Senate panel says Goldman 'clearly misled' clients, Congress

WASHINGTON (Reuters) - In the most damning official U.S. report yet produced on Wall Street's role in the financial crisis, a Senate panel accused powerhouse Goldman Sachs of misleading clients and manipulating markets, while also condemning greed, weak regulation and conflicts of interest throughout the financial system.

Carl Levin, chairman of the Senate Permanent Subcommittee on Investigations, one of Capitol Hill's most feared panels, has a history with Goldman Sachs.

He clashed publicly with its Chief Executive Lloyd Blankfein a year ago at a hearing on the crisis.

The Democratic lawmaker again tore into Goldman at a press briefing on his panel's 639-page report, which is based on a review of tens of millions of documents over two years.

Levin accused Goldman of profiting at clients' expense as the mortgage market crashed in 2007. "In my judgment, Goldman clearly misled their clients and they misled Congress," he said, reading glasses perched as ever on the tip of his nose.

A Goldman Sachs spokesman said, "While we disagree with many of the conclusions of the report, we take seriously the issues explored by the subcommittee."

The panel's report is harder hitting than one issued in January by the government-appointed Financial Crisis Inquiry Commission, which "didn't report anything of significance," Republican Senator Tom Coburn said at the briefing.

More than two years since the crisis peaked, denunciations of Wall Street misconduct are less often heard on Capitol Hill, with lawmakers focused on fiscal issues. But Coburn joined Levin at Wednesday's bipartisan briefing, firing his own sharp attacks on the financial industry.

"Blame for this mess lies everywhere -- from federal regulators who cast a blind eye, Wall Street bankers who let greed run wild, and members of Congress who failed to provide oversight," said Coburn, the subcommittee's top Republican.

"It shows without a doubt the lack of ethics in some of our financial institutions who embraced known conflicts of interest to accomplish wealth for themselves, not caring about the outcome for their customers," he said.

The Levin-Coburn report criticized not only Goldman, but Deutsche Bank, the former Washington Mutual Bank, the U.S. Office of Thrift Supervision and credit rating agencies Moody's and Standard & Poor's.

"We will be referring this matter to the Justice Department and to the SEC," Levin said at the briefing, though he did not elaborate. A spokesman later said, "The subcommittee does not intend to reveal the specifics of any referral."

The report offered 19 recommendations for reform going beyond changes already enacted after the crisis in 2010's Dodd-Frank Wall Street and banking regulation overhaul.

Case studies from the go-go years of the real estate bubble formed the bulk of the report, which said a runaway mortgage securitization machine churned out abusive loans, toxic securities, and big fees for lenders and Wall Street.

It cited internal emails by Wall Street executives that described mortgage-backed securities underlying many collateralized debt obligations, or CDOs, as "crap" and "pigs."

It said Washington Mutual -- which became the largest failed bank in U.S. history in 2008 -- embraced a high-risk home loan strategy in 2005 while its own top executives were warning of a bubble that "will come back to haunt us."

The U.S. Office of Thrift Supervision -- which will be shut down and merged into another agency under 2010's Dodd-Frank regulatory overhaul -- logged 500 serious deficiencies at Washington Mutual from 2003-2008, but no crackdown followed, the report said.

Mass downgrades of mortgage-related investments in July 2007 by Moody's and Standard & Poor's constituted "the most immediate cause of the financial crisis," it said.

Investment banks, it said, charged $1 million to $8 million in fees to construct, underwrite and sell a mortgage-backed security in the bubble, and $5 million to $10 million per CDO.

As for Goldman, the subcommittee said, the firm "used net short positions to benefit from the downturn in the mortgage market." It said Goldman designed, marketed, and sold CDOs in ways that created conflicts of interest with clients, while also at times providing the bank with profits "from the same products that caused substantial losses for its clients."

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