Mr. Blankfein. The assets weren't selected. The assets, I
think, were being proposed, and what was proposed, more than
half of them were rejected by that agent that was picked.
Senator Tester. OK.
Mr. Blankfein. And I wouldn't--I don't know the
circumstances under which you use an agent and in which you
don't.
Senator Tester. I understand. It is a big company. ACA was
not the first choice of the portfolio management agent. In
fact, they described the arrangement as highly unusual. What I
was wondering, was the selection of a portfolio management
agent in Abacus 2001 due to the fact that the only investor
that could be found was IKB and they indicated they were only
interested in the CDOs if you used an independent portfolio
agent?
Mr. Blankfein. One thing I know for sure is that there was
at least another investor, because the independent selection
agent itself looked at the portfolio and bought the biggest
piece of it. So ACA also invested.
But on Abacus and how it was--I am sorry.
Senator Tester. No, go ahead. Keep going. That does bring
up another question, but I will let you finish.
Mr. Blankfein. But Abacus and how it was structured, I
don't know anything more other than what I learned from the
questions you asked Fabrice Tourre.
Senator Tester. OK. I guess I need to know the role,
because IKB was hung out for a lot of dough. You said that ACA
was an 80 to 90 percent buyer of $1.1 billion----
Mr. Blankfein. That was just in my head----
Senator Tester. That is OK. Are you saying that IKB only
had 10 percent of it? What are we really saying here?
Mr. Blankfein. I think IKB--we can provide the exact
numbers, but to the best of my recollection, that IKB had a
total position of something like 150, and I think--and these
numbers, I think, are in the complaint--I think the ACA ended
up having a total position that was multiples of that,
something--I seem to recall something in the 900s of millions.
Senator Tester. OK.
Mr. Blankfein. I am sorry. IKB, I think, had 150 and ACA
had 910 plus 42, representing different parts of the capital
structure, so 952 million.
Senator Tester. And we are talking about these folks were
on the long side of things when Paulson was on the short side?
Mr. Blankfein. Correct.
Senator Tester. And when it was marketed to IKB, because
this is a question that has been brought up, because we are
talking about disclosure and transparency and conflict of
interest and all that stuff, but was IKB told that Paulson was
a part of the process in selecting the securities?
Mr. Blankfein. Senator, all I have is the testimony, the
information we have from Fabrice Tourre. I don't have
independent knowledge of it. I just don't.
Senator Tester. OK. Well, all right. I listed off about
four or five different--four, I think it was, different
arrangements that Goldman had, and I do agree with Senator
McCaskill that there should probably be four or five other
folks up beside you as we move forward and try to dig down into
this.
I have been sitting here trying to really figure out a good
analogy of how this happened, and I get the impression from the
fellows that were up here earlier today and you that this is
kind of--works well at times that folks can pick securities
with their perspective that they are going to fail because they
sell them short and then try to market them to somebody else
who thinks they are going to be successful. And that is kind of
the way business is being done----
Mr. Blankfein. No, I am sorry, the securities weren't meant
to fail. They succeeded by conveying the risk that people
wanted to have, and in a market, that is not a failure.
Somebody had asked me----
Senator Tester. We are like we are speaking a different
language here, and that is not being critical of you----
Mr. Blankfein. Well, that is my fault----
Senator Tester. No, it is not. But it seems to me more than
just a little bit odd that Paulson picked these securities
because he was going to make some dough on them because they
were going to go down, and so he sold them short so that would
happen. He picked the securities that he could sell short so he
could make money on, and somebody else, somebody else that
maybe didn't have the information that Paulson had--so that is
where the disclosure and the transparency comes in--figured
that they were going to be OK, so they bought the long side.
That may be oversimplifying.
It seems to me, and it is not like selling a lame horse or
an unsound horse. It is not like selling a bin of corn that has
been through a cow and you are calling it corn when it is
really something else----
Mr. Blankfein. Right. I think in these transactions,
sometimes the buyer comes to you and reverse inquires and wants
somebody to offer the other side. Most of these transactions
are initiated--most transactions are initiated by one side or
the other, and in the absence of two sides, usually we provide
the side.
Senator Tester. OK. Because what I have read here indicates
that this independent portfolio selection agency on Abacus 07
AC-1 was selected, that ACA was selected because there was an
outfit by the name of IKB that wanted to buy it, and the only
way they would buy it is if you had this independent portfolio
selection agent. You are saying that is not correct?
Mr. Blankfein. No, I am not saying that is not correct. I
read that, too. What I am saying is I don't have--I just can't
go through the ins and outs of it because I just don't know
more than what I have heard.
Senator Tester. OK. Well, I can tell you here, right and
wrong are indifferent. It really sounds like there was a
failure to disclose information relevant to the parties in the
transaction. That is what it sounds like to me. The vehicles,
synthetic financial vehicles, and I know you said everybody has
the right to hedge their risk, but these go beyond that. I
mean, they really do. It is more like a scam.
I came in and I heard you talk about your clients being
critically important. This is early on.
Mr. Blankfein. Right.
Senator Tester. And I think anybody would think that--
anybody would know that. I mean, that is probably the most
important thing you can do, although the previous folks who
were up here today said that they really wouldn't say whether
they worked for the clients or worked for the company. They
said they were market----
Mr. Blankfein. Makers.
Senator Tester. They were market makers. That is what they
said they were. But the fact is, it was ironic to me that they
wouldn't say they worked for the clients.
Mr. Blankfein. Well, the----
Senator Tester. And that speaks volumes in and of itself.
Why would the clients believe in Goldman Sachs?
Mr. Blankfein. Senator, there are parts of our business
that are fiduciary--and it will sound splitting--but there is a
market and you can't--when you are a principal--I can
understand their confusion in answering the question. I am
trying to explain it, and I wish I were better to explain it.
There are parts of the business where you are a money
manager, where you owe a duty to the client. There are parts of
the business where you are a principal and you are giving the
client what it wants and it is understood where you have to
know that they are suitable, you have to know that the product
you do delivers what they expect to have, but the markets
couldn't work if you had to make sure it was good for them.
Senator Tester. So what you are saying, in one case, you
are working for the client. In the other case, you are setting
markets.
Mr. Blankfein. But they are also--and I will tell you, in
the business world, if we are not the biggest, most important
market maker, we are right up there.
Senator Tester. OK.
Mr. Blankfein. In other words, we do well at this and our
clients value us for this.
Senator Tester. Right.
Mr. Blankfein. In other words, it is not--what I am
describing to you----
Senator Tester. And one doesn't bleed over into the other,
or vice-versa?
Mr. Blankfein. I think the market understands when these
people are buying--I will say it like----
Senator Tester. So what are your responsibilities----
Mr. Blankfein. They are buying for their own P&L.
Senator Tester. OK. And so what are your responsibilities
when you create a product? Do you have any?
Mr. Blankfein. Yes, huge, fairness, that it be effective.
We have a whole process in our firm----
Senator Tester. Is disclosure part of it when you create a
product?
Mr. Blankfein. I think there are disclosure requirements in
connection with underwritings, and we are talking about these
are underwritings, what you are talking about.
Senator Tester. Yes.
Mr. Blankfein. Yes. But the disclosure is the disclosure of
the risks associated with that. It is not related to whether
you are long or short also or whether housing is going up and
down.
Senator Tester. I guess the point is, is disclosure----
Mr. Blankfein. Does the product work? Does the product
deliver what the client seeks?
Senator Tester. Yes. But disclosure----
Mr. Blankfein. Disclosure is very----
Senator Tester. If disclosure isn't given equally to both
sides, because you said there have got to be two sides for this
to work, if it is not given equally to both sides, whose
responsibility is that to make sure that the information is
given to both sides? It is not you, or is it you?
Mr. Blankfein. The disclosure requirements in an
underwrite, again, are very well evolved.
Senator Tester. OK. So is it you? Do you have to disclose
to both sides what is in so that both sides know?
Mr. Blankfein. I think the disclosure document would
disclose to the world of buyers of that instrument. I mean, I
think it is in the----
Senator Tester. So you think IKB knew that Paulson was part
of selecting the securities?
Mr. Blankfein. Again, this is what the lawsuit is, over
whether we satisfied it, and that is a factual and a legal
dispute now.
Senator Tester. OK. You know the instruments. Do you, on
behalf of Goldman, accept any responsibility for the collapse
of 2008?
Mr. Blankfein. Yes.
Senator Tester. Are you in any way embarrassed that the
U.S. taxpayer had to bail out Goldman?
Mr. Blankfein. We got funds from the government, and it was
an embarrassing situation then and it is embarrassing now.
Senator Tester. Do you think that those funds were
critically important as to you being able to stay in business?
Mr. Blankfein. I think they were critically important. I
don't know what would--I can't say what would have happened
otherwise----
Senator Tester. I understand.
Mr. Blankfein [continuing]. But they were critically
important for the system and, therefore, critically important
to us.
Senator Tester. Do you feel you owe anything to the
taxpayers because of that bailout?
Mr. Blankfein. I think, yes, and we owe--we live in the
good--yes, we--and for many other reasons. I would like to say,
Senator, also, on the--and I am answering you without
qualification on all those points----
Senator Tester. That is right.
Mr. Blankfein [continuing]. But we were not waiting for
government bailout. We--and I think this was quite famous and
observed, that weeks before that, we did a transaction with
Warren Buffett where we gave him equity warrants on a
substantial portion of Goldman Sachs in exchange for his
investment in Goldman Sachs, which I could tell you, he
wouldn't do in a million years if he thought we were going to
fail because he makes money and he doesn't give it away, even
if he liked us.
And then a day after that transaction, we did an equity
deal, a common equity deal in the market where we raised
another--his was $5 billion--we raised another $5.75 billion
dollars. Those deals closed, I think, 3 or 4 weeks before the
TARP. So I think the TARP and the action that the government
took was--you used the word critical, I will echo that
critical. It was critical for the overall environment. If the
market seized up and no one could get financing again, it would
have affected everybody including us.
And so we are grateful for it. We expressed that gratitude.
But we could get financing in the world. We got it. And,
frankly, when we took the five-and-three-quarters, we could
have gotten more if we wanted. So it was critical because I
think there was a--I don't know whether the system would have
gone completely out of kilter if it hadn't been done, but it
was too much of a risk and I am really glad--and we were
beneficiaries of what happened.
Senator Tester. Well, I appreciate it. I can tell you that
there are some things in my job as a U.S. Senator from Montana
that don't make a lot of sense. One of the things that doesn't
make a lot of sense to me is why these synthetic--and I know
you have got an answer for it--but why these synthetic
instruments came about when there is nothing in them.
And Senator McCaskill is right. It is just like betting on
a sports event. It is like betting on whether it is going to
rain. It is like betting on a bunch of stuff that doesn't make
any sense. It is not like hedging as a farmer would do it or as
an airline or a coal company or whatever might be. This is just
playing around, from my perspective.
And the fact is that I think part of this playing around is
why taxpayers had to bail out part of what went on on Wall
Street. I have got some issues with that, and I, like other
Members on this Subcommittee, think you are a smart guy and I
would like to work with you. I think this country is in dire
need of Wall Street reform and I think that you could add some
to the equation as long as we can bore down and get to the
facts----
Mr. Blankfein. Senator, I----
Senator Tester [continuing]. And transparency is critically
important, and making sure that consumers are protected.
I can't tell you how many stories I have heard of folks who
have lost their retirement, lost their college tuition for
their kids, lost all sorts of bad things while other folks that
got bailed out are making literally millions of dollars.
Mr. Blankfein. Senator, I agree and I would like to be
helpful and I will be helpful. And I would like to say another
thing. I can tell you, and I tried to, what the hedging purpose
was of having people be able to take long or short positions
synthetically in housing in order to shape their portfolios.
But that is not the end of the inquiry. If at the end of
the day, even if that--so I am explaining what the purpose is.
But even at the end of the day, if they are too complicated and
too risky and generate the kind of risk that apparently these
did, then notwithstanding--finding a social purpose or a
hedging purpose in them is not the end. Notwithstanding that,
they may be something that should not be permitted, and so,
therefore, I am not making a spirited defense that anybody
could think of should be done.
Senator Tester. Yes.
Mr. Blankfein. Clearly, the world needs more regulation.
Senator Tester. And I think part of this, as I look at it
as a regular person, you have a guy by the name of Paulson who
is picking out--who had a role in it. He may not have been the
only person, but he had a role in picking out these securities
and I firmly believe, from what I have read, he picked them so
they would fail so he could sell them short, and I think
somebody else may have not been told the story that Paulson
knew on the one side of the equation. And I think that is where
the problem is, also.
Thank you very much. I appreciate it, Mr. Chairman. Thank
you for being here, Mr. Blankfein.
Mr. Blankfein. Thank you, Senator.
Senator Levin. Thank you very much, Senator Tester.
Let me just pick up where Senator Tester left off. These
credit default swaps that you engaged in, these synthetics, in
my judgment and I think most people's judgment, do not serve a
social purpose. Maybe you can try to find one there, but in
most people's minds, there is no social purpose. It is a bet
not on whether or not your particular house will go up or down
in value or that particular house will that you have an
interest in. It is a bet on something that you have no interest
in, where there is no collateral involved, there is no risk
being taken by collateral, where people are betting whether or
not some event will occur. And what happened here is that you
won that bet. You won that bet with AIG.
Mr. Blankfein. I am sorry. We lost that. We lost money in
that ACA deal.
Senator Levin. No. I am not saying on the ACA deal.
Mr. Blankfein. I am sorry.
Senator Levin. The only reason you lost money on the ACA
deal was because you ended up with a piece of the long on
that----
Mr. Blankfein. Right.
Senator Levin [continuing]. That you did not intend to
have. We heard that earlier today.
