http://www.economist.com/business-finance/displaystory.cfm?story_id=16002681&source=features_box_main
"ONE of the worst days of my professional life" was Lloyd Blankfein's characterisation of April 16th, when the Securities and Exchange Commission (SEC) filed civil fraud charges against Goldman Sachs. The bank and an employee were accused of failing to disclose that a hedge fund that had influenced the composition of a complex mortgage-debt transaction was also shorting it. April 27th was surely not much better, either for the Wall Street firm's boss or any of the six other current and former Goldman investment bankers who testified before the Senate Permanent Subcommittee on Investigations. The roasting, which lasted more than ten hours, was as dramatic as any hearing focused largely on synthetic collateralised-debt obligations (CDOs) could be.
Goldman's persecutor-in-chief was the panel's chairman, Carl Levin. The gruff Democrat went beyond the SEC's complaint, accusing the firm of having concocted several deals, not just one, to profit from the collapse of the housing market, and also of being riddled with "inherent conflicts of interest." Not content merely to skewer America's pre-eminent investment house, the senator harrumphed that its conduct "calls into question the whole function of Wall Street"—a market that, while supposedly free, "isn't free of self-dealing." His attack rested, in part, on internal Goldman e-mails. In one, a senior executive described a Goldman-underwritten CDO as "one sh*tty deal". In another, a colleague applauded the structured-products team for making "lemonade from some big old lemons."
The team's representatives at the hearing squirmed in the spotlight. Fabrice Tourre, the employee charged by the SEC, firmly denied misleading investors. But he and his colleagues, coached by lawyers in light of the SEC case and clearly fearful of committing a legal faux pas, came across as evasive. At times the dialogue resembled a Pinter play: a question, then a long pause, followed by a spare, cryptic response.
The firm's senior executives put up a stronger, clearer defence. In response to Mr Levin's assertion that Goldman had profited from others' misery with a "big short", David Viniar, the bank's chief financial officer, pointed out that its net revenues in mortgages were a mere $500m in 2007, with a loss of $1.2 billion in 2007 and 2008 combined.
Mr Blankfein gurned incredulously at some of the senators' questions, doubtless baffled that they would characterise as immoral profiteering what he viewed as nothing worse than prudent risk management. (He must have wondered if Goldman would have been better off from a public-relations point of view by incurring giant losses, like Citigroup.) But he also struck a conciliatory tone, expressing gratitude for support from taxpayers, who were "understandably angry" towards Wall Street, and declaring that everyone in the industry has to "ratchet up their standards".
Nevertheless, he argued that criticism of Goldman's motives rested on a misunderstanding of the market-making business. Unlike money managers, market-makers owe no fiduciary duty to clients, and offer no warranties; their only responsibility is to make sure those they serve are getting the risk exposures they seek. Ironically, Mr Blankfein was at his most uncomfortable when tackling questions about a disclosure the firm had made, rather than one it had not: its decision to release e-mails that happened to reveal details of Mr Tourre's personal life, a move leading to speculation that the Frenchman was being, as one senator put it, "hung out to dry".