Wednesday, April 28, 2010

'Clash of the Titans' on Capitol Hill

Business Times - 29 Apr 2010


'Clash of the Titans' on Capitol Hill

In addition to obscenities, what made Goldman's Senate hearings so exciting was the Hollywood-like cast of characters

By LEON HADAR
WASHINGTON CORRESPONDENT

WAS he playing the role of the unrepentant villain of the Capitol Hill production 'Clash of the Titans'? Or was he the Good Guy who turned out to be the Bad Guy and who was now pleading for forgiveness, or at least for some empathy from angry lawmakers in the Senate hearing room and the American people who were watching the financial/political crime drama at home?

Or will he remain an enigma for most of the audience long after the film credits are shown?

There are no simple answers to these and similar questions. But one thing was clear. Goldman Sachs CEO Lloyd Blankfein was the star of the Washington vs Wall Street show - all 10 hours and 40 minutes of it. Other proposed names for the spectacle included 'Lawmakers vs Bankers', 'Uncle Sam vs Uncle Sachs' and 'Blankfein vs Levin'.

'Levin' was Democratic Senator Carl Levin from Michigan, the chairman of the Senate Permanent Subcommittee on Investigations who played the role the Grand Inquisitor during yesterday's political theatre - attacking, grilling, mocking, bashing, humiliating - or just running over and crushing Mr Blankfein and his young and colourful - and yet not very talkative - associates from the legendary investment firm.

They kept defending themselves against fire over some of the trades the bank was involved in leading up to the financial crisis. While the hearing was unrelated to the recent Securities and Exchange Commission (SEC) fraud investigation against Goldman, the topic was at front and centre stage.

Here in a tense exchange was Chairman Levin asking Dan Sparks, the former head of Goldman's mortgage department, whether he should have told clients when he was betting against their trades.

Mr Levin quoted a Goldman email message that used an obscenity: 'June 22 is the date of this e-mail: 'Boy, that Timberwolf was one S -- -- y (expletive) deal'.'

And then Mr Levin asked: 'How much of that '(expletive) deal' did you sell to your clients after June 22, 2007?'

Daniel Sparks, former head of Goldman's mortgage business: Mr Chairman, I don't know the answer to that. But the price would have reflected levels that they wanted to invest. . .

Mr Levin: Oh, of course.

Mr Sparks: . . . at that time.

Mr Levin: But they don't know it's a - you didn't tell them you thought it was a (expletive) deal.

Mr Sparks: Well, I didn't say that.

Mr Levin concluded the exchange by suggesting that Mr Sparks and his colleagues 'sold hundreds of millions of that deal after your people knew it was a (expletive) deal'.

In addition to a lot of colourful obscenities, what made the hearings so exciting was the Hollywood-like cast of characters. There was Fabrice Tourre, a 31-year-old French-born Goldman trader, who is also known as 'Fabulous Fab', and who has been accused of fraud by the SEC for his role in structuring securities for Goldman's clients to invest in securities that Goldman was betting against.

Fabulous Fab, whose revealing email messages to his many girl friends were included in the evidence gathered by the Senate investigative committee, was asked by the lawmakers whether he felt a duty to act in the best interest of Goldman's clients.

'I believe we have a duty to serve our clients, and with respect to our role as market maker, to show prices to our clients and to offer them liquidity,' he responded. But 'I do not believe we were acting as investment advisers for our clients', he added.

Suffice to say that the response did not go over very well with Mr Levin and the other senators who have yet to approve legislation aimed at reforming the financial industry's regulatory system as part of an effort to prevent another devastating financial meltdown.

The legislative package proposed by the Democrats - and still being blocked by the Republicans - includes severe restrictions in the trading of derivatives, which is bound to significantly curb just the kind of business that Goldman is being accused of doing.

Indeed, the Democrats hope that the 'Clash of the Titans' on Capitol Hill would provide their legislation with political momentum and put pressure on the Republicans to support it or take so-called 'cloture' votes that would be used to portray the Republicans as allies of slimy bankers on Wall Street.

In any case, both Democratic and Republicans senators recognise that attacking Wall Street in front of television cameras is considered to be a very popular pursuit among economically distressed Americans, especially during this election year.

Hence, yesterday's political spectacle provided a bipartisan opportunity for liberal, conservative and centrist lawmakers to compare Wall Street to a Las Vegas casino and its bankers to sleazy bookmakers, or bookies.

'You think you are so smart?' asked Democratic Senator Claire McCaskill of Missouri. '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 committee has gathered,' she said.

To add insult to injury, Republican Senator John Ensign, who represents Nevada - where Las Vegas in Located - in the Senate, said that 'most people in Las Vegas would take offence 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're playing the game.' Ouch!

On another level, the Senate hearings may have also highlighted what could be described as a clash of cultures between Washington and Wall Street. Mr Levin and other politicians in Washington were blasting the 'greed' displayed by the bankers of Goldman Sachs and the rest of the Wall Street. They accused the bankers of intentionally selling 'complicated' financial products that they knew would fail, of 'betting' against the US housing market and of earning of huge profits doing that.

Why were Goldman bankers denying they were shorting the mortgage market for profit? Mr Levin asked. 'My best estimate is that it's because the firm 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 or the mortgage market as a whole,' he responded.

But the way Mr Blankfein and other Goldman executives saw it, their actions followed the basic rules of the way business was done on Wall Street of helping their clients make trades.

'Our clients expect us to facilitate transactions for them in all market conditions,' said Goldman Sachs' chief risk officer, Craig Broderick. 'As such, the better we understand and can manage risk, the more willing and able we are to transact with clients, regardless of our views on the markets,' he insisted.

In short, we on Wall Street do what we have to do. It's too bad that the guys on Capitol Hill cannot say the same things.




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