Mr. Blankfein. Senator, I am afraid, with due respect, that
misses the point.
Senator Levin. No. You said that you lost money on the
deal.
Mr. Blankfein. We did.
Senator Levin. I understand what you are saying, but now
listen to what I am saying. You intended to sell that piece of
the long and couldn't do it.
Mr. Blankfein. Right. Therefore----
Senator Levin. You had never intended----
Mr. Blankfein [continuing]. We took the risk and we
failed----
Senator Levin. You had never intended to invest in that
deal.
Mr. Blankfein. We intend to sell everything we have as
profit. The reason why it is risky----
Senator Levin. No. You don't intend to sell your short
positions all the time, do you?
Mr. Blankfein. Well----
Senator Levin. You intended to keep short positions in all
kinds of transactions we went into today. You insisted on
keeping short positions even when a client preferred that short
position. We gave an example of that. You put your own interest
ahead of your client when the client wanted a short position in
one of these deals. So you were doing that for your own
proprietary interest in those other deals. You were keeping a
short position. You wanted to go short. In this one, you didn't
want to go short. I understand that. But you were paid a whole
bunch of money by the Federal Government. AIG owed you that
money, did they not?
Mr. Blankfein. AIG--I am sorry, we are switching----
Senator Levin. Did AIG owe you some money, and the money
which was paid to AIG through the TARP program then was
filtered through to you? Is that true?
Mr. Blankfein. They--AIG had--yes. Yes. AIG owed us margin,
most of which we had collected.
Senator Levin. Right. But they owed you some money, and the
TARP funds ended up paying their debt to you, did it not?
Mr. Blankfein. I don't know if those were TARP funds. I am
not sure.
Senator Levin. You don't know whether TARP funds that went
to AIG then came through to you?
Mr. Blankfein. They were--again, I don't know what pocket
they came from. I know that government money went into AIG and
that money flowed through.
Senator Levin. And that money flowed through. How many
billions of dollars flowed through, government money, to you
through AIG?
Mr. Blankfein. Well, literally, the cash flow has been
reported, and I think David Viniar went through this. It went
to $12.9 billion flowed. They gave us stuff and we gave them
back stuff. So, in other words, it wasn't $12.9 billion----
Senator Levin. What was it that flowed to you net? Of those
funds through AIG?
Mr. Blankfein. Net of what we gave them back?
Senator Levin. Yes.
Mr. Blankfein. I would say the only thing that----
Senator Levin. Just give me a dollar figure, if you would.
Mr. Blankfein. The only thing that flowed through to us was
an additional $2.5 billion worth of margin that they owed us
against which we had an insurance contract in case they didn't
pay us.
Senator Levin. I understand. But they owed you $2.5
billion.
Mr. Blankfein. They owed us $2.5 billion.
Senator Levin. The government did not owe you $2.5 billion,
did we?
Mr. Blankfein. No, the government did not.
Senator Levin. But you ended up with $2.5 billion of
taxpayers' funds.
Mr. Blankfein. That we would have gotten from an insurance
company had we not.
Senator Levin. Yes, but you wouldn't have gotten it from
the taxpayers.
Mr. Blankfein. Well, we weren't looking to get it from the
taxpayers.
Senator Levin. But you got it from the taxpayers.
Mr. Blankfein. In lieu of what would have come from the
insurance----
Senator Levin. From a private party. We didn't owe you any
money.
Mr. Blankfein. I didn't----
Senator Levin. Two private parties owed you money, either
AIG or that insurance company that you insured the AIG debt
with. So why do you end up with $2.5 billion of taxpayers'
money in your pocket when we don't owe you the money? AIG owes
you the money or an insurance company owes you the money----
Mr. Blankfein. But the U.S. Government decided not to allow
AIG to default. And if they had defaulted, that is, if they had
not paid us the money, they would have been in default and we
would have gotten paid from an insurance company.
Senator Levin. You would have gotten paid from somebody
other than the taxpayer.
Mr. Blankfein. Correct.
Senator Levin. So why do you end up with $2.5 billion of
taxpayers' money?
Mr. Blankfein. Because the government made a decision that
the government didn't want AIG to default.
Senator Levin. And you could have gotten that money from a
private insurance company.
Mr. Blankfein. Correct.
Senator Levin. And so now you have got money of the
taxpayers in your pocket----
Mr. Blankfein. No, we got money from AIG.
Senator Levin. That was taxpayers' money, Mr. Blankfein.
Yes?
Mr. Blankfein. AIG got money from the government----
Senator Levin. Taxpayers' money.
Mr. Blankfein [continuing]. That paid it over to us----
Senator Levin. Right. That is what I am saying.
Mr. Blankfein [continuing]. So that we got that $2.5
billion instead of the $2.5 billion we would have gotten in
insurance.
Senator Levin. I know we are going around and around----
Mr. Blankfein. We are.
Senator Levin [continuing]. But the facts still are that
you got $2.5 billion of taxpayers' money on a private deal.
Does that bother you?
Mr. Blankfein. It bothers me to the----
Senator Levin. So why didn't you go after that other
insurance company instead of taking taxpayers' money? Why isn't
that unjust enrichment at the expense of the taxpayers? Why
don't you go after the insurance----
Mr. Blankfein. Because it was insurance against the default
of AIG. By the U.S. Government intervening, AIG didn't default
and therefore they didn't owe us the insurance. So we were
either going to get it from AIG, or upon their default from the
insurance.
Senator Levin. Right.
Mr. Blankfein. One way or the other, we would get the $2.5
billion.
Senator Levin. Right. But you wouldn't have gotten it from
taxpayers' money if you had gotten it from the private parties.
Mr. Blankfein. I would have much rather----
Senator Levin. Let me ask you, did you have any
conversations with anybody at the Treasury Department about
that?
Mr. Blankfein. About----
Senator Levin. Whether or not AIG would get money and then
pay it to you?
Mr. Blankfein. No.
Senator Levin. You had no conversations with anybody at the
Treasury Department or the Federal Government?
Mr. Blankfein. At the time of the announcement, I was asked
by my regulator, maybe all of my regulators, are you OK, in
other words, do you have exposure, and I said, no, we don't.
That was the--because we had this insurance contract. And by
the way, $2.5 billion wouldn't have caused us that much--in
other words, that is not necessarily an unmanageable number,
but----
Senator Levin. If it is not unmanageable for you, it is
kind of disgraceful from the taxpayers' point of view that you
end up with taxpayers' money which we don't owe you. We didn't
owe you that.
Mr. Blankfein. Only because AIG owed it and because the
government did not want AIG to fail. AIG honored its
obligations and paid us. Without that, we would have gotten our
insurance on the----
Senator Levin. I know. I understand you would have gotten
it from a private source, not from the taxpayers.
Mr. Blankfein. Correct.
Senator Levin. You said that a number of times here. There
was a statement of the Senators in the 1930s who were
investigating the Great Depression. I don't know if you heard
this this morning or not. Did you hear my opening statement
this morning by any chance?
Mr. Blankfein. Yes, I did.
Senator Levin. And what they said is that investors must
believe that their investment banker would not offer them bonds
unless the banker believed them to be safe, and ended up
saying, but while the banker may make mistakes, he must never
make the mistake of offering investments to his clients which
he does not believe in.
Now, you turned that idea, which is a pretty fundamental
idea, offering to clients investments that the banker does not
believe in, you said you shouldn't have to be sure that an
investment is good for a client. I agree with that. But that is
not the issue. You can't guarantee an investment is going to be
good for a client. The question is if you believe that it is a
bad investment for that client because you are going short
against that at the same time you are selling it, that is what
these Senators back in the 1930s were saying was one of the
causes of the Great Depression, that bankers were selling
things, making money for themselves, by selling things that
they didn't believe in.
And that is what happened here. You were selling things
that you didn't believe in. What was the sure test of that is
that you were betting against them at the same time you were
selling them. You were taking and intending to keep a short
position, and that is a very different thing from what you said
about 20 minutes ago, that is you should not have to make sure
that an investment is good for the client. No one is saying
that. Of course, you can't make sure. But you can make sure
that someone you sell an investment to knows that you believe
it is a bad investment and that you, at the same time, are
betting against that same investment.
Now, I am going to leave it at that. You obviously don't
see that. It troubles me that you don't see that. It troubles
me that you don't see that your client is yourself, that is
what this has turned into too often, is that Goldman Sachs has
turned itself into its own client and has taken advantage of a
relationship by doing what you did in so many of these cases.
And another thing you did, you took stuff from your own
inventory in massive amounts which you didn't believe in and
sold it. That is OK, but you did more than that. You then bet
against your own sale. That happened in at least two of these
cases. That is what is so troubling to me.
Now, there is another problem here which is the bigger
issue, a broader issue, that you made a major decision to bet
against the housing market. We can spend a lot more time on
that if you want to. Let us put up a couple of charts here to
just show you very quickly what I mean by that. Put up the
chart about their long sales. Exhibit 163.\1\
---------------------------------------------------------------------------
\1\ See Exhibit No. 163, which appears in the Appendix on page
1009.
---------------------------------------------------------------------------
Now, if you take a look at Exhibit 50 \2\--I will get to
Exhibit 163 in a minute. This is what you sent to the
Securities and Exchange Commission on November 7, 2007. If you
look at page 5, you will see here that you said your long cash
subprime mortgage exposure consists of mortgage loans and
mortgage-backed securities. And then you said, ``As of August
31, 2007 and November 24, 2006 our investments in subprime
mortgages totaled $462 million and $7.8 billion, respectively,
and our investments in subprime mortgage-backed.''
---------------------------------------------------------------------------
\2\ See Exhibit No. 50, which appears in the Appendix on page 390.
---------------------------------------------------------------------------
Mr. Blankfein. I am sorry. I am not following.
Senator Levin. OK. Page 5, do you see that? Exhibit 50.
Mr. Blankfein. Give me one second to see what----
Senator Levin. Sure.
Mr. Blankfein. OK. I am just cautioning that I haven't seen
this paper before.
Senator Levin. This table?
Mr. Blankfein. I am sorry. I am just cautioning that I have
never seen this piece of paper, but----
Senator Levin. OK. Well, this is a letter that Goldman
Sachs sent to the Securities and Exchange Commission on
November 7. So here is what you folks said. You said what your
investments were in November 2006 and what your investments--
this is on the long side now--of August 2007. That is what
happened to your investments.
Take a look at this chart that we have got over here, and I
will give you the number of it if you want to look at a smaller
one, but that is what you did on the long side. That is what
you were selling long, OK.
Now, you also went short, big time. You don't acknowledge
it is big time. You said it was, what, a small net short. After
deducting your long position, you said that your short position
was what? You used the word ``small,'' I believe.
Mr. Blankfein. I used the word ``small'' because the one
immutable fact, and the way you really can tell--because some
of--you can't----
Senator Levin. OK. Use the word ``small.'' That is OK. Let
us take a look----
Mr. Blankfein. Yes.
Senator Levin. Let us take a look at how small they were.
Let us just take a look at how small your net shorts were.
We put up another chart, which is based on your numbers,
and I will give you the numbers in a minute. This chart shows
how net short you were. That is total net short. That is taking
everything into consideration. I am going to give you the
numbers right now on that. Exhibit 162.\1\ Take a look at this
chart.
---------------------------------------------------------------------------
\1\ See Exhibit No. 162, which appears in the Appendix on page 997.
---------------------------------------------------------------------------
This chart, which is the same one as you see up there, was
taken from information from your Mortgage Department's top
sheets, which were supplied by Goldman from February to
December 2007, listing the department's short positions,
Goldman's short positions, several times per month.
Now, we gave you an example, if you will look at that, of
those top sheets.
Mr. Blankfein. Where am I looking? I am sorry.
Senator Levin. You are looking at Exhibit 162. Do you see
that?
Mr. Blankfein. Not yet. I am doing the best I can. It is
just that graph.
Senator Levin. This is your short positions. Now, this is
based on your top sheets, by the way. This is what you call
small net shorts. Every single day, by the way, you are net
short, so that is not something which was sporadic, until
December when you cashed in your net shorts. But everyday until
December 20, you had a net short, as high as $13 billion. And
the back-up sheets you have seen there are attached to that
exhibit. Is that what you would call a small net short, $13
billion?
Mr. Blankfein. No, I think--you can't go by the gross
amount because some of these positions don't move. The way you
can tell whether you are short and long, really, the best way
is, look, if you were short early in the crisis----
Senator Levin. I am just asking you. You said these were
small positions.
Mr. Blankfein. Senator, they are.
Senator Levin. I didn't use the word ``small.''
Mr. Blankfein. Senator, I am doing the best I can, and I am
trying to be responsive.
Senator Levin. The answer is yes. If you think $12 billion
is a small net short, the answer is, you think that is small.
Mr. Blankfein. This didn't act like a $12 billion position.
You can see our entire P&L from residential for the whole year
2007 was under $500 million. There are--you can have gross
headline numbers, but early in the crisis, if the better
credit--if you are long the better credit, the slightly better
credit, and short the slightly worse credit, the positions you
are short could move more than the positions you are long, and
those could reverse at different times.
In these complicated portfolios, you can have gross numbers
that were long or short, but the portfolio didn't necessarily
react that way. That is why successive people who have
testified here, including our risk managers, said you really
had to look at how they behaved. The best evidence of how they
behaved is what was the P&L from it? When the market went down,
did it make money or lose money, and it----
Senator Levin. Fine. Let us look at the P&L.
Mr. Blankfein. OK.
[Pause.]
Senator Levin. Are you familiar with Exhibit 55b? \1\ We
talked about this today. This is Mr. Swenson's performance
evaluation. ``Extraordinary profits'' from the shorts at his
desk, $3 billion as of September 2007. ``Tremendous profits,''
he said, ``extraordinary profits.''
