Levin says Goldman Sachs pushed “shitty” products on the American people

I know to some extent it’s political theater – grandstanding done for the benefit of disgusted Democrats like myself – and I realize that it would have meant exponentially more had it come prior to our recent banking meltdown, as opposed to after it, but something in me really liked hearing my Senator, Carl Levin, rip into Goldman Sachs execs today. Here, in case you missed it, is a clip from Levin’s opening statement:

…Why does this matter? Surely there is no law, ethical guideline or moral injunction against profit. But Goldman Sachs didn’t just make money. It profited by taking advantage of its clients’ reasonable expectation that it would not sell products that it didn’t want to succeed, and that there was no conflict of economic interest between the firm and the customers it had pledged to serve. Goldman’s actions demonstrate that it often saw its clients not as valuable customers, but as objects for its own profit. This matters because instead of doing well when its clients did well, Goldman Sachs did well when its clients lost money. Its conduct brings into question the whole function of Wall Street, which traditionally has been seen as an engine of growth, betting on America’s successes and not its failures…

And here he is in action, grilling Goldman Sachs’ Daniel Sparks on the “shitty deals” he and his associates crammed down the throats of the American people.

[note: Speaking of banking reform, not only do I believe there should be a robust and independent Consumer Financial Protection Agency, as we’ve discussed before, but, like Ron Paul and Alan Grayson, I believe that any reform legislation should give the Government Accountability Office the authority to audit the Federal Reserve.]

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  1. Savage
    Posted April 27, 2010 at 9:44 pm | Permalink

    Someone needs to string all of those “shitty” quotes together in an audio file.

  2. Glen S.
    Posted April 28, 2010 at 6:18 am | Permalink

    I read recently that from 1995 to 2009 — the assets of the six biggest U.S. banks (MorganStanley, GoldmanSachs, WellsFargo, Citigroup, JPMorganChase and Bank of America) grew from 20 percent to 60 percent of U.S. GDP. And, I have no doubt that this rapid concentration of national wealth into the hands of so few institutions (and individuals) played a major role in fueling the subprime crisis and subsequent economic meltdown.

    It seems to me that one small thing many ordinary citizens who are disgusted by this mess can do to send a signal to Wall Street is to simply stop giving these guys your money. If you have a checking or savings (or credit card) account with Chase, Citibank or BofA, etc., cancel it — and move your business to one of our many small, locally-owned, locally-controlled banks or credit unions.

    For me, the idea of “bank local” is just as important as trying to buy groceries at the Ypsi Co-op, or hardware at Congdon’s. I like knowing that at least some of my money stays here in the community, and I appreciate the higher level of personal service (and often better rates and terms) my local credit union provides — compared to any of the big national chains.

  3. Posted April 28, 2010 at 7:13 am | Permalink

    “It profited by taking advantage of its clients’ reasonable expectation that it would not sell products that it didn’t want to succeed, and that there was no conflict of economic interest between the firm and the customers it had pledged to serve.” This quote betrays a fundamental misunderstanding of what Goldman Sachs was doing and of who they were dealing with.

    For example, in the SEC complaint, the company that they are alleged to have defrauded is IKB Deutsche Industriebank, a company that bragged about having “high expertise in all fields of corporate finance” including “rating advisory and industry research”, and considered exactly this sort of transaction (CLOs and international lending) to be at the core of its business over the last decade.

    In other words, IKB was seeking out this type of transaction. If they didn’t buy from Goldman Sachs, they would have bought from someone else, but they were definitely going to buy it. And John Paulson, who took the other side of the transaction, did a whole bunch of similar transactions, and made a bunch of money. Goldman Sachs matched a buyer with a seller, and took a commission. Nothing wrong with that.

    As for the question of a “conflict of economic interest”, in most cases, a business’ obligation is simply to provide whatever was agreed upon. If IKB had contracted with Goldman Sachs for advisory services, that would be a different story (but why would they do that when they claimed to have “high expertise”?) and in that case Goldman Sachs would have had an obligation to provide good advice to the best of their ability. But this seems to have been primarly a sales transaction, and again, the only real obligation there is to deliver the agreed upon goods.

    Also, keep in mind that alot has been made of the fact that John Paulson was on the other side of the transaction. In fact, the core of the SEC argument seems to be that “IKB would not have invested in the transaction had it known that Paulson played a significant role in the collateral selection process while intending to take a short position in ABACUS 2007-AC1.” I think that’s a pretty dubious claim given first that IKB had identified this type of transaction as their business model, and second that at the time Paulson was just some hedge fund guy. Paulson didn’t become famous until after the housing collapse, and his fame came precisely because he sold short in transactions just like this one.

