Documents released at a Senate hearing into Goldman Sachs’ role in the financial crisis show the firm strategizing on how to bet against its clients’ investments.
The revelations came during a chaotic hearing of the Senate Permanent Subcommittee on Investigations, which on Tuesday heard from a number of Goldman executives who denied any wrongdoing in its investments ahead of the financial collapse of 2008.
The hearing featured protesters in jail uniforms calling for the arrest of Goldman executives, and was punctuated by a profanity-laced exchange between a Goldman executive and Sen. Carl Levin (D-MI), who used the term “sh**ty deal” 11 times.
But buried in the day’s events was a report from McClatchy news service that former Goldman trader Joshua Birnbaum told his bosses the financial firm could exploit investors’ expectations that Goldman is investing in real estate in the long term by betting on a collapse of the housing market in the short term.
Because the “world would think” that Goldman expects a strong real estate market, the company would be able to bet against real estate and win big. Ã¢â‚¬Å“We could use that fear [of a market collapse] to our advantage if we could flip our risk,” Birnbaum wrote, as quoted by McClatchy.
That revelation is important because defenders of Goldman Sachs have been arguing that the SEC’s civil fraud case against the company is weak. They point to evidence that a Goldman client, ACA Management, knew that Goldman was betting against ACA’s investments. If that were the case, it would be very difficult to prove that Goldman Sachs committed fraud.
But the documents from Birnbaum suggest the company expected its clients not to know which way it was investing on real estate, thus strengthening the argument that the investment bank was committing fraud.
In Senate testimony Tuesday, Goldman execs categorically denied any wrongdoing.
“I did not mislead” investors involved in the SEC’s case, Goldman employee Fabrice Tourre — the only individual named in the SEC’s case — told the Senate panel. “I deny — categorically — the SEC’s allegation,” Tourre said, adding that “I will defend myself in court against this false claim.”
“We didnÃ¢â‚¬â„¢t have a massive short against the housing market and we certainly did not bet against our clients,” Goldman CEO LLoyd Blankfein said in a prepared statement that was released ahead of his appearance. “Rather, we believe that we managed our risk as our shareholders and our regulators would expect.”
LEVIN’S ‘SH**TY’ DEAL
Sen. Levin raised eyebrows during Goldman testimony when he repeatedly used the expression “sh**ty deal” to describe a failed investment package championed by Goldman Sachs. The expression had been used by a Goldman operative in an email about the package.
Several news sources stated Levin used the term 11 times during the course of a testy exchange with Goldman exec Daniel Sparks over a sub-prime mortgage investment package known as Timberwolf. CBS reports:
“Quoting a Goldman e-mail: ‘boy that Timberwolf was one shitty deal,’ Levin said. “How much of that shitty deal did you sell?”
He added: “You didn’t tell them that you thought this was a shitty deal?”
Levin grew increasingly frustrated with what he saw as non-answers from Sparks, a former head of Goldman’s mortgages department, and vowed to keep Goldman executives there “as long as it takes to get the answers…to the public.”
“You knew it was a shitty deal and that’s what your e-mails show,” he said. “How much of this shitty deal did you continue to sell to your clients?”
He added: “Should Goldman Sachs be trying to sell the shitty deal, can you answer that one yes or no?”
Pat Garofalo at ThinkProgress notes that Timberwolf lost 80 percent of its value within five months of its issuance.