---------------------------------------------------------------------------
\1\ See Exhibit No. 55b, which appears in the Appendix on page 441.
---------------------------------------------------------------------------
Mr. Blankfein. I am sorry. I see Tab 55, and then it goes
to 56. Is there an a and b?
Senator Levin. Exhibit 55 a, b, and c. First, there is a b.
Do you see that?
Mr. Blankfein. I go from Exhibit 55 to 56.
Senator Levin. It is inside Exhibit 55.
Mr. Blankfein. Is there a tab?
Senator Levin. It is just inside Exhibit 55.
Mr. Blankfein. Reviewee's feedback?
Senator Levin. Yes.
Mr. Blankfein. OK, sorry. It was Exhibit 55.
Senator Levin. Mr. Swenson talked about ``extraordinary
profits,'' ``tremendous profits,'' ``$3 billion.''
Mr. Blankfein. Where am I looking on Exhibit 55?
[Pause.]
Mr. Blankfein. OK. I see it now, sir. What page number?
Senator Levin. Page 2. Do you see that?
Mr. Blankfein. Yes. I am on page 2 now.
Senator Levin. Do you see there where it says ``tremendous
profits'' in the second paragraph? Is $3 billion a tremendous
profit?
Mr. Blankfein. I see the contributions to the $3 billion of
SBG trading profits?
Senator Levin. Yes. Do you consider that a tremendous
profit?
Mr. Blankfein. For that trading desk----
Senator Levin. Yes.
Mr. Blankfein [continuing]. It would have been, and I think
the guy who is writing this is bragging about his local
business.
Senator Levin. Right. Local? That was a big part of your
business that year, wasn't it?
Mr. Blankfein. Well, it was adjacent to other businesses. I
would never even see this. I would see the mortgage----
Senator Levin. That is why I am showing it to you right
now. I am just asking you, do you think that is a big profit,
$3 billion?
Mr. Blankfein. That is a big number, just like the loss in
his adjacent business is a big loss.
Senator Levin. That was the profit they made.
Mr. Blankfein. That was the revenue----
Senator Levin. The profits they made that year on short
sales. That is what we are talking about, taking short
positions, they made huge profits. What you want to do is
deduct the long positions, which you had in your inventory
mainly, from that. That is not the question. Did you bet big
time in 2007 against the housing mortgage business, and you
did. You went big and short----
Mr. Blankfein. No, we did not.
Senator Levin. Well, let us take a look at what you told
your Board.
Mr. Blankfein. Sure.
Senator Levin. Go to Exhibit 18.\1\ This is from Sparks.
This was just in the synthetics.
---------------------------------------------------------------------------
\1\ See Exhibit No. 18, which appears in the Appendix on page 271.
---------------------------------------------------------------------------
Mr. Blankfein. Is one local----
Senator Levin. I know. Everything is local. I am just
telling you what happened in the shift. I will get to the major
shift in a minute. That is what you told your Board, that there
was a major shift, OK, but I will get to that in a minute. Let
us talk about what made up that major shift.
Mr. Blankfein. OK. I am looking at----
Senator Levin. ``In [this] synthetic space,'' and that is
what we have been talking about--do you see that at the
bottom----
Mr. Blankfein. Exhibit 18?
Senator Levin [continuing]. On Exhibit 18?
Mr. Blankfein. In synthetic space, yes.
Senator Levin. ``The desk started the quarter with long, $6
billion . . . and shifted the position to net short $10 billion
. . . by reducing the longs . . . and increasing shorts.'' That
is what it says. Now, that was one piece of your operation.
They shifted from long to short.
Then you told the SEC on Form 8-K, which is Exhibit 154,\2\
and this is dated September 20----
---------------------------------------------------------------------------
\2\ See Exhibit No. 154, which appears in the Appendix on page 966.
---------------------------------------------------------------------------
Mr. Blankfein. I am sorry. Where am I looking?
Senator Levin. You are looking at Exhibit 154.
Mr. Blankfein. Yes, sir.
Senator Levin. Have you got it?
Mr. Blankfein. Yes, I do. Thank you.
Senator Levin. OK, page 3, second paragraph, second line.
``Net revenues in mortgages were also significantly higher,
despite continued deterioration in the market environment.
Significant losses on non-prime loans and securities were more
than offset by gains on short mortgage positions.'' OK. So your
significant losses on the non-prime loans and securities were
more than offset by gains on the short mortgage positions. That
was some of your net short positions.
Now take a look at Exhibit 46,\3\ page 3, the bottom
paragraph. ``It is important to note however that we are active
traders of mortgage securities and loans and, as with any of
the financial instruments we trade, at any point in time we may
choose to take a directional view of the market''--that is what
you deny--``and will express that view through the use of
mortgage securities, loans, and derivatives. Therefore,
although we did have long balance sheet exposure to sub-prime
securities in the past three years, albeit small exposure, our
net risk position was variously either long or short depending
on our changing view of the market.''
---------------------------------------------------------------------------
\3\ See Exhibit No. 46, which appears in the Appendix on page 361.
---------------------------------------------------------------------------
Mr. Blankfein. Sure.
Senator Levin. It is a view of the market--this is your own
filing, by the way--changing view of the market. ``For example,
during most of 2007, we maintained a net short sub-prime
position and therefore stood to benefit from declining prices
in the mortgage market.'' That is your filing.
Now, take a look at Exhibit 48,\1\ a Tax Department
Presentation, October 2007. Here, on page 2, right in the
middle. ``So what happened to us? A quick word on our own
market and credit risk performance in this regard. In market
risk - you saw in our 2nd and 3rd qtr results that we made
money despite our inherently long cash positions.'' Inherently
long. That is what was inherited----
---------------------------------------------------------------------------
\1\ See Exhibit No. 48, which appears in the Appendix on page 376.
---------------------------------------------------------------------------
Mr. Blankfein. No, inherent, not inherited.
Senator Levin. Both. Much of it was inherited, right? They
were in your inventory, and some of it for a long time, but OK.
You don't know the breakdown of it. I am going to keep reading.
``Because starting early in 2007, our mortgage trading desk
started putting on big short positions.'' OK. Those aren't my
words. Those are Goldman Sachs' words. ``Big short positions,
mostly using the ABX, which is a family of indices designed to
replicate cash bonds, and did so in enough quantity that we
were net short and made money, substantial money in the third
quarter as the subprime market weakened. This remains our
position today.''
That is your Tax Department's presentation. You made
``substantial money in the third quarter.'' I am sorry, that
was the Chief Risk Officer who said this in an internal
presentation to Goldman's Tax Department, to be perfectly
accurate.
Then you did that Form 8-K filing, which we have already
read about, talking about you did very well that year. You did
very well because you had a big short.
And then Exhibit 45.\2\ That is the conference call that
Goldman held for the third quarter of 2007. ``Our risk bias
from that market was to be short and that net short position
was profitable.'' No hedge there. Profitable because of our
short position.
---------------------------------------------------------------------------
\2\ See Exhibit No. 45, which appears in the Appendix on page 349.
---------------------------------------------------------------------------
Then there is that September conference call. Let me go on.
Now, what had happened is that you had a meeting with your
Board of Directors--I assume that you would have been there--in
March 2007. That is Exhibit 22.\3\ You had made a decision.
There were big problems, we have heard all day long, about the
subprime sector, about mortgages, and that shows on page 8 of
Exhibit 22, if we are together. The first quarter: ``Long
position grows with increased market activity.'' This is back
in 2006, first and second quarter of 2006. Do you see that
arrow? Going back to 2006, you reported----
---------------------------------------------------------------------------
\3\ See Exhibit No. 22, which appears in the Appendix on page 276.
---------------------------------------------------------------------------
Mr. Blankfein. What page?
Senator Levin. Eight. Do you see that big arrow in the
middle?
Mr. Blankfein. I do.
Senator Levin. OK. And then the first and second quarter of
2006, your long position grows. And then as you go down 2006,
third and fourth quarter, you start scaling back purchasing of
riskier loans. You reduce your CDO activity. Residual assets--
those are the ones in your inventory--marked down to reflect
market deterioration--and look here--Goldman Sachs ``reverses
long market position through purchases of single-name CDS and
reductions of ABX.'' You are reversing your long market
position. That is a direction for most people's vocabulary. You
don't like to use the word ``direction'' in your public
statements, but that is what happened. You told the Board that
you reversed the long market position.
And then when you had the next Board meeting in September,
you told your Board, and this is Exhibit 41,\1\ page 4--have
you got it?
---------------------------------------------------------------------------
\1\ See Exhibit No. 41, which appears in the Appendix on page 327.
---------------------------------------------------------------------------
Mr. Blankfein. I do.
Senator Levin. OK. This is what you told your Board in
September, you were going back, and on page 4, you will see the
first quarter. What did you do in the first quarter? You ``shut
down all residential mortgage warehouses.'' You ``reduced
[your] loan position.'' You ``increased protection''--that
means going short--``on disaster scenarios.'' In the second
quarter, you ``shut down all [your] CDO warehouses.'' You
``took significant mark to market losses.'' You ``reduced
[your] loan purchases.'' You ``reduced counterparty exposure.''
And then in quarter two and three, here is what you said.
You ``positioned [the] business tactically.'' And this, by the
way, is under the heading, ``The business has taken proactive
steps to position the firm strategically in the ensuing
mortgage credit and liquidity crisis.''
Perfectly proper, what you did. That is not the issue. You
``shorted synthetics.'' You ``shorted CDOs and RMBS.'' You
``reduced [your] long inventory.'' You were short, short,
short. You shorted like crazy. It is clear from all these
documents.
Mr. Blankfein, you can say publicly that there was no
direction here, but your documents show otherwise. The words
are used even to the Board that you ``shifted''--changed your
position from long to short. You told the Board repeatedly what
you were doing to focus on the short position. So there is
clearly a directional change. It was so sharp, I think you may
have been the only bank like yourself that made money when the
housing bubble burst.
You made--maybe you don't think it is a lot of money, maybe
it is not the amount of money you usually make in a month or a
year, but according to your own records, it was a billion
dollars net, after all of your long losses in that year. You
say it is a half-a-billion. OK. Your records show it is a
billion, but we won't quibble over half-a-billion dollars. You
came out ahead in 2007 in a market which crashed, and you did
it because you went short, big time, big short, in your own
words, Mr. Viniar's words. You don't want to acknowledge that,
I know, but that is what your own documents show.
I am not sure, again, why it is that you are saying these
things publicly, like there was no directional change and that
you weren't big net short in 2007 when you were. These are big
net short positions. I know you are saying those are net short,
and they are. If you just looked at the short side, they would
be huge. But you don't want to look at the short side, and that
is okay. You want to look at the net short side. You were up to
$13 billion net short and there wasn't a day that year, until
the end of December, when you actually had anything other than
a net short position.
So you want folks to trust you. You basically want folks to
trust you, but here is the way I have seen it. We have been
through this business of selling securities to people and in
that same deal not telling them that you were betting against
those securities. We have gone through that----
Mr. Blankfein. Will you indulge me for one second?
Senator Levin. Yes. Just wait until I am done, because I
want to give you my view.
You want to be trusted. I am glad you want to be trusted,
but I think you can understand why there are a lot of folks who
have some real doubts when, you don't acknowledge the big
short, you try to hedge that, tamp that down, and when you also
over and over again in these documents, which we went through
today in the first panel, you were selling securities to your
clients at the same time you are betting against those same
securities.
Now, you can argue that people know that, and what I am
saying to you is that people expect, as those 1930's Senators
said, that bankers would be selling things that they would
expect or hope or believe will be OK, not that they are betting
against.
And so that is what we have shown as to the problems. You
are in a fairly unique position, by the way, not just because
of your big size but because of the big short. The big short
puts your bank in a position where you were one of the rare
banks that actually came out okay in 2007. The other ones who
were on the wrong side, on the long side, who didn't engage in
the big short like you did, lost big time. Some of them went
under.
And so it is not the fact that you made a profit. It is not
the fact even that you went short. You have a right to go
short. It is the conflict. It is the conflict that is so
troubling to me between going in that direction, clearly
changing direction--nothing could be clearer from these
documents. You told your Board you were changing direction.
Your documents show changing direction.
But then in that process, over and over again in securities
that you were selling to customers, you bet against those
securities simultaneously with the sale as part of the security
distribution, and that is part that troubles me most, I think.
There are a lot of things that trouble me here, including the
language that--not just the language, the beliefs that your own
sales people had that they were selling junk or crap.
And when you say that nothing you heard today troubled
you--that is what you answered one of my colleagues, that
nothing you heard from that first panel troubled you, you
thought it was all OK, one of my colleagues pressed you on
that. I don't know whether you heard----
Mr. Blankfein. He asked me concerned, and I----
Senator Levin. Concerned.
Mr. Blankfein. Yes.
Senator Levin. That is OK. If that didn't concern you, that
the people who are selling securities under your name believe
that they are selling crap or junk, and words even saltier than
those, if that doesn't concern you, that concerns me and, I
think, would concern an awful lot of people in this country.
You shouldn't be selling junk. You shouldn't be selling crap.
You shouldn't be betting against your own customer at the same
time you are selling to them.
And that all coming together is creating a necessity that
we take some regulatory steps in the conflict of interest area.
There is an amendment which will be offered, introduced to the
Dodd bill which will strengthen the bill in that regard, in the
conflict of interest area, because the conflict of interest not
only exists there, it exists--and I think maybe you or another
Goldman representative today acknowledged that--in the area of
credit rating. There is the appearance of a conflict of
interest, because you folks are paying the credit raters to
rate securities that you are selling, and it is clearly in your
interest that they be AAA.
