Congressional Record, Volume 156 Issue 56 (Tuesday, April 20, 2010)

[Congressional Record Volume 156, Number 56 (Tuesday, April 20, 2010)]
[House]
[Pages H2673-H2676]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

WALL STREET VS. MAIN STREET

The SPEAKER pro tempore. Under a previous order of the House, the
gentlewoman from Ohio (Ms. Kaptur) is recognized for 5 minutes.
Ms. KAPTUR. Mr. Speaker, Wall Street speculation and the disaster it
caused have been clear since the bailout in the fall of 2008. More
foreclosures on Main Street, higher profits for Wall Street.
I fought against that bailout, and I continue to fight for Main
Street and the people who are not high powered gamblers nor high paid
investors nor the mega banks. My fight is for people to regain their
jobs, for people to save their homes, and for people to have their hope
restored.
I've been observing the U.S. Securities and Exchange Commission
taking a baby step, long overdue, as watchdog of the markets that they
are supposed to be regulating as enforcers of securities law.
As the New York Times reports today, rather than asserting that
Goldman misrepresented a product it was selling, the most commonly used
grounds for securities fraud, the Securities and Exchange Commission
said in a civil lawsuit filed on Friday that the investment bank misled
customers about how the product was created. In fact, the SEC can only
file civil cases, so it's high time to look, rather, at the apparent
criminal fraud involved in and around the hidden works of Wall Street
and the financial crisis it precipitated.
Last year I introduced H.R. 3995, the 2008 Financial Crisis
Investigation and Prosecution Act, authorizing the Director of the FBI
to hire 1,000 additional agents and additional forensic accounting
experts to probe down into the misdeeds that brought down the economy
of our Nation.
Though the FBI is slightly beefing up their ranks on investigating
fraud, during the savings and loan scandal of the late 1980s and early
1990s 1,000 agents, as well as forensic experts, exacted justice.
Today, if there are even 300 over there doing part-time work on this,
that would be a high number.
Back in the eighties and nineties, that savings and loan crisis cost
the people of our country $170 billion placed right squarely on the
back of our taxpayers. The 2008 financial crisis could cost our people
trillions of dollars. So it must be the focus of the Department of
Justice to find and fight the fraud in our financial system. And they
simply need more financial white collar crime agents to do so.
Citizens following the law have nothing to fear. Those committing
criminal acts should know they will be caught. That is why, in addition
to authorizing more FBI agents, H.R. 3995 also authorizes the hiring of
more prosecutors in the Department of Justice to take those cases to
trial.

[[Page H2674]]

In addition, the SEC has an important role in enforcement, as shown
on Friday of last week, and H.R. 3995 strengthens the SEC by
authorizing the hiring of more investigators.
Many groups support this effort and recognize the necessity of
ensuring our financial system is rid of these criminals, and also
pointing out who's profited from the harm that has been caused to the
American people through their moral hazards.
No one knows exactly how much the financial crisis of 2008 will cost
our taxpayers, but one way to lessen that blow to them is to claw back
to the assets of those who rigged the system to their benefit and our
Republic's detriment. Our citizens want those who committed crimes to
be held accountable, and H.R. 3995 supports the agencies who can work
for real justice.
I ask my colleagues to support this bipartisan bill and work to
support the agencies tasked with finding and fighting massive fraud in
our financial system.
Furthermore, Congress should be assured that the Department of
Justice is on task to find and fight this fraud.
The charges against Goldman Sachs, the speculators there, by the SEC
have released a wave of response across this country. And in today's
New York Times Letters to the Editor, Oliver Revell, who served for 30
years as Special Agent and Senior Executive of the FBI and as an
Associate Deputy Director, wrote to the Times, ``It is clear to me that
the SEC charges should be held in abeyance, and that the FBI and
Justice Department should immediately open an investigation in the
apparent fraud that occurred in this area.''
He states that out of concern that the SEC's civil charges might
result in future criminal actions being impossible, as evidence in
civil trials can be excluded as inadmissible from criminal trial if it
is used first in a civil trial.
I agree. And I'm circulating a letter among my colleagues asking
Attorney General Holder to investigate Goldman Sachs and other related
cases to find and fight fraud in our financial system.
Many questions are yet to be answered and situations investigated.
How much of this was under the watch of then CEO of Goldman Sachs,
Henry Paulsen, the former Secretary of the Department of the Treasury,
who then bailed out the big banks with which he was so intimately
implicated?
AIG must be one of these cases since Goldman Sachs was the largest
domestic recipient of counterparty payments through AIG. Goldman's
excessive profits in this first quarter have gone up more than $3.5
billion. Imagine if you could borrow at one-half percent interest from
the Federal Reserve and then lend that money out at 3.5 percent
interest rate. You'd be making billions, too.
And it's not just all about Goldman Sachs. It's about Lehman
Brothers, Washington Mutual, other banks, our speculative firms, hedge
funds, mortgage companies. Fraud is against the law, and right now
fraud appears to be rampant and getting away with it. We need to be
investigating and catching the criminals and leaving those who abide
the law alone.
I fought the bailout in part because I was concerned that rampant
fraud was highly likely. And Congress needs to fight for Main Street
and support those agencies that are responsible for fighting fraud in
our system.
I ask my colleagues to join me by also signing the letter we have
composed to Attorney General Holder asking for a criminal investigation
with fraud related to these institutions; and also invite my colleagues
to cosponsor H.R. 3995.

