Goldman Sachs & SEC In Settlement Talks; Silver Lining?

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Goldman & SEC Reportedly Talking Settlement


Goldman Sachs Group Inc.'s lawyers are in talks with representatives of the U.S. Securities and Exchange Commission to settle the fraud charges brought against it by the regulator, the Wall Street Journal said, citing people familiar with the situation.

Goldman's co-general counsel Gregory Palm, along with other lawyers and SEC officials participated in the preliminary discussion, the paper said, adding that the talks did not include any terms, such as the amount of fine or agreements Goldman could make with the agency.

On Friday, Goldman Sachs Group Chief Executive Officer Lloyd Blankfein called for the besieged company to undertake a "rigorous self-examination" at the annual shareholder meeting.

"There is no bigger priority for our board of directors and management than to undertake a comprehensive review of all of our business practices," Blankfein told shareholders.

Goldman will establish a business standards committee that will report suggestions to management on standards and transparency, he said.

The committee, which Blankfein first broached during U.S. Senate hearings last week but explained in more detail on Friday, is the latest sign that Goldman is responding to the concerns of regulators and the public backlash facing the firm.

Goldman, Wall Street's dominant investment bank, is facing fraud charges from the SEC, which has accused the bank of failing to tell investors that the securities underlying risky debt tied to subprime mortgages were chosen by a short-seller, John Paulson, whose fund was betting the securities would lose value.

Goldman has drawn the attention of a Senate subcommittee and is facing shareholder lawsuits. It also is facing a Justice Department criminal investigation, sources previously told Reuters.

Silver lining?

Blankfein, who testified before a U.S. Senate subcommittee last week, said Friday that it "was not the most comfortable moment in my life."

Blankfein said lawmakers in Washington asked that Goldman return to help assess the impact of financial regulation. Goldman has a "duty" to explain the ramifications, he said.

For the past year, Goldman has faced a backlash over its quick rebound from the financial crisis and its bonus pool, which topped $16 billion last year.

The Rev. Jesse Jackson raised some of those criticisms on Friday, expressing concerns about Goldman's success while others struggled.

Blankfein, who said late last year he was "doing God's work," made an effort to demonstrate humility Friday.

"There is no future for Goldman, certainly no success for Goldman Sachs, unless the economy as a whole grows, and the economy grows in a way in which it doesn't create a wider divergence," he told Jackson. "If there is a silver lining, it certainly affords us an opportunity to be introspective."

Goldman shares turned positive on Friday, rising 1.2 percent to $144.03 in midday trading. They were the top performer in the Amex Securities Broker/Dealer Index.

Silver lining?
Blankfein, who testified before a U.S. Senate subcommittee last week, said Friday that it "was not the most comfortable moment in my life."

Blankfein said lawmakers in Washington asked that Goldman return to help assess the impact of financial regulation. Goldman has a "duty" to explain the ramifications, he said.

For the past year, Goldman has faced a backlash over its quick rebound from the financial crisis and its bonus pool, which topped $16 billion last year.

The Rev. Jesse Jackson raised some of those criticisms on Friday, expressing concerns about Goldman's success while others struggled.

Blankfein, who said late last year he was "doing God's work," made an effort to demonstrate humility Friday.

"There is no future for Goldman, certainly no success for Goldman Sachs, unless the economy as a whole grows, and the economy grows in a way in which it doesn't create a wider divergence," he told Jackson. "If there is a silver lining, it certainly affords us an opportunity to be introspective."

Goldman shares turned positive on Friday, rising 1.2 percent to $144.03 in midday trading. They were the top performer in the Amex Securities Broker/Dealer Index.

Calls for Blankfein's Resignation

Some have speculated that Blankfein might not be able to keep his job through the struggles facing the firm, but he did not offer any indication Friday that he would step aside.

Longtime corporate gadfly Evelyn Y. Davis kicked off the question and answer session by calling for Blankfein's voluntary resignation — and setting a deadline of Monday.

"I have no current plan to step down Monday," answered Blankfein, cracking a smile.

Davis persisted, later asking Blankfein, "If you won't resign by Monday, how about by the end of the month?"

Blankfein again retorted, "I have no intention of doing that right now."

One shareholder from Yonkers received loud applause when he expressed his support for Blankfein.