Do you remember during the deposition that you had with my
staff, do you remember being asked the question----
Mr. Blankfein. Senator, have we moved past the question
you----
Senator Levin. Yes. Do you want to comment on what I just
said? That is OK. You can comment on what I just said and then
I will go back to the credit rating agencies. Go on.
Mr. Blankfein. I would say, Senator, people are using
language, big change, what they think, whether an isolated
individual is characterizing his P&L in isolation versus the
other position adjacent to him. The one unmutable fact here
that is in the past that is ascertainable, that is audited, is
the net of all these positions in the market yielded less than
$500 million worth of revenue in the residential space in
2007----
Senator Levin. In 2007----
Mr. Blankfein [continuing]. And lost $1.7 billion in 2008.
Senator Levin. We are not talking 2008.
Mr. Blankfein. In the context----
Senator Levin. The bubble burst in 2007. We are looking at
the causes of that bubble bursting.
Mr. Blankfein. In the context of the chaos in the market,
all the size positions, all the market making we were doing in
that period of time, with all that was going on, getting within
$500 million of flat during that year 2007, I think, reflects a
desire and an accomplishment to get closer to home. We bought--
OK, and I will just--so anyway, I just wanted to respond to
you----
Senator Levin. You may not think a half-a-billion dollars
is a lot, but the fact that you were able to get through 2007,
when the bubble burst, was because you went with the big short.
Those are your own----
Mr. Blankfein. Less than 1 percent of our revenues that
year.
Senator Levin. I know, but 56 percent of your value at
risk.
Mr. Blankfein. Because the market volatility----
Senator Levin. I know the because, but you put a huge
amount of value at risk to go short in that market.
Mr. Blankfein. The market forced the value at risk higher
because of the volatility.
Senator Levin. All right. Now let us talk about the credit
rating agencies. We asked you this question during your
deposition.\1\ These are your words, so you will probably
remember them. We are going to get you a copy.
---------------------------------------------------------------------------
\1\ Exhibit No. 176, Deposition of Lloyd C. Blankfein, a Sealed
Exhibit, is retained in the files of the Subcommittee.
---------------------------------------------------------------------------
Mr. Blankfein. OK. Thank you.
Senator Levin. Take a look at page 46, if you would.
Mr. Blankfein. Page 46.
Senator Levin. Got it? Near the bottom.
Mr. Blankfein. Yes, sir.
Senator Levin. Now, at the bottom, line 25, ``Either based
on your own knowledge and opinions or what your senior
executives may have expressed to you, how critical did Goldman
believe that the ratings given by the CRAs were to the--how
critical were those ratings to the successful marketing and
selling of RMBSs and CDOs?'' Your answer, ``I don't know what
the standards--I don't know what drove the business. I don't
know what drove the business. I don't know how important they
were in the business to investors.'' You don't know how
important they are. We do.
OK, the next question. ``But did you understand that at
least there were certain classes of investors that could only
invest in certain rated products?'' Your answer, ``I never
thought of it.'' It strains credulity that you never thought
there are classes of investors that can only invest in AAA
products. Is that something you really never thought about,
never knew?
Mr. Blankfein. I never thought of it.
Senator Levin. You never thought of the importance of AAA,
that there are a whole bunch of institutions, universities, and
a whole bunch of other folks that can only invest in AAA? You
are not aware that your own firm argues for large AAA tranches?
You are not aware that those BBBs that are turned into the AAAs
through this process of CDO-ing them, that the reason for that
is to have more AAA tranches and more AAA securities?
Mr. Blankfein. Senator----
Senator Levin. You are not aware of all of that?
Mr. Blankfein. Senator, I never marketed that. I don't--I
mean, if you asked me whether I would think that it would be
more desirable to have a AAA than a AA, I would say, for sure.
If you are asking me whether I knew that some category is
absolutely barred from buying it unless it had a AAA, it is
just not within my--it wasn't within my scope to know that.
Senator Levin. Well, then look at the top question here.
When I said, ``Either based on your own knowledge''--that is
the bottom of page 46--``and the opinions of your senior
executives that they may have expressed to you, how critical
did Goldman believe that the ratings given by the CRAs were to
the successful marketing and selling of RMBSs and CDOs?'' Now
we are talking the marketing and selling. How important is it?
Your answer, ``I don't know what the standards--I don't know
what drove the business. I don't know what drove the business.
I don't know how important they were in the business to
investors.'' You are telling us that you don't know that AAA
ratings are important to investors? That is what you say in
your deposition.
Mr. Blankfein. Senator, I am not saying--you are using
different language----
Senator Levin. I am reading it exactly. Based on what you
know or the opinions----
Mr. Blankfein. I said I don't know the standards. I don't
know what drove the business. I don't know what drove the
business. I don't know----
Senator Levin. ``I don't know how important they were in
the business to investors.''
Mr. Blankfein. That is----
Senator Levin. You don't know how important AAA----
Mr. Blankfein. I can't say the extent to it. Senator, I am
being asked a question in a deposition about a line of business
that I never personally was in in my--I never did this in my
life in the firm and I am being asked. There are so many people
at Goldman Sachs who can answer this question with precision. I
wasn't one of them.
Senator Levin. That wasn't precision. That is the question.
You don't know that those ratings are important to sales?
Mr. Blankfein. I said I don't know how important they were
in the business to investors.
Senator Levin. Oh.
Mr. Blankfein. And that is--I don't know----
Senator Levin. Do you know that they are important?
Mr. Blankfein. Yes, I know that they are important, and I
know that they be preferred--at the same price, by the way. But
I don't know the extent to which those investors for a lower
rating but a higher yield are capable of buying it. I just
don't know.
Senator Levin. The deposition was taken by staff, not by
me, so when I said, I asked you something, it was the----
Mr. Blankfein. I am sorry.
Senator Levin. No, that was my statement. When I said, I
asked you something, it wasn't me. It was the staff that asked
you the question.
Mr. Blankfein. I was taking it at the royal ``we.''
Senator Levin. I didn't say ``we.''
Mr. Blankfein. I am sorry.
Senator Levin. I said ``I.''
Let me just close with a very brief statement. We have a
debate going on here at this moment on how Congress should
respond to the abuses that we have looked at in four hearings
now. Those abuses include the conveyor belt of toxic mortgages
that got into the financial system, huge demand for them that
came from a whole lot of places. We focused on WaMu. We always
focus on a case history and they were a very logical case
history. So WaMu dumps, and others like them, dump billions of
dollars of toxic mortgages into the system.
Goldman and other banks like them provided these lenders
with more money to issue bad loans. There is evidence, by the
way, from the documents we came in with today that Goldman was
very much aware that they were buying loans from companies that
were selling bad loans, including New Century.
Then the financial engineering comes along to turn those
high-risk mortgages into allegedly safe investments, taking
BBBs and other things that are not good, solid B's, turning
them into ``safe investments'' through the magic of CDOs.
Selling them then to pension funds, universities,
municipalities, insurance companies, and banks. So now the
poison spreads further.
Then we have these synthetic securities, which magnifies
all of that. The mortgage system begins to buckle under the
weight of these loans and the synthetic stuff that floods the
system. And then we have this situation where Goldman bets
against the mortgage market as a whole, profits from its
collapse. I know it was only a half-a-billion dollars in 2007,
but amazingly enough there was a profit at all. The rare
instance where despite all the losses that you took in your
inventory and on the longs, you nonetheless were able to make a