[From The New York Times, April 20, 2010]

The Uproar Over Goldman Sachs

To the Editor:
Re ``S.E.C. Accuses Goldman of Fraud in Housing Deal''
(front page, April 17):
The securities fraud lawsuit against Goldman Sachs exposes
a serious flaw in modern Western capitalism.
Adam Smith taught us that the point of a robust capital
market is to direct capital to its best and highest use,
where, combined with labor, it will produce the goods and
services most valued by society. Asset bubbles are a problem,
but at least mortgage-backed securities enabled people to
live in their overvalued houses.
The Goldman ``Abacus'' transaction involved ``synthetic''
collateralized debt obligations, derivatives whose value rose
and fell with the value of real C.D.O.'s elsewhere. It
produced no goods or services, financed no consumption--
nothing at all. Money that could, and should, have been used
to add value to society was not invested; it was squandered
as surely as if the parties had wagered on a horse race.
Legitimate hedging is one thing. Gambling with people's
savings, university endowments and municipal funds, on the
other hand, should be a crime.
Caroline Poplin,
Bethesda, Md., April 18, 2010.

To the Editor:
Goldman Sachs's ethical failures and hypocrisy are more
important than whether it is legally guilty of fraud. Goldman
presents itself as having higher standards than other Wall
Street firms. It even posts ``Our Business Principles'' on
its Web site, something most firms do not do. Among these are
``Our clients' interests always come first'' and ``Integrity
and honesty are at the heart of our business.''
In the Abacus 2007-AC1 transaction, according to the
Securities and Exchange Commission lawsuit, Goldman knowingly
sold a product that was designed to fail, favoring its own
interests and the interests of one client (John A. Paulson, a
hedge fund manager) over the interests of other clients.
Further, it failed to fully disclose how the Abacus portfolio
was assembled. Goldman clearly did not adhere to its stated
business principles in this deal.
Jeffrey Cohen,
Arroyo Seco, N.M., April 18, 2010.

To the Editor:
As a real estate agent on the North Fork of Long Island in
the roaring housing market here from 1998 to 2005, I was
puzzled by the willingness of banks to give ``no doc'' (no
documentation) and ``liars'' (self-explanatory) bans. Some of
these buyers were borrowing more than the cost of their new
homes.
Today we can see why the banks were so generous. The
Securities and Exchange Commission charges that at least one
bank, Goldman Sachs, knowingly sold packages of subprime
loans that were meant to fail so that a savvy investor could
most profitably short a pool of them.
Some subprime mortgage borrowers who are underwater, owing
more on their homes than they are worth, are walking away,
leaving their homes and the payments they have already made
to the banks.
These days the North Fork real estate sales market isn't
roaring anymore, but many of those former homeowners are
keeping the rental market purring.
Janice Keller,
Mattituck, N.Y., April 17, 2010.