Shareholders backed the company's nominations for directors and a proposal for an advisory vote on pay. They defeated a proposal by The Maryknoll Sisters of St. Dominic relating to the use of collateral in derivatives trading.

Shareholders defeated a proposal urging the company to separate the roles of chairman and CEO. Goldman's board has recommended a vote against that proposal.

Blankfein, who is also chairman, said at the meeting that splitting the chairman and CEO roles would undercut the board's judgment.

"Our bylaws and our policy don't require that the chairman and CEO be in one office," he said. "It is the judgment of the board."


Sources: CNBC, Reuters

Lloyd Blankfein Refuses To Resign; AIG Dumps Goldman Sachs

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AIG DUMPS Goldman Sachs As Its Top Adviser


As its legal troubles mount, Goldman Sachs is losing a big corporate client: the American International Group.

A.I.G., the insurance giant that planned to retain Goldman to help reorganize its businesses, has replaced Goldman as its main corporate adviser, according to three people with knowledge of the matter, which was not intended to be public. Instead, the insurer is turning to Citigroup and Bank of America.

The move is the first in what some analysts warn could be a series of defections among Goldman’s clients after accusations — vigorously denied by Goldman — that it defrauded customers in a complex mortgage investment. A Goldman spokesman declined to comment.

As Goldman’s legal problems have escalated — first with a civil fraud suit filed by the Securities and Exchange Commission, and then with a federal criminal investigation — some investors have grown increasingly anxious about the potential damage to Goldman’s reputation and business.

A.I.G.’s decision leaves Goldman out of the mix at a pivotal moment for the insurance company and breaks a traditionally close relationship. A.I.G., which has yet to repay billions of dollars of federal aid, helped to insure billions of dollars of Goldman’s mortgage securities, including seven deals like the one involved in the securities fraud case filed last month by the S.E.C.

The news comes as Goldman executives prepare to meet with shareholders on Friday at the bank’s annual meeting. Goldman’s chairman and chief executive, Lloyd C. Blankfein, will confront shareholders who are anxious over the S.E.C. case and a continuing criminal investigation into the bank’s mortgage trading unit.

In what some characterize as a referendum on Mr. Blankfein, shareholders will also vote whether to separate the roles of chairman and chief executive. Many corporations, including major banks, have separated those roles to improve corporate governance.

While A.I.G. is the first company that is known to have canceled major work with Goldman, European officials and some local officials in the United States have also said they are reconsidering their relationships with the bank. Several shareholders have filed suits against Goldman and its board and executives, saying they should have disclosed the S.E.C. investigation earlier.

Goldman executives have told analysts that the bank’s business has not suffered since the case. The bank’s most recent quarterly profit — $3.3 billion — was a huge success by almost any standard, and Goldman officials said the results were proof that they were doing right by their clients.

Still, Goldman’s share price has fallen about 20 percent since the S.E.C. complaint was announced.

An A.I.G. spokeswoman declined to comment. Bank of America and Citigroup did not immediately respond to requests for comment.

A.I.G. met with its two new advisers on Thursday, according to the people with knowledge of the situation. The issue at hand is how A.I.G. can sell off parts of its business to help it return government bailout money while still preserving valuable units that will be part of a surviving company. Once involved in practically every insurance business, A.I.G. is trying to redefine its role in the industry.

The company’s relationship with Goldman dates back decades. A.I.G.’s former chief executive, Maurice R. Greenberg, had a long relationship with Goldman’s leaders. A.I.G. and Goldman briefly considered merging, in the late 1990s.

But this relationship proved disastrous for A.I.G. in the mortgage crisis. A.I.G. insured some $20 billion of mortgage securities for Goldman, including seven similar to the deal at the center of the S.E.C. case, known as Abacus 2007-AC1, though it did not insure that specific deal.

In 2007, Goldman put on a negative bet against housing — what its chief financial officer, David A. Viniar, called “the big short” — and the bank issued aggressive demands for A.I.G. to put up collateral for some of its trades with Goldman. Those demands from Goldman and later other banks contributed to A.I.G.’s liquidity crisis and eventually led to a government bailout.

After the government stepped in, Goldman was among the largest recipients of money from A.I.G. when the insurance company paid its counterparties 100 cents on the dollar to end contracts tied to mortgage investments.