profit because of your huge investment on the short side.
I happen to be one that believes in a free market. But if
it is going to be truly free, it cannot be designed for just a
few people to reap enormous benefits while passing the risks on
to the rest of us. It must be free of deception. It has got to
be free of conflicts of interest. It needs a cop on the beat
and it has got to get back on Wall Street.
Senator Dodd's bill is an important beginning, and we hope
to strengthen it with provisions that address conflicts of
interest, that address proprietary trading that puts a firm's
self-interest ahead of its clients' interests. That is what we
saw evidence of today. That addresses these synthetic
instruments that magnify risk while gambling on the demise of
companies instead of on their successes; that ends these
reckless lending practices, such as stated income, which means
liar loans, and negatively amortizing loans; that gives
stronger enforcement tools for regulators to protect consumers.
That is what we have got to do to rebuild the defenses to
protect Main Street from the excesses of Wall Street and those
other excesses that we have studied during these four hearings.
I hope these hearings provide added strength to the reform
effort. A lot of us will be working on legislation to stop the
abuses that were exposed in these four hearings.
We thank our staffs. They have worked extremely hard and
extremely long hours. Elise Bean and our staff, and I know that
this is true also of Senator Coburn's staff, have spent untold
hours digging through these documents.
I love the way some of your folks tell the press that the
documents were cherry-picked. That book in front of you is a
whole bowl of cherries. These are not cherry-picked. Those
documents reflect the history of what happened here. From
millions of documents, you obviously have to select some that
you think represent a reality, and we did that. It is a reality
which has some unseemly aspects to it, particularly in terms of
conflicts. But we are just hoping that whether or not we can
get the support of Wall Street firms, and you indicated some
willingness to support reforms here today, but whether we get
that support for a strong reform bill, we have to have the
willpower and the backbone to do just that.
We thank our witnesses. Mr. Blankfein, we thank you. It has
been a long day. We thank all of the witnesses. And again,
particularly, we thank our staffs.
We stand adjourned.
[Whereupon, at 8:42 p.m., the Subcommittee was adjourned.]
A P P E N D I X
----------
[GRAPHIC] [TIFF OMITTED] T7322.001
[GRAPHIC] [TIFF OMITTED] T7322.002
[GRAPHIC] [TIFF OMITTED] T7322.003
[GRAPHIC] [TIFF OMITTED] T7322.004
[GRAPHIC] [TIFF OMITTED] T7322.005
[GRAPHIC] [TIFF OMITTED] T7322.006
[GRAPHIC] [TIFF OMITTED] T7322.007
[GRAPHIC] [TIFF OMITTED] T7322.008
[GRAPHIC] [TIFF OMITTED] T7322.009
[GRAPHIC] [TIFF OMITTED] T7322.010
[GRAPHIC] [TIFF OMITTED] T7322.011
[GRAPHIC] [TIFF OMITTED] T7322.012
[GRAPHIC] [TIFF OMITTED] T7322.016
[GRAPHIC] [TIFF OMITTED] T7322.017
[GRAPHIC] [TIFF OMITTED] T7322.018
[GRAPHIC] [TIFF OMITTED] T7322.013
[GRAPHIC] [TIFF OMITTED] T7322.014
[GRAPHIC] [TIFF OMITTED] T7322.015
[GRAPHIC] [TIFF OMITTED] T7322.019
[GRAPHIC] [TIFF OMITTED] T7322.020
[GRAPHIC] [TIFF OMITTED] T7322.021
[GRAPHIC] [TIFF OMITTED] T7322.022
[GRAPHIC] [TIFF OMITTED] T7322.023
[GRAPHIC] [TIFF OMITTED] T7322.024
[GRAPHIC] [TIFF OMITTED] T7322.025
[GRAPHIC] [TIFF OMITTED] T7322.026
[GRAPHIC] [TIFF OMITTED] T7322.027
[GRAPHIC] [TIFF OMITTED] T7322.028
[GRAPHIC] [TIFF OMITTED] T7322.029
[GRAPHIC] [TIFF OMITTED] T7322.030
[GRAPHIC] [TIFF OMITTED] T7322.031
[GRAPHIC] [TIFF OMITTED] T7322.032
[GRAPHIC] [TIFF OMITTED] T7322.033
[GRAPHIC] [TIFF OMITTED] T7322.034
[GRAPHIC] [TIFF OMITTED] T7322.035
[GRAPHIC] [TIFF OMITTED] T7322.036
[GRAPHIC] [TIFF OMITTED] T7322.037
[GRAPHIC] [TIFF OMITTED] T7322.038
[GRAPHIC] [TIFF OMITTED] T7322.039
[GRAPHIC] [TIFF OMITTED] T7322.040
[GRAPHIC] [TIFF OMITTED] T7322.041
[GRAPHIC] [TIFF OMITTED] T7322.042
[GRAPHIC] [TIFF OMITTED] T7322.043
[GRAPHIC] [TIFF OMITTED] T7322.044
[GRAPHIC] [TIFF OMITTED] T7322.045
[GRAPHIC] [TIFF OMITTED] T7322.046
[GRAPHIC] [TIFF OMITTED] T7322.047
[GRAPHIC] [TIFF OMITTED] T7322.048
[GRAPHIC] [TIFF OMITTED] T7322.049
[GRAPHIC] [TIFF OMITTED] T7322.050
[GRAPHIC] [TIFF OMITTED] T7322.051
[GRAPHIC] [TIFF OMITTED] T7322.052
[GRAPHIC] [TIFF OMITTED] T7322.053
[GRAPHIC] [TIFF OMITTED] T7322.054
[GRAPHIC] [TIFF OMITTED] T7322.055
[GRAPHIC] [TIFF OMITTED] T7322.056
[GRAPHIC] [TIFF OMITTED] T7322.057
[GRAPHIC] [TIFF OMITTED] T7322.058
[GRAPHIC] [TIFF OMITTED] T7322.059
[GRAPHIC] [TIFF OMITTED] T7322.060
[GRAPHIC] [TIFF OMITTED] T7322.061
[GRAPHIC] [TIFF OMITTED] T7322.062
[GRAPHIC] [TIFF OMITTED] T7322.063
[GRAPHIC] [TIFF OMITTED] T7322.064
[GRAPHIC] [TIFF OMITTED] T7322.065
[GRAPHIC] [TIFF OMITTED] T7322.066
[GRAPHIC] [TIFF OMITTED] T7322.067
[GRAPHIC] [TIFF OMITTED] T7322.068
[GRAPHIC] [TIFF OMITTED] T7322.069
[GRAPHIC] [TIFF OMITTED] T7322.070
[GRAPHIC] [TIFF OMITTED] T7322.071
[GRAPHIC] [TIFF OMITTED] T7322.072
[GRAPHIC] [TIFF OMITTED] T7322.073
[GRAPHIC] [TIFF OMITTED] T7322.074
[GRAPHIC] [TIFF OMITTED] T7322.075
[GRAPHIC] [TIFF OMITTED] T7322.076
[GRAPHIC] [TIFF OMITTED] T7322.077
[GRAPHIC] [TIFF OMITTED] T7322.078
[GRAPHIC] [TIFF OMITTED] T7322.079
[GRAPHIC] [TIFF OMITTED] T7322.080
[GRAPHIC] [TIFF OMITTED] T7322.081
[GRAPHIC] [TIFF OMITTED] T7322.082
[GRAPHIC] [TIFF OMITTED] T7322.083
[GRAPHIC] [TIFF OMITTED] T7322.084
[GRAPHIC] [TIFF OMITTED] T7322.085
[GRAPHIC] [TIFF OMITTED] T7322.086
[GRAPHIC] [TIFF OMITTED] T7322.087
[GRAPHIC] [TIFF OMITTED] T7322.088
[GRAPHIC] [TIFF OMITTED] T7322.089
[GRAPHIC] [TIFF OMITTED] T7322.090
[GRAPHIC] [TIFF OMITTED] T7322.091
[GRAPHIC] [TIFF OMITTED] T7322.092
[GRAPHIC] [TIFF OMITTED] T7322.093
[GRAPHIC] [TIFF OMITTED] T7322.094
[GRAPHIC] [TIFF OMITTED] T7322.095
[GRAPHIC] [TIFF OMITTED] T7322.096
[GRAPHIC] [TIFF OMITTED] T7322.097
[GRAPHIC] [TIFF OMITTED] T7322.098
[GRAPHIC] [TIFF OMITTED] T7322.099
[GRAPHIC] [TIFF OMITTED] T7322.100
[GRAPHIC] [TIFF OMITTED] T7322.101
[GRAPHIC] [TIFF OMITTED] T7322.102
[GRAPHIC] [TIFF OMITTED] T7322.103
[GRAPHIC] [TIFF OMITTED] T7322.104
[GRAPHIC] [TIFF OMITTED] T7322.105
[GRAPHIC] [TIFF OMITTED] T7322.106
[GRAPHIC] [TIFF OMITTED] T7322.107
[GRAPHIC] [TIFF OMITTED] T7322.108
[GRAPHIC] [TIFF OMITTED] T7322.109
[GRAPHIC] [TIFF OMITTED] T7322.110
[GRAPHIC] [TIFF OMITTED] T7322.111
[GRAPHIC] [TIFF OMITTED] T7322.112
[GRAPHIC] [TIFF OMITTED] T7322.113
[GRAPHIC] [TIFF OMITTED] T7322.114
[GRAPHIC] [TIFF OMITTED] T7322.115
[GRAPHIC] [TIFF OMITTED] T7322.116
[GRAPHIC] [TIFF OMITTED] T7322.117
[GRAPHIC] [TIFF OMITTED] T7322.118
[GRAPHIC] [TIFF OMITTED] T7322.119
[GRAPHIC] [TIFF OMITTED] T7322.120
[GRAPHIC] [TIFF OMITTED] T7322.121
[GRAPHIC] [TIFF OMITTED] T7322.122
[GRAPHIC] [TIFF OMITTED] T7322.123
[GRAPHIC] [TIFF OMITTED] T7322.124
[GRAPHIC] [TIFF OMITTED] T7322.125
[GRAPHIC] [TIFF OMITTED] T7322.126
[GRAPHIC] [TIFF OMITTED] T7322.127
[GRAPHIC] [TIFF OMITTED] T7322.128
[GRAPHIC] [TIFF OMITTED] T7322.129
[GRAPHIC] [TIFF OMITTED] T7322.130
[GRAPHIC] [TIFF OMITTED] T7322.131
[GRAPHIC] [TIFF OMITTED] T7322.132
[GRAPHIC] [TIFF OMITTED] T7322.133
[GRAPHIC] [TIFF OMITTED] T7322.134
[GRAPHIC] [TIFF OMITTED] T7322.135
[GRAPHIC] [TIFF OMITTED] T7322.136
[GRAPHIC] [TIFF OMITTED] T7322.137
[GRAPHIC] [TIFF OMITTED] T7322.138
[GRAPHIC] [TIFF OMITTED] T7322.139
[GRAPHIC] [TIFF OMITTED] T7322.140
[GRAPHIC] [TIFF OMITTED] T7322.141
[GRAPHIC] [TIFF OMITTED] T7322.142
[GRAPHIC] [TIFF OMITTED] T7322.143
[GRAPHIC] [TIFF OMITTED] T7322.144
[GRAPHIC] [TIFF OMITTED] T7322.145
[GRAPHIC] [TIFF OMITTED] T7322.146
[GRAPHIC] [TIFF OMITTED] T7322.147
[GRAPHIC] [TIFF OMITTED] T7322.148
[GRAPHIC] [TIFF OMITTED] T7322.149
[GRAPHIC] [TIFF OMITTED] T7322.150
[GRAPHIC] [TIFF OMITTED] T7322.151
[GRAPHIC] [TIFF OMITTED] T7322.152
[GRAPHIC] [TIFF OMITTED] T7322.153
[GRAPHIC] [TIFF OMITTED] T7322.154
[GRAPHIC] [TIFF OMITTED] T7322.155
[GRAPHIC] [TIFF OMITTED] T7322.156
[GRAPHIC] [TIFF OMITTED] T7322.157
[GRAPHIC] [TIFF OMITTED] T7322.158
[GRAPHIC] [TIFF OMITTED] T7322.159
[GRAPHIC] [TIFF OMITTED] T7322.160
[GRAPHIC] [TIFF OMITTED] T7322.161
[GRAPHIC] [TIFF OMITTED] T7322.162
[GRAPHIC] [TIFF OMITTED] T7322.163
[GRAPHIC] [TIFF OMITTED] T7322.164
[GRAPHIC] [TIFF OMITTED] T7322.165
[GRAPHIC] [TIFF OMITTED] T7322.166
[GRAPHIC] [TIFF OMITTED] T7322.167
[GRAPHIC] [TIFF OMITTED] T7322.168
[GRAPHIC] [TIFF OMITTED] T7322.169
[GRAPHIC] [TIFF OMITTED] T7322.170
[GRAPHIC] [TIFF OMITTED] T7322.171
[GRAPHIC] [TIFF OMITTED] T7322.172
[GRAPHIC] [TIFF OMITTED] T7322.173
[GRAPHIC] [TIFF OMITTED] T7322.174
[GRAPHIC] [TIFF OMITTED] T7322.175
[GRAPHIC] [TIFF OMITTED] T7322.176
[GRAPHIC] [TIFF OMITTED] T7322.177