To the Editor:
Re ``In a Rush to Judge Goldman?'' (column, April 17):
In questioning a rush to judgment against Goldman Sachs,
William D. Cohan seemingly tries to turn the table by asking:
if ``Goldman had lost billions instead of making billions,
would the S.E.C. have filed a lawsuit against Abacus's
investors?''
This ignores the fundamental issue in this case: fraud is
fraud, whether the perpetrator profits from his misdeeds or
not. The Securities and Exchange Commission is alleging that
Goldman omitted material information from a prospectus that
it was required by law to disclose so that the investors
could make an informed decision about whether to buy the
securities being offered.
Moreover, if Goldman did lose money--whether from the
actual trades or the recent drop in share price--and the
S.E.C. proved that Goldman had committed fraud, then
Goldman's shareholders have been hurt by this activity and
would have a right to sue to recoup their losses from those
responsible.
James O. Chamberlain,
Forest Hills, Queens, April 17, 2010.

To the Editor:
Re ``So Many Ways to Almost Say I'm Sorry'' (Week in
Review, April 18):
Its the ``say you're sorry'' season for highly compensated
bankers, but the apologies ring hollow. An apology without a
commitment to make amends by way of financial reparations is
similar to the ``thank you'' note that arrives six months
after the gift has been received.
It's better than nothing, but not by much.
Joan Evangelisti,
Racine, Wis., April 19, 2010.

[[Page H2675]]

____
[From the New York Times, April 19, 2010]

A Difficult Path in Goldman Case

(By Binyamin Applebaum)