A.I.G. has been through a series of executive changes since its collateral battle with Goldman, and the insurance giant continued to hire Goldman for certain assignments, like its recent sales of its Asian unit, A.I.A., as well as Alico, its overseas life and health insurance business.

Earlier this year, A.I.G. heard pitches from various banks on its overall strategy. It indicated to several parties that Goldman had won that business. Goldman had not begun significant work on A.I.G.’s strategy.

Citigroup also worked with A.I.G. on its sales of A.I.A. and Alico, and Bank of America has been helping the insurance company with some financing. But the change last week was a step up in both of their roles to fill the gap left by Goldman.

Goldman’s employees, top to bottom, have been reassuring clients in recent weeks to try to retain their business. On Wednesday, Mr. Blankfein held a conference call with wealthy individual clients whose savings are managed by the bank.

Still, last week the Teachers’ Retirement System of Oklahoma warned Goldman’s asset management division that it was “on alert” and that the state pension might stop working with Goldman because of the S.E.C. accusations.


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Sources: CNBC, NY Times, Google Maps

Wall Street Battles Washington: Who Will Win?

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The Wall Street-Washington Divide


For all the money that has moved back and forth between Wall Street and Washington in recent years, what’s most striking is how little each understands, still, about the other.

When young executives from Goldman Sachs appeared before a Senate panel Tuesday, members were taken aback by what they viewed as an Arrogant and Condescending tone; “smart asses,” said one Conservative Republican.

Yet by afternoon, there were flashes of sympathy for Goldman chief Lloyd Blankfein as he tried to get senators to appreciate his pride in making the markets work — not just in profiting from “short” and “long” bets on derivatives.

All this comes to bear now in a few lines in the giant bill that would force major banks to spin off their swaps operations or lose all federal aid, including access to the Federal Reserve’s discount window. And Wednesday’s agreement to begin debate means the issue could be joined as early as Thursday, when Democrats take up their revised derivatives language — including this Section 716.

The restrictions go beyond even the “Volcker rule” associated with the former Fed chairman, Paul Volcker, an adviser to President Barack Obama. And since just five commercial banks — including Goldman, JPMorgan Chase and Morgan Stanley — account for 97 percent of the value in the derivatives market, it’s seen as a direct hit on Wall Street, provoking a fierce reaction.

Sen. Judd Gregg (R-N.H.) was almost apoplectic this week in a floor speech condemning the provision as an ill-informed attempt to really rough up Wall Street — not reform it.

“It is penal. That is the purpose of this: punitive,” said Gregg. “In the end, it is going to cut off our nose to spite our face.”

“Rampant pandering populism” was his favorite catchphrase; that and Argentina under Juan Peron in the 1950s.

The Treasury — albeit considerably calmer — shares some of his concerns. An unusually aggressive memo from the Federal Reserve staff recommends outright that the provision be deleted. But at the insistence of Senate Agriculture Committee Chairwoman Blanche Lincoln, it remains.

The Arkansas Democrat has touched a chord among senators wanting to break up the concentration of power in a few banks and put the focus back on traditional lending, not speculative trades.

“If they want to do swaps, there’s no problem with them wanting to be in this business,” Lincoln told POLITICO. “But they need to separate themselves out so they are not putting at risk the depositors from the bank. And I don’t think that’s an unreasonable thing to ask.”

“They can do it. They just have to separate it out. They have to capitalize it on its own. They can’t capitalize it from the depositors at the bank.”

Nonetheless, Volcker, who remains an icon for many in Congress, has proposed a more qualified ban: allowing banks to operate a derivatives business to serve their customers but not to trade among themselves or take positions on a proprietary trade.

For example, if a big Wall Street bank were asked to offload a large block of stock for a retirement investment fund, it might decide to do so in increments, so as to guard against any sudden impact on the markets. Since those stock transactions could then take some time, Volcker would allow the bank to protect itself — and its depositors — by generating derivatives as a hedge on the stock price.

Lincoln said she’s not fazed by going beyond Volcker. But as she explained her language, she also seemed to be leaving some room for compromise. Bank holding companies could have swap operations — separate from the bank itself, for example. And she said she is not opposed to a bank’s buying a swap to protect itself but that it ought not to be the dealer.

“They can still use a derivative as a risk-balancing tool,” Lincoln told POLITICO. “They just can’t be a major swap dealer.”

