[Congressional Record (Bound Edition), Volume 156 (2010), Part 4]
[House]
[Pages 5840-5842]
[From the U.S. 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.
  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.

[[Page 5841]]

  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 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.,

[[Page 5842]]

     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 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

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