Washington.--In accusing Goldman Sachs of defrauding
investors, regulators are not only taking aim at a company
with deep pockets and a will to fight--they are also pursuing
an unusual claim that could be difficult to prove in court,
legal experts said.
Rather than asserting that Goldman misrepresented a product
it was selling, the most commonly used grounds for securities
fraud, the Securities and Exchange Commission said in a civil
suit filed Friday that the investment bank misled customers
about how that product was created.
It is the rough equivalent of asserting that an antiques
dealer lied about the provenance, but not the quality, of an
old table.
To a layperson, the case against Goldman may seem clear
cut.
After all, investors did not know some information about
the product that they might have considered vital, and they
lost $1 billion in the end. But the rules that govern these
kinds of transactions are not so plain.
Several experts on securities law said fraud cases like
this one, which focuses on context rather than content, are
generally more difficult to win, because it can be hard to
persuade a jury that the missing information might have led
buyers to walk away.
They added, however, that the strength of the S.E.C.'s case
is impossible to gauge until the agency discloses more of the
evidence it has assembled. So far it has provided only a
sketch.
The stakes are huge. The S.E.C., battered by its failure to
identify or prevent several major frauds in recent years, is
eager to re-establish its credibility as an enforcer. But in
choosing such a difficult battlefield, the commission also
risks losing a case at a time when it is trying to re-
establish its reputation as a tough watchdog.
Goldman's sterling reputation, a foundation of its
financial success, is also on the line. Rather than settling
with the government, it has so far chosen to fight back. The
company says it provided its investors with all the
information required by law. It has also stressed that it
sold the securities to financial firms that were
sophisticated investors.
The commission's core accusation is that while Goldman
provided to those firms a detailed list of the assets
contained in a security it built and sold in 2007, it
concealed the role of John Paulson, a hedge fund manager who
worked with Goldman to pick what assets went into the
security. Mr. Paulson then placed bets that the security
would lose value.
In essence, the buyers bet that housing prices would go up,
while Mr. Paulson bet that prices would fall.
Goldman was not legally required to provide any information
to the investors, because Goldman found the buyers without
offering them on the open market. But for any information
that Goldman chose to provide, it was required by law to give
a complete and accurate account.
Goldman outlined its likely defense arguments in two
letters sent to the S.E.C. in September in response to a
notice from the agency that the company was under
investigation and could be sued.
In the letters, Goldman's lawyers at Sullivan & Cromwell
wrote that the company Goldman hired to manage the deal, ACA
Management, was ``no mindless dupe that could be easily
manipulated.'' Furthermore, the letters said that the
downturn of the housing market was not a foregone conclusion,
and that it was therefore misleading for the S.E.C. to
consider the transaction through the lens of ``perfect
hindsight.''
The letters went on to argue that, contrary to the S.E.C.'s
assertions, Goldman disclosed all information about the deal
that was material. In particular, the letters drew a sharp
distinction between information about the security, which the
company said it provided in full, and information about Mr.
Paulson's role.
The second letter said, ``It is this concrete information
on the assets--not the economic interest of the entity that
selected them--that investors could analyze and use to inform
their decisions.''
To win its case, the S.E.C. must prove that Goldman was not
merely silent about Mr. Paulson's role but actually gave
investors the wrong impression, experts in securities law
said. Then it must prove that the missing information was
material, a legal term meaning that investors armed with that
knowledge might have decided not to buy the product from
Goldman, or to do so at a lower price.
Allen Ferrell, a law professor at Harvard, said the suit
rested on an unusual definition of material information.
``We normally think of material information as specific to
the mortgages, not somebody's prediction about the future
course of macroeconomic events,'' Professor Ferrell said.
``So who cares whether Paulson is bullish or bearish?
Whatever his personal opinion is about the future course of
housing prices, the question is, did the investors have
access to the underlying mortgages?''
But Donald C. Langevoort, a law professor at Georgetown
University, said the case was consistent with other
government efforts in past years to broaden the definition of
material information. ``The S.E.C. has long insisted that
context is important,'' Professor Langevoort said. ``If you
think of it more broadly in that way, this isn't an
unprecedented case.''
Professor Langevoort cited as an example the commission's
2003 settlement with 10 investment banks over accusations
that their research departments were providing
recommendations to investors without disclosing that
favorable reviews were used to attract underwriting business
from the companies issuing the stock.
Adam C. Pritchard, a law professor at the University of
Michigan, said that the S.E.C.'s focus on the construction of
Goldman's security reflected the increased complexity of
financial instruments. Construction has simply become a more
important part of the process, he said. But he added, ``The
basic idea that an undisclosed conflict of interest could be
misleading is pretty much as old as stockbrokers.''
In pursuing a new twist on an old idea, however, the S.E.C.
has deeply unsettled the financial markets, opening the way
for investors to file claims against banks that sold similar
products, and forcing firms to reconsider their own
liability.
Richard W. Painter, a corporate law professor at the
University of Minnesota, said the novel nature of the fraud
charges made it important for the S.E.C. to disclose more
details quickly, so that markets were not paralyzed by
uncertainty over the boundaries.
``The S.E.C. needs to step to the plate with very specific
facts and make it clear what they think Goldman did that was
wrong,'' Professor Painter said.

[From the New York Times, April 20, 2010]