Watching from across the Capitol, House Financial Services Committee Chairman Barney Frank (D-Mass.) said that Lincoln’s comments did leave room for compromise.

“The question is whether there is a legitimate need for commercial banks, including small ones, to be able to hedge their own risks,” Frank said in an interview. “If that’s made clear, then there is no problem.”

“There’s a bit of a push-pull in this. I believe the consensus will be, they can’t be dealers, they can’t be major players, but they should be allowed to hedge their own commercial risk.”

“Volume becomes very important for the regulators,” Frank said, imagining some conversation in the future when a regulator asks a bank: “‘You’re saying you’re hedging your own risk, and you’re way out there?’”

“I like the idea that banks don’t have other profit centers,” the chairman said, smiling. “They’ll have to lend more money.”

Gregg warned that separating the banks from swaps operations will create less credit, not more, since the new independent entity will drain away capital to meet its own needs.

“Where it comes from, quite honestly, is the creditworthiness of other activity. ... It will cause a contraction of about $700 billion of credit in this country.”

Within Democratic ranks, Lincoln’s activist stance is not without some irony. In the run-up to her committee markup last week, Treasury officials had portrayed her as being too weak on derivatives regulation and took credit for turning her around.

But she’s now gone further than the administration expected — and left Treasury in a position where it now looks like it’s defending the Wall Street banks from a more populist Congress.

Treasury Secretary Timothy Geithner didn’t help himself in this regard by failing to even meet with the new chairwoman before her markup. And given his own history with the New York Federal Reserve and dealings with many of the same Wall Street interests, it’s the Lincoln camp that now suggests he ought to be on the defensive.


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Sources: Dylan Ratigan Show, MSNBC, Politico, Google Maps

Goldman's E-mails Reveal Profits Soared As Housing Bubble Burst

Goldman E-Mails Cited Serious Profit on Mortgages


In late 2007, as the mortgage crisis gained momentum and many banks were suffering losses, Goldman Sachs executives traded e-mail messages saying that they would make “some serious money” betting against the housing markets, The New York Times’s Louise Story and Sewell Chan report.

The messages, released Saturday by the Senate Permanent Subcommittee on Investigations, appear to contradict statements by Goldman that left the impression that the firm lost money on mortgage-related investments.

In the messages, Lloyd C. Blankfein, the bank’s chief executive, acknowledged in November 2007 that the firm had lost money initially. But it later recovered by making negative bets, known as short positions, to profit as housing prices plummeted. “Of course we didn’t dodge the mortgage mess,” he wrote. “We lost money, then made more than we lost because of shorts.”

He added, “It’s not over, so who knows how it will turn out ultimately.”

In another message, dated July 25, 2007, David A. Viniar, Goldman’s chief financial officer, reacted to figures that said the company had made a $51 million profit from bets that housing securities would drop in value. “Tells you what might be happening to people who don’t have the big short,” he wrote to Gary D. Cohn, now Goldman’s president.

Actions taken by Wall Street firms during the housing collapse have become a major factor in the contentious debate over financial reform. In his weekly radio address on Saturday, President Obama said Wall Street had “hurt just about every sector of our economy” and again pressed the case for tighter regulation. On Monday, Senate Democrats will try to prevent a Republican filibuster in the first major test of the administration’s effort to push through legislation.

Goldman on Saturday denied that it made a significant profit on mortgage-related products in 2007 and 2008. It said the subcommittee had “cherry-picked” e-mail messages from the nearly 20 million pages of documents it provided. This sets up a showdown between the Senate subcommittee and Goldman, which has aggressively defended itself since the Securities and Exchange Commission filed a security fraud complaint against it nine days ago. On Tuesday, seven current and former Goldman employees, including Mr. Blankfein, are expected to testify at a Congressional hearing.

Carl Levin, Democrat of Michigan and head of the Permanent Subcommittee on Investigations, said that the e-mail messages contrasted with Goldman’s public statements about its trading results. “The 2009 Goldman Sachs annual report stated that the firm ‘did not generate enormous net revenues by betting against residential related products,’ ” Senator Levin said in a statement Saturday. “These e-mails show that, in fact, Goldman made a lot of money by betting against the mortgage market.”

The messages appear to connect some of the dots at a crucial moment of Goldman history. They show that in 2007, as most other banks hemorrhaged money from plummeting mortgage holdings, Goldman prospered.