[GRAPHIC] [TIFF OMITTED] T7322.178
[GRAPHIC] [TIFF OMITTED] T7322.179
[GRAPHIC] [TIFF OMITTED] T7322.180
[GRAPHIC] [TIFF OMITTED] T7322.181
[GRAPHIC] [TIFF OMITTED] T7322.182
[GRAPHIC] [TIFF OMITTED] T7322.183
[GRAPHIC] [TIFF OMITTED] T7322.184
[GRAPHIC] [TIFF OMITTED] T7322.185
[GRAPHIC] [TIFF OMITTED] T7322.186
[GRAPHIC] [TIFF OMITTED] T7322.187
[GRAPHIC] [TIFF OMITTED] T7322.188
[GRAPHIC] [TIFF OMITTED] T7322.189
[GRAPHIC] [TIFF OMITTED] T7322.190
[GRAPHIC] [TIFF OMITTED] T7322.191
[GRAPHIC] [TIFF OMITTED] T7322.192
[GRAPHIC] [TIFF OMITTED] T7322.193
[GRAPHIC] [TIFF OMITTED] T7322.194
[GRAPHIC] [TIFF OMITTED] T7322.195
[GRAPHIC] [TIFF OMITTED] T7322.196
[GRAPHIC] [TIFF OMITTED] T7322.197
[GRAPHIC] [TIFF OMITTED] T7322.198
[GRAPHIC] [TIFF OMITTED] T7322.199
[GRAPHIC] [TIFF OMITTED] T7322.200
[GRAPHIC] [TIFF OMITTED] T7322.201
[GRAPHIC] [TIFF OMITTED] T7322.202
[GRAPHIC] [TIFF OMITTED] T7322.203
[GRAPHIC] [TIFF OMITTED] T7322.204
[GRAPHIC] [TIFF OMITTED] T7322.205
[GRAPHIC] [TIFF OMITTED] T7322.206
[GRAPHIC] [TIFF OMITTED] T7322.207
[GRAPHIC] [TIFF OMITTED] T7322.208
[GRAPHIC] [TIFF OMITTED] T7322.209
[GRAPHIC] [TIFF OMITTED] T7322.210
[GRAPHIC] [TIFF OMITTED] T7322.211
[GRAPHIC] [TIFF OMITTED] T7322.212
[GRAPHIC] [TIFF OMITTED] T7322.213
[GRAPHIC] [TIFF OMITTED] T7322.214
[GRAPHIC] [TIFF OMITTED] T7322.215
[GRAPHIC] [TIFF OMITTED] T7322.216
[GRAPHIC] [TIFF OMITTED] T7322.217
[GRAPHIC] [TIFF OMITTED] T7322.218
[GRAPHIC] [TIFF OMITTED] T7322.219
[GRAPHIC] [TIFF OMITTED] T7322.220
[GRAPHIC] [TIFF OMITTED] T7322.221
[GRAPHIC] [TIFF OMITTED] T7322.222
[GRAPHIC] [TIFF OMITTED] T7322.223
[GRAPHIC] [TIFF OMITTED] T7322.224
[GRAPHIC] [TIFF OMITTED] T7322.225
[GRAPHIC] [TIFF OMITTED] T7322.226
[GRAPHIC] [TIFF OMITTED] T7322.227
[GRAPHIC] [TIFF OMITTED] T7322.228
[GRAPHIC] [TIFF OMITTED] T7322.229
[GRAPHIC] [TIFF OMITTED] T7322.230
[GRAPHIC] [TIFF OMITTED] T7322.231
[GRAPHIC] [TIFF OMITTED] T7322.232
[GRAPHIC] [TIFF OMITTED] T7322.233
[GRAPHIC] [TIFF OMITTED] T7322.234
[GRAPHIC] [TIFF OMITTED] T7322.235
[GRAPHIC] [TIFF OMITTED] T7322.236
[GRAPHIC] [TIFF OMITTED] T7322.237
[GRAPHIC] [TIFF OMITTED] T7322.238
[GRAPHIC] [TIFF OMITTED] T7322.239
[GRAPHIC] [TIFF OMITTED] T7322.240
[GRAPHIC] [TIFF OMITTED] T7322.241
[GRAPHIC] [TIFF OMITTED] T7322.242
[GRAPHIC] [TIFF OMITTED] T7322.243
[GRAPHIC] [TIFF OMITTED] T7322.244
[GRAPHIC] [TIFF OMITTED] T7322.245
[GRAPHIC] [TIFF OMITTED] T7322.246
[GRAPHIC] [TIFF OMITTED] T7322.247
[GRAPHIC] [TIFF OMITTED] T7322.248
[GRAPHIC] [TIFF OMITTED] T7322.249
[GRAPHIC] [TIFF OMITTED] T7322.250
[GRAPHIC] [TIFF OMITTED] T7322.251
[GRAPHIC] [TIFF OMITTED] T7322.252
[GRAPHIC] [TIFF OMITTED] T7322.253
[GRAPHIC] [TIFF OMITTED] T7322.254
[GRAPHIC] [TIFF OMITTED] T7322.255
[GRAPHIC] [TIFF OMITTED] T7322.256
[GRAPHIC] [TIFF OMITTED] T7322.257
[GRAPHIC] [TIFF OMITTED] T7322.258
[GRAPHIC] [TIFF OMITTED] T7322.259
[GRAPHIC] [TIFF OMITTED] T7322.260
[GRAPHIC] [TIFF OMITTED] T7322.261
[GRAPHIC] [TIFF OMITTED] T7322.262
[GRAPHIC] [TIFF OMITTED] T7322.263
[GRAPHIC] [TIFF OMITTED] T7322.264
[GRAPHIC] [TIFF OMITTED] T7322.265
[GRAPHIC] [TIFF OMITTED] T7322.266
[GRAPHIC] [TIFF OMITTED] T7322.267
[GRAPHIC] [TIFF OMITTED] T7322.268
[GRAPHIC] [TIFF OMITTED] T7322.269
[GRAPHIC] [TIFF OMITTED] T7322.270
[GRAPHIC] [TIFF OMITTED] T7322.271
[GRAPHIC] [TIFF OMITTED] T7322.272
[GRAPHIC] [TIFF OMITTED] T7322.273
[GRAPHIC] [TIFF OMITTED] T7322.274
[GRAPHIC] [TIFF OMITTED] T7322.275
[GRAPHIC] [TIFF OMITTED] T7322.276
[GRAPHIC] [TIFF OMITTED] T7322.277
[GRAPHIC] [TIFF OMITTED] T7322.278
[GRAPHIC] [TIFF OMITTED] T7322.279
[GRAPHIC] [TIFF OMITTED] T7322.280
[GRAPHIC] [TIFF OMITTED] T7322.281
[GRAPHIC] [TIFF OMITTED] T7322.282
[GRAPHIC] [TIFF OMITTED] T7322.283
[GRAPHIC] [TIFF OMITTED] T7322.284
[GRAPHIC] [TIFF OMITTED] T7322.285
[GRAPHIC] [TIFF OMITTED] T7322.286
[GRAPHIC] [TIFF OMITTED] T7322.287
[GRAPHIC] [TIFF OMITTED] T7322.288
[GRAPHIC] [TIFF OMITTED] T7322.289
[GRAPHIC] [TIFF OMITTED] T7322.290
[GRAPHIC] [TIFF OMITTED] T7322.291
[GRAPHIC] [TIFF OMITTED] T7322.292
[GRAPHIC] [TIFF OMITTED] T7322.293
[GRAPHIC] [TIFF OMITTED] T7322.294
[GRAPHIC] [TIFF OMITTED] T7322.295
[GRAPHIC] [TIFF OMITTED] T7322.296
[GRAPHIC] [TIFF OMITTED] T7322.297
[GRAPHIC] [TIFF OMITTED] T7322.298
[GRAPHIC] [TIFF OMITTED] T7322.299
[GRAPHIC] [TIFF OMITTED] T7322.300
[GRAPHIC] [TIFF OMITTED] T7322.301
[GRAPHIC] [TIFF OMITTED] T7322.302
[GRAPHIC] [TIFF OMITTED] T7322.303
[GRAPHIC] [TIFF OMITTED] T7322.304
[GRAPHIC] [TIFF OMITTED] T7322.305
[GRAPHIC] [TIFF OMITTED] T7322.306
[GRAPHIC] [TIFF OMITTED] T7322.307
[GRAPHIC] [TIFF OMITTED] T7322.308
[GRAPHIC] [TIFF OMITTED] T7322.309
[GRAPHIC] [TIFF OMITTED] T7322.310
[GRAPHIC] [TIFF OMITTED] T7322.311
[GRAPHIC] [TIFF OMITTED] T7322.312
[GRAPHIC] [TIFF OMITTED] T7322.313
[GRAPHIC] [TIFF OMITTED] T7322.314
[GRAPHIC] [TIFF OMITTED] T7322.315
[GRAPHIC] [TIFF OMITTED] T7322.316
[GRAPHIC] [TIFF OMITTED] T7322.317
[GRAPHIC] [TIFF OMITTED] T7322.318
[GRAPHIC] [TIFF OMITTED] T7322.319
[GRAPHIC] [TIFF OMITTED] T7322.320
[GRAPHIC] [TIFF OMITTED] T7322.321
[GRAPHIC] [TIFF OMITTED] T7322.322
[GRAPHIC] [TIFF OMITTED] T7322.323
[GRAPHIC] [TIFF OMITTED] T7322.324
[GRAPHIC] [TIFF OMITTED] T7322.325
[GRAPHIC] [TIFF OMITTED] T7322.326
[GRAPHIC] [TIFF OMITTED] T7322.327
[GRAPHIC] [TIFF OMITTED] T7322.328
[GRAPHIC] [TIFF OMITTED] T7322.329
[GRAPHIC] [TIFF OMITTED] T7322.330
[GRAPHIC] [TIFF OMITTED] T7322.331
[GRAPHIC] [TIFF OMITTED] T7322.332
[GRAPHIC] [TIFF OMITTED] T7322.333
[GRAPHIC] [TIFF OMITTED] T7322.334
[GRAPHIC] [TIFF OMITTED] T7322.335
[GRAPHIC] [TIFF OMITTED] T7322.336
[GRAPHIC] [TIFF OMITTED] T7322.337
[GRAPHIC] [TIFF OMITTED] T7322.338
[GRAPHIC] [TIFF OMITTED] T7322.339
[GRAPHIC] [TIFF OMITTED] T7322.340
[GRAPHIC] [TIFF OMITTED] T7322.341
[GRAPHIC] [TIFF OMITTED] T7322.342
[GRAPHIC] [TIFF OMITTED] T7322.343
[GRAPHIC] [TIFF OMITTED] T7322.344
[GRAPHIC] [TIFF OMITTED] T7322.345
[GRAPHIC] [TIFF OMITTED] T7322.346
[GRAPHIC] [TIFF OMITTED] T7322.347
[GRAPHIC] [TIFF OMITTED] T7322.348
[GRAPHIC] [TIFF OMITTED] T7322.349
[GRAPHIC] [TIFF OMITTED] T7322.350
[GRAPHIC] [TIFF OMITTED] T7322.351
[GRAPHIC] [TIFF OMITTED] T7322.352
[GRAPHIC] [TIFF OMITTED] T7322.353
[GRAPHIC] [TIFF OMITTED] T7322.354
[GRAPHIC] [TIFF OMITTED] T7322.355
[GRAPHIC] [TIFF OMITTED] T7322.356
[GRAPHIC] [TIFF OMITTED] T7322.357
[GRAPHIC] [TIFF OMITTED] T7322.358
[GRAPHIC] [TIFF OMITTED] T7322.359
[GRAPHIC] [TIFF OMITTED] T7322.360
[GRAPHIC] [TIFF OMITTED] T7322.361
[GRAPHIC] [TIFF OMITTED] T7322.362
[GRAPHIC] [TIFF OMITTED] T7322.363
[GRAPHIC] [TIFF OMITTED] T7322.364
[GRAPHIC] [TIFF OMITTED] T7322.365
[GRAPHIC] [TIFF OMITTED] T7322.366
[GRAPHIC] [TIFF OMITTED] T7322.367
[GRAPHIC] [TIFF OMITTED] T7322.368
[GRAPHIC] [TIFF OMITTED] T7322.369
[GRAPHIC] [TIFF OMITTED] T7322.370
[GRAPHIC] [TIFF OMITTED] T7322.371
[GRAPHIC] [TIFF OMITTED] T7322.372
[GRAPHIC] [TIFF OMITTED] T7322.373
[GRAPHIC] [TIFF OMITTED] T7322.374
[GRAPHIC] [TIFF OMITTED] T7322.375
[GRAPHIC] [TIFF OMITTED] T7322.376
[GRAPHIC] [TIFF OMITTED] T7322.377
[GRAPHIC] [TIFF OMITTED] T7322.378
[GRAPHIC] [TIFF OMITTED] T7322.379
[GRAPHIC] [TIFF OMITTED] T7322.380
[GRAPHIC] [TIFF OMITTED] T7322.381
[GRAPHIC] [TIFF OMITTED] T7322.382
[GRAPHIC] [TIFF OMITTED] T7322.383
[GRAPHIC] [TIFF OMITTED] T7322.384
[GRAPHIC] [TIFF OMITTED] T7322.385
[GRAPHIC] [TIFF OMITTED] T7322.386
[GRAPHIC] [TIFF OMITTED] T7322.387
[GRAPHIC] [TIFF OMITTED] T7322.388
[GRAPHIC] [TIFF OMITTED] T7322.389
[GRAPHIC] [TIFF OMITTED] T7322.390
[GRAPHIC] [TIFF OMITTED] T7322.391
[GRAPHIC] [TIFF OMITTED] T7322.392
[GRAPHIC] [TIFF OMITTED] T7322.393
[GRAPHIC] [TIFF OMITTED] T7322.394
[GRAPHIC] [TIFF OMITTED] T7322.395
[GRAPHIC] [TIFF OMITTED] T7322.396
[GRAPHIC] [TIFF OMITTED] T7322.397
[GRAPHIC] [TIFF OMITTED] T7322.398
[GRAPHIC] [TIFF OMITTED] T7322.399
[GRAPHIC] [TIFF OMITTED] T7322.400
[GRAPHIC] [TIFF OMITTED] T7322.401
[GRAPHIC] [TIFF OMITTED] T7322.402
[GRAPHIC] [TIFF OMITTED] T7322.403
[GRAPHIC] [TIFF OMITTED] T7322.404
[GRAPHIC] [TIFF OMITTED] T7322.405
[GRAPHIC] [TIFF OMITTED] T7322.406
[GRAPHIC] [TIFF OMITTED] T7322.407
[GRAPHIC] [TIFF OMITTED] T7322.408
[GRAPHIC] [TIFF OMITTED] T7322.409
[GRAPHIC] [TIFF OMITTED] T7322.410
[GRAPHIC] [TIFF OMITTED] T7322.411
[GRAPHIC] [TIFF OMITTED] T7322.412
[GRAPHIC] [TIFF OMITTED] T7322.413
[GRAPHIC] [TIFF OMITTED] T7322.414
[GRAPHIC] [TIFF OMITTED] T7322.415
[GRAPHIC] [TIFF OMITTED] T7322.416
[GRAPHIC] [TIFF OMITTED] T7322.417
[GRAPHIC] [TIFF OMITTED] T7322.418
[GRAPHIC] [TIFF OMITTED] T7322.419
[GRAPHIC] [TIFF OMITTED] T7322.420
[GRAPHIC] [TIFF OMITTED] T7322.421
[GRAPHIC] [TIFF OMITTED] T7322.422
[GRAPHIC] [TIFF OMITTED] T7322.423
[GRAPHIC] [TIFF OMITTED] T7322.424
[GRAPHIC] [TIFF OMITTED] T7322.425
[GRAPHIC] [TIFF OMITTED] T7322.426
[GRAPHIC] [TIFF OMITTED] T7322.427