letters

The Uproar Over Goldman Sachs

To the Editor:
It is clear to me that the Securities and Exchange
Commission charges should be held in abeyance and that the
F.B.I. and the Justice Department should immediately open an
investigation into the apparent fraud that occurred in this
situation.
Goldman Sachs officials who approved of this insider
manipulation, including Fabrice Tourre, the apparent creator
of the Abacus 2007-AC1 fund, should be the immediate targets
of this investigation, as should John A. Paulson, the
apparent beneficiary of the fund.
If the S.E.C. proceeds with a civil case, much of the
evidence may be inadmissible in a criminal proceeding because
of Fifth Amendment issues. In my experience as an agent and
former associate deputy director of the F.B.I. who was in
charge of criminal investigations, this case should go to the
top of the F.B.I.'s priority list. There should be an
intensive investigation of all potentially criminal acts in
this apparent scam.
Oliver Revell
Zurich, April 17, 2010
To the Editor:
Re ``S.E.C. Accuses Goldman of Fraud in Housing Deal''
(front page, April 17):
The securities fraud lawsuit against Goldman Sachs exposes
a serious flaw in modern Western capitalism.
Adam Smith taught us that the point of a robust capital
market is to direct capital to its best and highest use,
where, combined with labor, it will produce the goods and
services most valued by society. Asset bubbles are a problem,
but at least mortgage-backed securities enabled people to
live in their overvalued houses.
The Goldman ``Abacus'' transaction involved ``synthetic''
collateralized debt obligations, derivatives whose value rose
and fell with the value of real C.D.O.'s elsewhere. It
produced no goods or services, financed no consumption--
nothing at all. Money that could, and should, have been used
to add value to society was not invested; it was squandered
as surely as if the parties had wagered on a horse race.
Legitimate hedging is one thing. Gambling with people's
savings, university endowments and municipal funds, on the
other hand, should be a crime.
Caroline Poplin
Bethesda, Md.,
April 18, 2010
To the Editor:
Goldman Sachs's ethical failures and hypocrisy are more
important than whether it is legally guilty of fraud. Goldman
presents itself as having higher standards than other Wall
Street firms. It even posts ``Our Business Principles'' on
its Web site, something most firms do not do. Among these are
``Our clients' interests always come first'' and ``Integrity
and honesty are at the heart of our business.''
In the Abacus 2007-AC1 transaction, according to the
Securities and Exchange Commission lawsuit, Goldman knowingly
sold a product that was designed to fail, favoring its own
interests and the interests of one client (John A. Paulson, a
hedge fund manager) over the interests of other clients.
Further, it failed to fully disclose how the Abacus portfolio
was assembled. Goldman clearly did not adhere to its stated
business principles in this deal.
Jeffrey Cohen
Arroyo Seco, N.M.,
April 18, 2010
To the Editor:
As a real estate agent on the North Fork of Long Island in
the roaring housing market here from 1998 to 2005, I was
puzzled by the willingness of banks to give ``no doc'' (no
documentation) and ``liars'' (self-explanatory) loans. Some
of these buyers were borrowing more than the cost of their
new homes.
Today we can see why the banks were so generous. The
Securities and Exchange Commission charges that at least one
bank, Goldman Sachs, knowingly sold packages of

[[Page H2676]]

subprime loans that were meant to fail so that a savvy
investor could most profitably short a pool of them.
Some subprime mortgage borrowers who are underwater, owing
more on their homes than they are worth, are walking away,
leaving their homes and the payments they have already made
to the banks.
These days the North Fork real estate sales market isn't
roaring anymore, but many of those former homeowners are
keeping the rental market purring.
Janice Keller
Mattituck, N.Y.,
April 17, 2010
To the Editor:
Re ``In a Rush to Judge Goldman?'' (column, April 17):
In questioning a rush to judgment against Goldman Sachs,
William D. Cohan seemingly tries to turn the table by asking:
if ``Goldman had lost billions instead of making billions,
would the S.E.C. have filed a lawsuit against Abacus's
investors?''
This ignores the fundamental issue in this case: fraud is
fraud, whether the perpetrator profits from his misdeeds or
not. The Securities and Exchange Commission is alleging that
Goldman omitted material information from a prospectus that
it was required by law to disclose so that the investors
could make an informed decision about whether to buy the
securities being offered.
Moreover, if Goldman did lose money--whether from the
actual trades or the recent drop in share price--and the
S.E.C. proved that Goldman had committed fraud, then
Goldman's shareholders have been hurt by this activity and
would have a right to sue to recoup their losses from those
responsible.
James O. Chamberlain
Forest Hills, Queens,
April 17, 2010
To the Editor:
Re ``So Many Ways to Almost Say `I'm Sorry' '' (Week in
Review, April 18):
It's the ``say you're sorry'' season for highly compensated
bankers, but the apologies ring hollow. An apology without a
commitment to make amends by way of financial reparations is
similar to the ``thank you'' note that arrives six months
after the gift has been received.
It's better than nothing, but not by much.
Joan Evangelisti
Racine, Wis., April 19, 2010

____________________