At first, Goldman openly discussed its prescience in calling the housing downfall. In the third quarter of 2007, the investment bank reported publicly that it had made big profits on its negative bet on mortgages.

But by the end of 2007, the firm curtailed disclosures about its mortgage trading results. Its chief financial officer told analysts that they should not expect Goldman to reveal whether it was long or short on the housing market. By late 2008, Goldman was emphasizing its losses, rather than its profits, pointing regularly to write-downs of $1.7 billion on mortgage assets in 2008 and not disclosing the amount it made on its negative bets.

Goldman and other firms often take positions on both sides of an investment. Some are long, which are bets that the investment will do well, and some are shorts, which are bets the investment will do poorly.

Goldman has said it added shorts to balance its mortgage book, not to make a directional bet on a market collapse. But the messages released by the subcommittee Saturday appear to show that in 2007, at least, Goldman’s short bets were eclipsing the losses on its long positions.

In May 2007, for instance, Goldman workers e-mailed one another about losses on a bundle of mortgages issued by Long Beach Mortgage Securities. Though the firm lost money on those, a worker wrote, there was “good news”: “we own 10 mm in protection.” That meant Goldman had enough of a bet against the bond that, over all, it profited by $5 million.

On Oct. 11, 2007, one Goldman manager in the trading unit wrote to another, “Sounds like we will make some serious money,” and received the response, “Yes we are well positioned.”



Documents released by the Senate subcommittee appear to indicate that in July 2007, Goldman’s accounting showed losses of $322 million on positive mortgage positions, but its negative bet — what Mr. Viniar called “the big short” — brought in $373 million.

As recently as a week ago, a Goldman spokesman emphasized that the firm had tried only to hedge its mortgage holdings in 2007.

The firm said in its annual report this month that it did not know back then where housing was headed, a sentiment expressed by Mr. Blankfein the last time he appeared before Congress.

“We did not know at any minute what would happen next, even though there was a lot of writing,” he told the Financial Crisis Inquiry Commission in January.

It is not known how much money in total Goldman made on its negative housing bets. Neither Goldman nor the panel issued information about Goldman’s mortgage earnings in 2009

In its response on Saturday, Goldman Sachs released an assortment of internal e-mail messages. They showed workers disagreeing at some junctures over the direction of the mortgage market. In 2008, Goldman was stung by some losses on higher-quality mortgage bonds it held, when the crisis expanded from losses on risky bonds with subprime loans to losses in mortgages that were given to people with better credit histories.

Still, in late 2006, there are messages that show Goldman executives discussing ways to get rid of the firm’s positive mortgage positions by selling them to clients. In one message, Goldman’s chief financial officer, Mr. Viniar, wrote, “Let’s be aggressive distributing things.”

Goldman also released detailed financial statements for its mortgage trading unit. Those statements showed that a group of traders in what was known as the structured products group made a profit of $3.69 billion as of Oct. 26, 2007, which more than covered losses in other parts of Goldman’s mortgage unit.

Several traders from that group will testify on Tuesday, and their profitable short positions are likely to be of interest to the Senate committee. The Abacus deal that is involved in the S.E.C. complaint and others like it were created within that group.

The messages released by Goldman included many written by Fabrice Tourre, the executive who is the only Goldman employee named in the S.E.C. complaint. They reveal his skepticism about the direction of the subprime mortgage market in 2007. In a March 7 message to his girlfriend, he wrote, “According to Sparks, that business is totally dead, and the poor little subprime borrowers will not last so long.” He was referring to Dan Sparks, then the head of Goldman’s mortgage trading unit.

The Senate subcommittee began its investigation in November 2008, but its work attracted little attention until a series of hearings in the last month.

The Senate announced that it would convene a hearing on Goldman Sachs within a week of the S.E.C.’s fraud suit. Some members of Congress questioned whether the two investigations had been coordinated.

Mr. Levin’s staff said there was no connection between the two investigations. The subcommittee issued subpoenas to Goldman on June 30 of last year and again on March 12, and informed Goldman about who would be called as witnesses on April 5. The S.E.C. has said there was no political motivation in the timing of its complaint.

Among the lawyers Goldman has hired to deal with the Senate inquiry are Michael D. Bopp, a partner at Gibson, Dunn & Crutcher, and K. Lee Blalack II, a partner at O’Melveny & Myers.