[GRAPHIC] [TIFF OMITTED] T7322.428
[GRAPHIC] [TIFF OMITTED] T7322.429
[GRAPHIC] [TIFF OMITTED] T7322.430
[GRAPHIC] [TIFF OMITTED] T7322.431
[GRAPHIC] [TIFF OMITTED] T7322.432
[GRAPHIC] [TIFF OMITTED] T7322.433
[GRAPHIC] [TIFF OMITTED] T7322.434
[GRAPHIC] [TIFF OMITTED] T7322.435
[GRAPHIC] [TIFF OMITTED] T7322.436
[GRAPHIC] [TIFF OMITTED] T7322.437
[GRAPHIC] [TIFF OMITTED] T7322.438
[GRAPHIC] [TIFF OMITTED] T7322.439
[GRAPHIC] [TIFF OMITTED] T7322.440
[GRAPHIC] [TIFF OMITTED] T7322.441
[GRAPHIC] [TIFF OMITTED] T7322.442
[GRAPHIC] [TIFF OMITTED] T7322.443
[GRAPHIC] [TIFF OMITTED] T7322.444
[GRAPHIC] [TIFF OMITTED] T7322.445
[GRAPHIC] [TIFF OMITTED] T7322.446
[GRAPHIC] [TIFF OMITTED] T7322.447
[GRAPHIC] [TIFF OMITTED] T7322.448
[GRAPHIC] [TIFF OMITTED] T7322.449
[GRAPHIC] [TIFF OMITTED] T7322.450
[GRAPHIC] [TIFF OMITTED] T7322.451
[GRAPHIC] [TIFF OMITTED] T7322.452
[GRAPHIC] [TIFF OMITTED] T7322.453
[GRAPHIC] [TIFF OMITTED] T7322.454
[GRAPHIC] [TIFF OMITTED] T7322.455
[GRAPHIC] [TIFF OMITTED] T7322.456
[GRAPHIC] [TIFF OMITTED] T7322.457
[GRAPHIC] [TIFF OMITTED] T7322.458
[GRAPHIC] [TIFF OMITTED] T7322.459
[GRAPHIC] [TIFF OMITTED] T7322.460
[GRAPHIC] [TIFF OMITTED] T7322.461
[GRAPHIC] [TIFF OMITTED] T7322.462
[GRAPHIC] [TIFF OMITTED] T7322.463
[GRAPHIC] [TIFF OMITTED] T7322.464
[GRAPHIC] [TIFF OMITTED] T7322.465
[GRAPHIC] [TIFF OMITTED] T7322.466
[GRAPHIC] [TIFF OMITTED] T7322.467
[GRAPHIC] [TIFF OMITTED] T7322.468
[GRAPHIC] [TIFF OMITTED] T7322.469
[GRAPHIC] [TIFF OMITTED] T7322.470
[GRAPHIC] [TIFF OMITTED] T7322.471
[GRAPHIC] [TIFF OMITTED] T7322.472
[GRAPHIC] [TIFF OMITTED] T7322.473
[GRAPHIC] [TIFF OMITTED] T7322.474
[GRAPHIC] [TIFF OMITTED] T7322.475
[GRAPHIC] [TIFF OMITTED] T7322.476
[GRAPHIC] [TIFF OMITTED] T7322.477
[GRAPHIC] [TIFF OMITTED] T7322.478
[GRAPHIC] [TIFF OMITTED] T7322.479
[GRAPHIC] [TIFF OMITTED] T7322.480
[GRAPHIC] [TIFF OMITTED] T7322.481
[GRAPHIC] [TIFF OMITTED] T7322.482
[GRAPHIC] [TIFF OMITTED] T7322.483
[GRAPHIC] [TIFF OMITTED] T7322.484
[GRAPHIC] [TIFF OMITTED] T7322.485
[GRAPHIC] [TIFF OMITTED] T7322.486
[GRAPHIC] [TIFF OMITTED] T7322.487
[GRAPHIC] [TIFF OMITTED] T7322.488
[GRAPHIC] [TIFF OMITTED] T7322.489
[GRAPHIC] [TIFF OMITTED] T7322.490
[GRAPHIC] [TIFF OMITTED] T7322.491
[GRAPHIC] [TIFF OMITTED] T7322.492
[GRAPHIC] [TIFF OMITTED] T7322.493
[GRAPHIC] [TIFF OMITTED] T7322.494
[GRAPHIC] [TIFF OMITTED] T7322.495
[GRAPHIC] [TIFF OMITTED] T7322.496
[GRAPHIC] [TIFF OMITTED] T7322.497
[GRAPHIC] [TIFF OMITTED] T7322.498
[GRAPHIC] [TIFF OMITTED] T7322.499
[GRAPHIC] [TIFF OMITTED] T7322.500
[GRAPHIC] [TIFF OMITTED] T7322.501
[GRAPHIC] [TIFF OMITTED] T7322.502
[GRAPHIC] [TIFF OMITTED] T7322.503
[GRAPHIC] [TIFF OMITTED] T7322.504
[GRAPHIC] [TIFF OMITTED] T7322.505
[GRAPHIC] [TIFF OMITTED] T7322.506
[GRAPHIC] [TIFF OMITTED] T7322.507
[GRAPHIC] [TIFF OMITTED] T7322.508
[GRAPHIC] [TIFF OMITTED] T7322.509
[GRAPHIC] [TIFF OMITTED] T7322.510
[GRAPHIC] [TIFF OMITTED] T7322.511
[GRAPHIC] [TIFF OMITTED] T7322.512
[GRAPHIC] [TIFF OMITTED] T7322.513
[GRAPHIC] [TIFF OMITTED] T7322.514
[GRAPHIC] [TIFF OMITTED] T7322.515
[GRAPHIC] [TIFF OMITTED] T7322.516
[GRAPHIC] [TIFF OMITTED] T7322.517
[GRAPHIC] [TIFF OMITTED] T7322.518
[GRAPHIC] [TIFF OMITTED] T7322.519
[GRAPHIC] [TIFF OMITTED] T7322.520
[GRAPHIC] [TIFF OMITTED] T7322.521
[GRAPHIC] [TIFF OMITTED] T7322.522
[GRAPHIC] [TIFF OMITTED] T7322.523
[GRAPHIC] [TIFF OMITTED] T7322.524
[GRAPHIC] [TIFF OMITTED] T7322.525
[GRAPHIC] [TIFF OMITTED] T7322.526
[GRAPHIC] [TIFF OMITTED] T7322.527
[GRAPHIC] [TIFF OMITTED] T7322.528
[GRAPHIC] [TIFF OMITTED] T7322.529
[GRAPHIC] [TIFF OMITTED] T7322.530
[GRAPHIC] [TIFF OMITTED] T7322.531
[GRAPHIC] [TIFF OMITTED] T7322.532
[GRAPHIC] [TIFF OMITTED] T7322.533
[GRAPHIC] [TIFF OMITTED] T7322.534
[GRAPHIC] [TIFF OMITTED] T7322.535
[GRAPHIC] [TIFF OMITTED] T7322.536
[GRAPHIC] [TIFF OMITTED] T7322.537
[GRAPHIC] [TIFF OMITTED] T7322.538
[GRAPHIC] [TIFF OMITTED] T7322.539
[GRAPHIC] [TIFF OMITTED] T7322.540
[GRAPHIC] [TIFF OMITTED] T7322.541
[GRAPHIC] [TIFF OMITTED] T7322.542
[GRAPHIC] [TIFF OMITTED] T7322.543
[GRAPHIC] [TIFF OMITTED] T7322.544
[GRAPHIC] [TIFF OMITTED] T7322.545
[GRAPHIC] [TIFF OMITTED] T7322.546
[GRAPHIC] [TIFF OMITTED] T7322.547
[GRAPHIC] [TIFF OMITTED] T7322.548
[GRAPHIC] [TIFF OMITTED] T7322.549
[GRAPHIC] [TIFF OMITTED] T7322.550
[GRAPHIC] [TIFF OMITTED] T7322.551
[GRAPHIC] [TIFF OMITTED] T7322.552
[GRAPHIC] [TIFF OMITTED] T7322.553
[GRAPHIC] [TIFF OMITTED] T7322.554
[GRAPHIC] [TIFF OMITTED] T7322.555
[GRAPHIC] [TIFF OMITTED] T7322.556
[GRAPHIC] [TIFF OMITTED] T7322.557
[GRAPHIC] [TIFF OMITTED] T7322.558
[GRAPHIC] [TIFF OMITTED] T7322.559
[GRAPHIC] [TIFF OMITTED] T7322.560
[GRAPHIC] [TIFF OMITTED] T7322.561
[GRAPHIC] [TIFF OMITTED] T7322.562
[GRAPHIC] [TIFF OMITTED] T7322.563
[GRAPHIC] [TIFF OMITTED] T7322.564
[GRAPHIC] [TIFF OMITTED] T7322.565
[GRAPHIC] [TIFF OMITTED] T7322.566
[GRAPHIC] [TIFF OMITTED] T7322.567
[GRAPHIC] [TIFF OMITTED] T7322.568
[GRAPHIC] [TIFF OMITTED] T7322.569
[GRAPHIC] [TIFF OMITTED] T7322.570
[GRAPHIC] [TIFF OMITTED] T7322.571
[GRAPHIC] [TIFF OMITTED] T7322.572
[GRAPHIC] [TIFF OMITTED] T7322.573
[GRAPHIC] [TIFF OMITTED] T7322.574
[GRAPHIC] [TIFF OMITTED] T7322.575
[GRAPHIC] [TIFF OMITTED] T7322.576
[GRAPHIC] [TIFF OMITTED] T7322.577
[GRAPHIC] [TIFF OMITTED] T7322.578
[GRAPHIC] [TIFF OMITTED] T7322.579
[GRAPHIC] [TIFF OMITTED] T7322.580
[GRAPHIC] [TIFF OMITTED] T7322.581
[GRAPHIC] [TIFF OMITTED] T7322.582
[GRAPHIC] [TIFF OMITTED] T7322.583
[GRAPHIC] [TIFF OMITTED] T7322.584
[GRAPHIC] [TIFF OMITTED] T7322.585
[GRAPHIC] [TIFF OMITTED] T7322.586
[GRAPHIC] [TIFF OMITTED] T7322.587
[GRAPHIC] [TIFF OMITTED] T7322.588
[GRAPHIC] [TIFF OMITTED] T7322.589
[GRAPHIC] [TIFF OMITTED] T7322.590
[GRAPHIC] [TIFF OMITTED] T7322.591
[GRAPHIC] [TIFF OMITTED] T7322.592
[GRAPHIC] [TIFF OMITTED] T7322.593
[GRAPHIC] [TIFF OMITTED] T7322.594
[GRAPHIC] [TIFF OMITTED] T7322.595
[GRAPHIC] [TIFF OMITTED] T7322.596
[GRAPHIC] [TIFF OMITTED] T7322.597
[GRAPHIC] [TIFF OMITTED] T7322.598
[GRAPHIC] [TIFF OMITTED] T7322.599
[GRAPHIC] [TIFF OMITTED] T7322.600
[GRAPHIC] [TIFF OMITTED] T7322.601
[GRAPHIC] [TIFF OMITTED] T7322.602
[GRAPHIC] [TIFF OMITTED] T7322.603
[GRAPHIC] [TIFF OMITTED] T7322.604
[GRAPHIC] [TIFF OMITTED] T7322.605
[GRAPHIC] [TIFF OMITTED] T7322.606
[GRAPHIC] [TIFF OMITTED] T7322.607
[GRAPHIC] [TIFF OMITTED] T7322.608
[GRAPHIC] [TIFF OMITTED] T7322.609
[GRAPHIC] [TIFF OMITTED] T7322.610
[GRAPHIC] [TIFF OMITTED] T7322.611
[GRAPHIC] [TIFF OMITTED] T7322.612
[GRAPHIC] [TIFF OMITTED] T7322.613
[GRAPHIC] [TIFF OMITTED] T7322.614
[GRAPHIC] [TIFF OMITTED] T7322.615
[GRAPHIC] [TIFF OMITTED] T7322.616
[GRAPHIC] [TIFF OMITTED] T7322.617
[GRAPHIC] [TIFF OMITTED] T7322.618
[GRAPHIC] [TIFF OMITTED] T7322.619
[GRAPHIC] [TIFF OMITTED] T7322.620
[GRAPHIC] [TIFF OMITTED] T7322.621
[GRAPHIC] [TIFF OMITTED] T7322.622
[GRAPHIC] [TIFF OMITTED] T7322.623
[GRAPHIC] [TIFF OMITTED] T7322.624
[GRAPHIC] [TIFF OMITTED] T7322.625
[GRAPHIC] [TIFF OMITTED] T7322.626
[GRAPHIC] [TIFF OMITTED] T7322.627
[GRAPHIC] [TIFF OMITTED] T7322.628
[GRAPHIC] [TIFF OMITTED] T7322.629
[GRAPHIC] [TIFF OMITTED] T7322.630
[GRAPHIC] [TIFF OMITTED] T7322.631
[GRAPHIC] [TIFF OMITTED] T7322.632
[GRAPHIC] [TIFF OMITTED] T7322.633
[GRAPHIC] [TIFF OMITTED] T7322.634
[GRAPHIC] [TIFF OMITTED] T7322.635
[GRAPHIC] [TIFF OMITTED] T7322.636
[GRAPHIC] [TIFF OMITTED] T7322.637
[GRAPHIC] [TIFF OMITTED] T7322.638
[GRAPHIC] [TIFF OMITTED] T7322.639
[GRAPHIC] [TIFF OMITTED] T7322.640
[GRAPHIC] [TIFF OMITTED] T7322.641
[GRAPHIC] [TIFF OMITTED] T7322.642
[GRAPHIC] [TIFF OMITTED] T7322.643
[GRAPHIC] [TIFF OMITTED] T7322.644
[GRAPHIC] [TIFF OMITTED] T7322.645
[GRAPHIC] [TIFF OMITTED] T7322.646
[GRAPHIC] [TIFF OMITTED] T7322.647
[GRAPHIC] [TIFF OMITTED] T7322.648
[GRAPHIC] [TIFF OMITTED] T7322.649
[GRAPHIC] [TIFF OMITTED] T7322.650
[GRAPHIC] [TIFF OMITTED] T7322.651
[GRAPHIC] [TIFF OMITTED] T7322.652
[GRAPHIC] [TIFF OMITTED] T7322.653
[GRAPHIC] [TIFF OMITTED] T7322.654
[GRAPHIC] [TIFF OMITTED] T7322.655
[GRAPHIC] [TIFF OMITTED] T7322.656
[GRAPHIC] [TIFF OMITTED] T7322.657
[GRAPHIC] [TIFF OMITTED] T7322.658
[GRAPHIC] [TIFF OMITTED] T7322.659
[GRAPHIC] [TIFF OMITTED] T7322.660
[GRAPHIC] [TIFF OMITTED] T7322.661
[GRAPHIC] [TIFF OMITTED] T7322.662
[GRAPHIC] [TIFF OMITTED] T7322.663
[GRAPHIC] [TIFF OMITTED] T7322.664
[GRAPHIC] [TIFF OMITTED] T7322.665
[GRAPHIC] [TIFF OMITTED] T7322.666
[GRAPHIC] [TIFF OMITTED] T7322.667
[GRAPHIC] [TIFF OMITTED] T7322.668
[GRAPHIC] [TIFF OMITTED] T7322.669
[GRAPHIC] [TIFF OMITTED] T7322.670
[GRAPHIC] [TIFF OMITTED] T7322.671
[GRAPHIC] [TIFF OMITTED] T7322.672
[GRAPHIC] [TIFF OMITTED] T7322.673
[GRAPHIC] [TIFF OMITTED] T7322.674
[GRAPHIC] [TIFF OMITTED] T7322.675
[GRAPHIC] [TIFF OMITTED] T7322.676
[GRAPHIC] [TIFF OMITTED] T7322.677
[GRAPHIC] [TIFF OMITTED] T7322.678