    In other words, while it’s easy to wag your finger at Goldman Sachs and say “Bad company!”, the truth of the matter is that Goldman Sachs was doing exactly what any business is supposed to do: provide customers (Paulson and IKB, in this case) with the goods or services they want while making money for the owners (shareholders/partners).

  4. Edward
    Posted April 28, 2010 at 8:14 am | Permalink

    If I’m understanding you correctly, cmandler, you feel as though Goldman should get a pass for selling investments that they knew were shit because the buyers also knew they were shit. Is that right?

    What about the shareholders of both companies? Did they know they were trafficing in shitty investments?

  5. Posted April 28, 2010 at 8:45 am | Permalink

    Shitty indeed!

    As Jimmy Paige once wrote – or was it Robert Plant? – “It makes me wonder”. I wonder what defect it is in the psychological makeup of a group of human beings that would have them putting the health and well being of millions of other human beings behind the private profit of a very few. Most of these lawmakers who live in the pockets of the Plutocracy call themselves “Christians”. Have they ever made a serious study of the books? You know! – Matthew, Mark, Luke and John? – Those guys! How do they justify their actions? How do they sleep at night? We’re talkin’ major hypocrisy here! That’s what makes them so much fun to watch! I always get a certain twisted delight in watching their fake piety. Imagine Wendy O. Williams being cast as Bernadette of Lourdes; or Marilyn Manson as Mahatma Gandhi. It’s kind of the same thing.

    Sooner or later our right wing friends, within the Congress and without, are going to be forced to admit that the era of anything goes deregulation was a really stupid idea. You can only sit calmly in a burning house, ignoring the flames all about you, for just so long. Sooner or later you’ll be forced to flee for your life. After making your escape, if you still refuse to acknowledge that the house is indeed on fire, you’re beyond the point where you can make rational decisions on your own. You’ve entered Librium Country, hombre!


    Tom Degan

  6. Posted April 28, 2010 at 12:52 pm | Permalink

    Edward: Yes, the buyers knew – or should have known – that the investments were shit.

    The buyers were – or claimed to be – experts at this type of investment. If the investment really was shitty (and I certainly believe it was), either the buyers were lying to the public (including their shareholders) about their abilities and knowledge, or they understood that the investment was shitty but thought they’d still make money. Personally, I think it was some of both; that’s what tends to happen near the top of financial bubbles. (Recommended reading on the topic: Devil Take the Hindmost: A History of Financial Speculation by Edward Chancellor) If the former, IKB shareholders might have legal recourse against IKB management (IANAL, and it’s a German company), but if the latter probably not – there’s a significant difference between lying about what you can do, and misjudging.

  7. Dr. Phelps
    Posted April 28, 2010 at 2:05 pm | Permalink

    I believe the sale of the Timberwolf product that Senator Levin was referring to was not restricted to IKB. If I’m reading this Business Week story correctly, Bear Sterns and several others participated. In fact, I believe Levin mentioned that Timberwolf was, for a time, the number one investment being pushed by Goldman’s sales staff.


    The transaction was Timberwolf Ltd., a $1 billion collateralized debt obligation holding pieces of other CDOs, according to a statement from the Permanent Subcommittee on Investigations. The CDO also included optimistic side-bets on the performance of CDOs, derivatives in which the firm took the opposite pessimistic side in “many” cases, the panel said…

    Within five months of Timberwolf’s debut, the CDO had lost 80 percent of its value, and it was liquidated in 2008, according to the panel.

    The CDO was among securities that Goldman Sachs sold to clients after deciding the New York-based firm needed to reduce its mortgage holdings…

    The Timberwolf CDO was issued in March 2007, following a Goldman Sachs quarter that ended February 2007 in which one department of the bank shifted from $6 billion of bets that mortgage bonds would perform to $10 billion they would default, according to Bloomberg data and information the panel released.

    Bear Stearns Asset Management, the manager of two hedge funds overseen by Ralph Cioffi whose collapse in June 2007 roiled global markets, was among the buyers, purchasing about $300 million, according to the committee.

  8. dp in ypsi
    Posted April 28, 2010 at 10:35 pm | Permalink

    I wonder why our free-spending Congress still uses paper exhibits. It looks dramatic and all, but you’d think they could have an iPad/Kindle, or something of the sort, where the exhibit in question is instantly presented to the witness.

  9. Posted April 29, 2010 at 7:45 am | Permalink

    Well, I was writing about the ABACUS 2007-AC1, which is the one to which the SEC lawsuit refers. That one was sold to IKB and to ABN Amro.

    They were undeniably all shitty investments.

    As for Timberwolf, the article you linked to even points out that Goldman Sachs did disclose conflicts of interest.