Mr. Bopp and Mr. Blalack are based in Washington and both once worked as lawyers for the Permanent Subcommittee on Investigations. Mr. Blalack was the subcommittee’s chief counsel and staff director.


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Goldman Prepares Its Defense To Market Timing & Subprime Risk Charges

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Goldman Readies Reply To Claims It Misled Clients

Goldman Sachs is preparing its most detailed defense yet to allegations that it misled clients in its mortgage securities business, arguing that the firm was unsure whether housing prices would rise or fall and did not take any action at odds with the interests of its clients.

An internal Goldman document, prepared for senior executives and obtained by The Washington Post, addresses the criticism that the bank invested its own money betting against the housing market while simultaneously urging clients to invest in securities that would increase in value only if the housing market did.

Those concerns over possible double-dealing spiked a week ago as the Securities and Exchange Commission filed a fraud suit against Goldman, alleging that it misled clients by selling them mortgage-related securities secretly designed to fail.

Goldman prepared the 11-page document to serve as the basis for testimony that chief executive Lloyd Blankfein is scheduled to deliver Tuesday before the Senate Permanent Subcommittee on Investigations.

The Goldman paper describes debates among top executives in 2006 and 2007 over whether the firm should make investment decisions based on the belief that the mortgage market would continue to prosper. The document details meetings and e-mails that ultimately resulted in a decision to reduce the company's exposure to the mortgage market, especially subprime loans, by making new investments that would pay off if housing prices fell.

Subprime Risk

Over the past few years, other financial firms and some in the media have complained that Goldman recognized the risks of the subprime mortgage market early on and, without telling clients, developed financial products that would allow the bank to bet against mortgages with its own money. At the same time, Goldman continued to sell mortgage-related investments to clients who expected the subprime loan business to remain vibrant, critics have alleged.

While the firm moved to significantly reduce its losses when the housing market cratered, the impression conveyed by the document is that Goldman was confused, like many other financial firms, over how bad the collapse would be and suffered losses as a result.

The document also reprises Goldman's frequent explanation that it was not investing its own money in financial transactions to make a trading profit but to help investors who wanted to do a deal and could not easily find someone else to trade with. That role, commonly played by investment banks, is known as being a market maker.

A spokesman for the Senate subcommittee declined Friday evening to comment on Goldman's defense.

"Our investigation has found that investment banks such as Goldman Sachs were not market makers helping clients," Sen. Carl M. Levin (D-Mich.), who heads the panel, said Friday. "They were self-interested promoters of risky and complicated financial schemes that were a major part of the 2008 crisis."

In the paper, Goldman argues that it was a relatively small player in the mortgage market, bringing in only $500 million from its residential mortgage business in 2007, less than 1 percent of the firm's overall revenues.

Still, the bank's mortgage investments were large enough that executives began to worry in 2006 that it was betting too heavily on the health of the housing market.

According to the document, the concerns arose in late 2006, when Dan Sparks, the head of the mortgage unit, wrote to top executives that the "subprime market [was] getting hit hard," with the firm losing $20 million in one day.

On Dec. 14, 2006, financial officer David Viniar called Goldman's mortgage traders and risk managers into a meeting to discuss investing strategy. They concluded that they would reduce the firm's overall exposure to the subprime mortgage market.

But the prevailing view of executives, as described in the paper, was not that the housing market was headed into a prolonged decline. They were not looking to short the market overall. That would have entailed making such large bets against mortgage securities that the firm would turn a profit if the market as a whole collapsed, which in fact it did.

The document acknowledges that Goldman at times shorted the overall market but describes those periods as temporary while the firm was rebalancing its portfolio to limit losses if mortgage securities were to lose more value.

At some moments, executives were actually considering making new bets, buying potentially undervalued securities that could pay off when the mortgage market turned around. A day after Viniar met with traders and risk managers, he wrote to Tom Montan, co-head of the securities division, saying, "There will be very good opportunities as the markets goes into what is likely to be even greater distress and we want to be in position to take advantage of them."

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Market Timing

The back-and-forth over which way the market would go, and how to invest in it, continued into 2007.

On March 14, Goldman co-president Jon Winkelried e-mailed Sparks and others asking what the bank was doing to protect itself from a decline in prices of not just subprime loans but also of other loans traditionally considered less risky. Sparks replied that the firm was trying to have "smaller" exposure to those loans also.