[GRAPHIC] [TIFF OMITTED] T7322.679
[GRAPHIC] [TIFF OMITTED] T7322.680
[GRAPHIC] [TIFF OMITTED] T7322.681
[GRAPHIC] [TIFF OMITTED] T7322.682
[GRAPHIC] [TIFF OMITTED] T7322.683
[GRAPHIC] [TIFF OMITTED] T7322.684
[GRAPHIC] [TIFF OMITTED] T7322.685
[GRAPHIC] [TIFF OMITTED] T7322.686
[GRAPHIC] [TIFF OMITTED] T7322.687
[GRAPHIC] [TIFF OMITTED] T7322.688
[GRAPHIC] [TIFF OMITTED] T7322.689
[GRAPHIC] [TIFF OMITTED] T7322.690
[GRAPHIC] [TIFF OMITTED] T7322.691
[GRAPHIC] [TIFF OMITTED] T7322.692
[GRAPHIC] [TIFF OMITTED] T7322.693
[GRAPHIC] [TIFF OMITTED] T7322.694
[GRAPHIC] [TIFF OMITTED] T7322.695
[GRAPHIC] [TIFF OMITTED] T7322.696
[GRAPHIC] [TIFF OMITTED] T7322.697
[GRAPHIC] [TIFF OMITTED] T7322.698
[GRAPHIC] [TIFF OMITTED] T7322.699
[GRAPHIC] [TIFF OMITTED] T7322.700
[GRAPHIC] [TIFF OMITTED] T7322.701
[GRAPHIC] [TIFF OMITTED] T7322.702
[GRAPHIC] [TIFF OMITTED] T7322.703
[GRAPHIC] [TIFF OMITTED] T7322.704
[GRAPHIC] [TIFF OMITTED] T7322.705
[GRAPHIC] [TIFF OMITTED] T7322.706
[GRAPHIC] [TIFF OMITTED] T7322.707
[GRAPHIC] [TIFF OMITTED] T7322.708
[GRAPHIC] [TIFF OMITTED] T7322.709
[GRAPHIC] [TIFF OMITTED] T7322.710
[GRAPHIC] [TIFF OMITTED] T7322.711
[GRAPHIC] [TIFF OMITTED] T7322.712
[GRAPHIC] [TIFF OMITTED] T7322.713
[GRAPHIC] [TIFF OMITTED] T7322.714
[GRAPHIC] [TIFF OMITTED] T7322.715
[GRAPHIC] [TIFF OMITTED] T7322.716
[GRAPHIC] [TIFF OMITTED] T7322.717
[GRAPHIC] [TIFF OMITTED] T7322.718
[GRAPHIC] [TIFF OMITTED] T7322.719
[GRAPHIC] [TIFF OMITTED] T7322.720
[GRAPHIC] [TIFF OMITTED] T7322.721
[GRAPHIC] [TIFF OMITTED] T7322.722
[GRAPHIC] [TIFF OMITTED] T7322.723
[GRAPHIC] [TIFF OMITTED] T7322.724
[GRAPHIC] [TIFF OMITTED] T7322.725
[GRAPHIC] [TIFF OMITTED] T7322.726
[GRAPHIC] [TIFF OMITTED] T7322.727
[GRAPHIC] [TIFF OMITTED] T7322.728
[GRAPHIC] [TIFF OMITTED] T7322.729
[GRAPHIC] [TIFF OMITTED] T7322.730
[GRAPHIC] [TIFF OMITTED] T7322.731
[GRAPHIC] [TIFF OMITTED] T7322.732
[GRAPHIC] [TIFF OMITTED] T7322.733
[GRAPHIC] [TIFF OMITTED] T7322.734
[GRAPHIC] [TIFF OMITTED] T7322.735
[GRAPHIC] [TIFF OMITTED] T7322.736
[GRAPHIC] [TIFF OMITTED] T7322.737
[GRAPHIC] [TIFF OMITTED] T7322.738
[GRAPHIC] [TIFF OMITTED] T7322.739
[GRAPHIC] [TIFF OMITTED] T7322.740
[GRAPHIC] [TIFF OMITTED] T7322.741
[GRAPHIC] [TIFF OMITTED] T7322.742
[GRAPHIC] [TIFF OMITTED] T7322.743
[GRAPHIC] [TIFF OMITTED] T7322.744
[GRAPHIC] [TIFF OMITTED] T7322.745
[GRAPHIC] [TIFF OMITTED] T7322.746
[GRAPHIC] [TIFF OMITTED] T7322.747
[GRAPHIC] [TIFF OMITTED] T7322.748
[GRAPHIC] [TIFF OMITTED] T7322.749
[GRAPHIC] [TIFF OMITTED] T7322.750
[GRAPHIC] [TIFF OMITTED] T7322.751
[GRAPHIC] [TIFF OMITTED] T7322.752
[GRAPHIC] [TIFF OMITTED] T7322.753
[GRAPHIC] [TIFF OMITTED] T7322.754
[GRAPHIC] [TIFF OMITTED] T7322.755
[GRAPHIC] [TIFF OMITTED] T7322.756
[GRAPHIC] [TIFF OMITTED] T7322.757
[GRAPHIC] [TIFF OMITTED] T7322.758
[GRAPHIC] [TIFF OMITTED] T7322.759
[GRAPHIC] [TIFF OMITTED] T7322.760
[GRAPHIC] [TIFF OMITTED] T7322.761
[GRAPHIC] [TIFF OMITTED] T7322.762
[GRAPHIC] [TIFF OMITTED] T7322.763
[GRAPHIC] [TIFF OMITTED] T7322.764
[GRAPHIC] [TIFF OMITTED] T7322.765
[GRAPHIC] [TIFF OMITTED] T7322.766
[GRAPHIC] [TIFF OMITTED] T7322.767
[GRAPHIC] [TIFF OMITTED] T7322.768
[GRAPHIC] [TIFF OMITTED] T7322.769
[GRAPHIC] [TIFF OMITTED] T7322.770
[GRAPHIC] [TIFF OMITTED] T7322.771
[GRAPHIC] [TIFF OMITTED] T7322.772
[GRAPHIC] [TIFF OMITTED] T7322.773
[GRAPHIC] [TIFF OMITTED] T7322.774
[GRAPHIC] [TIFF OMITTED] T7322.775
[GRAPHIC] [TIFF OMITTED] T7322.776
[GRAPHIC] [TIFF OMITTED] T7322.777
[GRAPHIC] [TIFF OMITTED] T7322.778
[GRAPHIC] [TIFF OMITTED] T7322.779
[GRAPHIC] [TIFF OMITTED] T7322.780
[GRAPHIC] [TIFF OMITTED] T7322.781
[GRAPHIC] [TIFF OMITTED] T7322.782
[GRAPHIC] [TIFF OMITTED] T7322.783
[GRAPHIC] [TIFF OMITTED] T7322.784
[GRAPHIC] [TIFF OMITTED] T7322.785
[GRAPHIC] [TIFF OMITTED] T7322.786
[GRAPHIC] [TIFF OMITTED] T7322.787
[GRAPHIC] [TIFF OMITTED] T7322.788
[GRAPHIC] [TIFF OMITTED] T7322.789
[GRAPHIC] [TIFF OMITTED] T7322.790
[GRAPHIC] [TIFF OMITTED] T7322.791
[GRAPHIC] [TIFF OMITTED] T7322.792
[GRAPHIC] [TIFF OMITTED] T7322.793
[GRAPHIC] [TIFF OMITTED] T7322.794
[GRAPHIC] [TIFF OMITTED] T7322.795
[GRAPHIC] [TIFF OMITTED] T7322.796
[GRAPHIC] [TIFF OMITTED] T7322.797
[GRAPHIC] [TIFF OMITTED] T7322.798
[GRAPHIC] [TIFF OMITTED] T7322.799
[GRAPHIC] [TIFF OMITTED] T7322.800
[GRAPHIC] [TIFF OMITTED] T7322.801
[GRAPHIC] [TIFF OMITTED] T7322.802
[GRAPHIC] [TIFF OMITTED] T7322.803
[GRAPHIC] [TIFF OMITTED] T7322.804
[GRAPHIC] [TIFF OMITTED] T7322.805
[GRAPHIC] [TIFF OMITTED] T7322.806
[GRAPHIC] [TIFF OMITTED] T7322.807
[GRAPHIC] [TIFF OMITTED] T7322.808
[GRAPHIC] [TIFF OMITTED] T7322.809
[GRAPHIC] [TIFF OMITTED] T7322.810
[GRAPHIC] [TIFF OMITTED] T7322.811
[GRAPHIC] [TIFF OMITTED] T7322.812
[GRAPHIC] [TIFF OMITTED] T7322.813
[GRAPHIC] [TIFF OMITTED] T7322.814
[GRAPHIC] [TIFF OMITTED] T7322.815
[GRAPHIC] [TIFF OMITTED] T7322.816
[GRAPHIC] [TIFF OMITTED] T7322.817
[GRAPHIC] [TIFF OMITTED] T7322.818
[GRAPHIC] [TIFF OMITTED] T7322.819
[GRAPHIC] [TIFF OMITTED] T7322.820
[GRAPHIC] [TIFF OMITTED] T7322.821
[GRAPHIC] [TIFF OMITTED] T7322.822
[GRAPHIC] [TIFF OMITTED] T7322.823
[GRAPHIC] [TIFF OMITTED] T7322.824
[GRAPHIC] [TIFF OMITTED] T7322.825
[GRAPHIC] [TIFF OMITTED] T7322.826
[GRAPHIC] [TIFF OMITTED] T7322.827
[GRAPHIC] [TIFF OMITTED] T7322.828
[GRAPHIC] [TIFF OMITTED] T7322.829
[GRAPHIC] [TIFF OMITTED] T7322.830
[GRAPHIC] [TIFF OMITTED] T7322.831
[GRAPHIC] [TIFF OMITTED] T7322.832
[GRAPHIC] [TIFF OMITTED] T7322.833
[GRAPHIC] [TIFF OMITTED] T7322.834
[GRAPHIC] [TIFF OMITTED] T7322.835
[GRAPHIC] [TIFF OMITTED] T7322.836
[GRAPHIC] [TIFF OMITTED] T7322.837
[GRAPHIC] [TIFF OMITTED] T7322.838
[GRAPHIC] [TIFF OMITTED] T7322.839
[GRAPHIC] [TIFF OMITTED] T7322.840
[GRAPHIC] [TIFF OMITTED] T7322.841
[GRAPHIC] [TIFF OMITTED] T7322.842
[GRAPHIC] [TIFF OMITTED] T7322.843
[GRAPHIC] [TIFF OMITTED] T7322.844
[GRAPHIC] [TIFF OMITTED] T7322.845
[GRAPHIC] [TIFF OMITTED] T7322.846
[GRAPHIC] [TIFF OMITTED] T7322.847
[GRAPHIC] [TIFF OMITTED] T7322.848
[GRAPHIC] [TIFF OMITTED] T7322.849
[GRAPHIC] [TIFF OMITTED] T7322.850
[GRAPHIC] [TIFF OMITTED] T7322.851
[GRAPHIC] [TIFF OMITTED] T7322.852
[GRAPHIC] [TIFF OMITTED] T7322.853
[GRAPHIC] [TIFF OMITTED] T7322.854
[GRAPHIC] [TIFF OMITTED] T7322.855
[GRAPHIC] [TIFF OMITTED] T7322.856
[GRAPHIC] [TIFF OMITTED] T7322.857
[GRAPHIC] [TIFF OMITTED] T7322.858
[GRAPHIC] [TIFF OMITTED] T7322.859
[GRAPHIC] [TIFF OMITTED] T7322.860
[GRAPHIC] [TIFF OMITTED] T7322.861
[GRAPHIC] [TIFF OMITTED] T7322.862
[GRAPHIC] [TIFF OMITTED] T7322.863
[GRAPHIC] [TIFF OMITTED] T7322.864
[GRAPHIC] [TIFF OMITTED] T7322.865
[GRAPHIC] [TIFF OMITTED] T7322.866
[GRAPHIC] [TIFF OMITTED] T7322.867
[GRAPHIC] [TIFF OMITTED] T7322.868
[GRAPHIC] [TIFF OMITTED] T7322.869
[GRAPHIC] [TIFF OMITTED] T7322.870
[GRAPHIC] [TIFF OMITTED] T7322.871
[GRAPHIC] [TIFF OMITTED] T7322.872
[GRAPHIC] [TIFF OMITTED] T7322.873
[GRAPHIC] [TIFF OMITTED] T7322.874
[GRAPHIC] [TIFF OMITTED] T7322.875
[GRAPHIC] [TIFF OMITTED] T7322.876
[GRAPHIC] [TIFF OMITTED] T7322.877
[GRAPHIC] [TIFF OMITTED] T7322.878
[GRAPHIC] [TIFF OMITTED] T7322.879
[GRAPHIC] [TIFF OMITTED] T7322.880
[GRAPHIC] [TIFF OMITTED] T7322.881
[GRAPHIC] [TIFF OMITTED] T7322.882
[GRAPHIC] [TIFF OMITTED] T7322.883
[GRAPHIC] [TIFF OMITTED] T7322.884
[GRAPHIC] [TIFF OMITTED] T7322.885
[GRAPHIC] [TIFF OMITTED] T7322.886
[GRAPHIC] [TIFF OMITTED] T7322.887
[GRAPHIC] [TIFF OMITTED] T7322.888
[GRAPHIC] [TIFF OMITTED] T7322.889
[GRAPHIC] [TIFF OMITTED] T7322.890
[GRAPHIC] [TIFF OMITTED] T7322.891
[GRAPHIC] [TIFF OMITTED] T7322.892
[GRAPHIC] [TIFF OMITTED] T7322.893
[GRAPHIC] [TIFF OMITTED] T7322.894
[GRAPHIC] [TIFF OMITTED] T7322.895
[GRAPHIC] [TIFF OMITTED] T7322.896
[GRAPHIC] [TIFF OMITTED] T7322.897
[GRAPHIC] [TIFF OMITTED] T7322.898
[GRAPHIC] [TIFF OMITTED] T7322.899
[GRAPHIC] [TIFF OMITTED] T7322.900
[GRAPHIC] [TIFF OMITTED] T7322.901
[GRAPHIC] [TIFF OMITTED] T7322.902
[GRAPHIC] [TIFF OMITTED] T7322.903
[GRAPHIC] [TIFF OMITTED] T7322.904
[GRAPHIC] [TIFF OMITTED] T7322.905
[GRAPHIC] [TIFF OMITTED] T7322.906
[GRAPHIC] [TIFF OMITTED] T7322.907
[GRAPHIC] [TIFF OMITTED] T7322.908
[GRAPHIC] [TIFF OMITTED] T7322.909
[GRAPHIC] [TIFF OMITTED] T7322.910
[GRAPHIC] [TIFF OMITTED] T7322.911
[GRAPHIC] [TIFF OMITTED] T7322.912
[GRAPHIC] [TIFF OMITTED] T7322.913
[GRAPHIC] [TIFF OMITTED] T7322.914
[GRAPHIC] [TIFF OMITTED] T7322.915
[GRAPHIC] [TIFF OMITTED] T7322.916
[GRAPHIC] [TIFF OMITTED] T7322.917
[GRAPHIC] [TIFF OMITTED] T7322.918
[GRAPHIC] [TIFF OMITTED] T7322.919
[GRAPHIC] [TIFF OMITTED] T7322.920
[GRAPHIC] [TIFF OMITTED] T7322.921
[GRAPHIC] [TIFF OMITTED] T7322.922
[GRAPHIC] [TIFF OMITTED] T7322.923
[GRAPHIC] [TIFF OMITTED] T7322.924
[GRAPHIC] [TIFF OMITTED] T7322.925
[GRAPHIC] [TIFF OMITTED] T7322.926
[GRAPHIC] [TIFF OMITTED] T7322.927
[GRAPHIC] [TIFF OMITTED] T7322.928