    The conflicts of interest section of Timberwolf’s prospectus said that Greywolf might “take into consideration research and other brokerage services” from investment banks in its decision-making for the CDO and also make separate investments with “interests different from or adverse to” the CDO’s collateral.

    “Under the terms of the Collateral Management Agreement,” Greywolf “will be permitted to take whatever action is in the Collateral Manager’s best interest regardless of the impact on the Collateral Assets,” according to the prospectus.

    …On Goldman Sachs’s role, the prospectus said the firm would act as the sole counterparty for the bullish derivative bets on CDOs that the vehicle was making through so-called credit- default swaps, “which creates concentration risk and may create certain conflicts of interest.”

    In other words: “We will act in our interests, not necessarily in yours. We are taking the opposite side of this bet, which means that if you lose money, we will make money.” That seems like a pretty clear disclosure.

    As I mentioned above, I think the investors (which, let’s not forget, were other big investment firms — these are not investments that casual or small-scale investors were making) generally knew that the investments were bad, but thought the bubble would keep going up long enough for them to make some money and pass it on to a bigger sucker. That’s a prime characteristic of investment bubbles as they near and reach their peak.

  10. Posted April 29, 2010 at 9:23 pm | Permalink

    I just got a letter from Levin…

    Dear Mr. Maynard:

    I thought you might be interested to know that, on Tuesday, the Senate Permanent Subcommittee on Investigations, which I chair, concluded the fourth in a series of hearings to explore some of the causes and consequences of the recent financial crisis. These hearings are the culmination of a year and a half long investigation by the Subcommittee.

    As I mentioned at the onset of these hearings two weeks ago, the goal of this investigation has been to bring to light the policies, procedures, incentives, compensation structures, and regulatory failures that collectively led to the meltdown of the financial services sector. This man-made economic catastrophe put our economy into a tailspin, costing millions of jobs, depleting retirement savings, closing businesses, and necessitating drastic and unprecedented federal intervention to stave off a second Great Depression. This federal intervention was a bitter pill for Congress and the American people to swallow and made it clear that our country’s financial regulatory system was in need of broad evaluation and overhaul.

    The Subcommittee’s first hearing on April 13th explored the role of high-risk mortgage lending. The hearing focused on a case study of Washington Mutual Bank, known as WaMu, whose reckless strategy to pursue higher profits by emphasizing high-risk exotic loans not only created hardship for borrowers, but also added excessive risk to the bank’s balance sheet. WaMu would then sell off these high-risk loans as mortgage-backed securities, building a conveyor belt that dumped toxic assets into the financial system.

    Our second hearing looked at how federal regulators were aware of WaMu’s risky and reckless policies, yet completely failed to rein them in. Instead of exercising prudent regulatory oversight, the Office of Thrift Supervision (OTS) repeatedly failed to act on major shortcomings it observed, and it thwarted other agencies from stepping in.

    The third hearing dealt with credit rating agencies, specifically case studies of Standard & Poor’s and Moody’s, the nation’s two largest credit raters. While WaMu and other lenders dumped their bad loans and regulators failed to stop their behavior, the credit rating agencies rubber stamped these high-risk financial products with AAA ratings. These credit rating agencies operate with an inherent conflict of interest – their revenue comes from the same firms whose products they are supposed to critically analyze, and those firms exert pressure on rating agencies who too often put market share ahead of analytical rigor.

    Finally, Tuesday’s hearing explored the role of investment banks in the development of the crisis. We focused on the activities during 2007 of Goldman Sachs, one of the oldest and most successful firms on Wall Street. Goldman Sachs was an active player in building the mortgage machinery that contributed to the economic collapse the following year. During the period leading up to 2008, Goldman made a lot of money packaging mortgages, getting AAA ratings, and selling securities backed by loans from notoriously poor-quality lenders, such as WaMu, Fremont and New Century.

    The Subcommittee investigation found that in 2007, Goldman Sachs was betting heavily that the housing market would decline while it was selling investments in that market to its clients. It sold those clients high-risk mortgage-backed securities that it wanted to get off its books in transactions that created a conflict of interest between Goldman’s bottom line and its clients’ interests.

    The Subcommittee’s extensive work has shown that at every stage of the game, the rules must be changed. This only further highlights the urgent and pressing need for comprehensive reform of our financial industry. I am disappointed that the full Senate has yet again failed to bring legislation to the floor intended to do just that. I am hopeful that the information brought to light as a result of these hearings will help persuade my colleagues of the dire need for reform of our financial services sector.

    My opening statement from Tuesday’s hearing contains more information on the Subcommittee’s investigation and is available on my Senate website at [http://www.levin.senate.gov/newsroom/release.cfm?id=324210].

    Carl Levin

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