Defiant Goldman CEO: We’re Market Makers, Not Advisors

Goldman Sachs CEO Lloyd Blankfein (April 27, 2010)Throughout some heated exchanges with senators, Goldman Sachs CEO Lloyd Blankfein denied in testimony today of profiting at the expense of clients from a massive short position against the housing market in 2007.
But Sen. Carl Levin, chairman of the Senate Subcommittee on Investigations, hammered away at accusations that Goldman Sachs put its own financial interests ahead of its clients and fed the housing bubble by selling structured securities backed by subprime mortgages – and then shorting, or betting against, some or most of those investment products.
“It troubles me that you don’t see…that Goldman Sachs had turned itself into its own client and had taken advantage of (client) relationships in doing what you did in so many of these cases,” Levin told Blankfein.
Blankfein said that it was not the role of Goldman, one of the top market makers on Wall Street, to tell clients what securities the firm were buying or shorting – the term for selling on margin expecting a downturn in value.
Blankfein said the “principal business” of Goldman is market making — taking positions on “the other side of what our clients want to do.”
“In the context of market making, that is not a conflict,” Blankfein said under repeated attempts by Levin to get the CEO to admit a conflict. “The institutional clients we have … wouldn’t care what our views are. They shouldn’t care. We do other things at the firm… where we are fiduciaries.”
In his opening testimony, Blankfein said his firm did not bet against clients.
“Rather, we believe that we managed our risk as our shareholders and our regulators would expect,” the CEO said.
Blankfein followed other Goldman executivesand the firm’s market makers, all denying any legal or moral wrongdoing during a long day of hearings on Capitol Hill designed to uncover the specific factors that contributed to the housing collapse, and subsequently, the financial crisis.
“I was not instructed to ‘go long’ or ‘go short.’ The focus was on risk, not direction,” tesitied Daniel Sparks, who headed Goldman’s mortgage department from late 2006 through 2008.
Fabrice Tourre, the 31-year-old Frenchman who is a Goldman vice president and market maker, also denied any wrongdoing in testimony today. Tourre is named along with the investment bank in a Securities and Exchange Commission civil fraud suite alleging deceptive marketing to investors of asset-backed securities tied primarily to high-risk, subprime mortgages.
Tourre structured the deal with the help of a hedge fund that was planning to short the residential mortgage-backed securities, the SEC said.
“All of the securities of that ratings class and vintage performed poorly because the subprime mortgage market suffered a broad collapse,” Tourre testified. “Goldman Sachs also had no economic motive to design the … transaction to fail. Quite the contrary, we held long exposure in the transaction …”

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