But managing director Richard Ruzika took issue with that answer a few days later, saying that Goldman might be overestimating the decline in housing. "It does feel to me like the market in general underestimated how bad it could get. And now could be overestimating where we are heading," he wrote in an e-mail. "While undoubtedly there will be some continued spillover, I'm not so convinced this is a total death spiral. In fact, we may have terrific opportunities."

Sparks later endorsed that optimistic view, suggesting as late as August 2007 that Goldman begin buying more mortgage securities.

The bank did not immediately follow that path, and by Nov. 30, 2007, Goldman had largely canceled out its exposure to subprime mortgages by increasing its bets that the market would continue to slide, according to the document.

But by that account, Goldman also continued to have $13.5 billion in exposure to safer, prime mortgages. That cost the bank. In 2008, the firm lost $1.7 billion on investments in residential mortgages.


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Obama Invites Wall Street To Join Reform Debate

President Obama Seeks Reform Buy-In From Wall Street


President Barack Obama told an audience stocked with some of Wall Street's brightest luminaries that he wants them to join him in passing new financial regulation legislation, criticizing a “failure of responsibility” that stretched from Wall Street to Washington and “nearly dragged our economy into a second Great Depression."

"I believe in the power of the free market," Obama said in remarks delivered at New York's Cooper Union. "But a free market was never meant to be a free license to take whatever you can get, however you can get it. That is what happened too often in the years leading up to the crisis."

Obama's remarks came at a moment when Senate negotiators said they were getting closer and closer to a deal allowing the regulatory legislation to move to the Senate floor. The political momentum led some observers to predict the bill could pass — and be signed by Obama — by Memorial Day.

Still, Obama urged the Wall street executives packing the hall to stop resisting the measure.

Both bills, he said, represent "significant improvement on the flawed rules" that are in place today, "despite the furious efforts of industry lobbyists to shape them to their special interests."

"I am sure that many of those lobbyists work for some of you," Obama said. " But I am here today because I want to urge you to join us, instead of fighting us in this effort."

Sitting in the third row as Obama addressed the audience were two executives squarely in the sights of Obama's administration: Goldman Sachs CEO Lloyd Blankfein and his number two, Gary Cohn.

The arrival of the Goldman duo, whose powerhouse Wall Street firm faces securities fraud charges from the SEC, heightened the drama of a speech.

Also in the audience as Obama spoke was Rolling Stone publisher Jann Wenner — whose magazine famously called Goldman Sachs a "great vampire squid wrapped around the face of humanity" in an article on the bank's vast influence last summer.

Wenner told POLITICO that Blankfein approached him before the speech began and said "I feel like I know you," mentioning the vampire squid article, which proved hugely damaging to Goldman's public image. Today, though Wenner said he doesn't think the phrase was overstated. "It met the case," he said, describing, as Blankfein schmoozed with audience members a few seats away, Goldman's "blood tentacles sucking money out of everything."

The Rev. Al Sharpton was also in the crowd, and told POLITICO that he and Blankfein chatted about growing up in Brooklyn, where the two men attended rival high schools. "It seems like we've been on rival sides for a long time," Sharpton said of Blankfein.

But Sharpton said he was pleased with Obama's decision to come to New York. "I'm glad he's here," Sharpton said. "He's doing what he said he'd do, despite the fact that so many on Wall Street contributed to his campaign."

In his remarks, the President also pushed back against GOP claims that the bill allows for more bailouts of Wall Street. "But what is not legitimate is to suggest that we’re enabling or encouraging future taxpayer bailouts, as some have claimed" Obama said. "That may make for a good sound bite, but it’s not factually accurate."

Obama made a pitch for several of the key items of the reform legislation.

On the "Volcker Rule," which would prohibit banks from engaging in certain transactions the president calls risky, Obama said, new restrictions would bring confidence back to the financial system -- which would be good for Wall Street. "By enacting these reforms, we’ll help ensure that our financial system – and our economy – continues to be the envy of the world," he said.

On the complex financial products known as derivatives, Obama said, that there are some legitimate uses of the instruments, such as for hedging business risk. Still, he said, the sector needs more transparency. "We want to ensure that financial products like standardized derivatives are traded in the open, in full view of businesses, investors, and those charged with oversight."

On the proposed new consumer financial protection agency, which would be housed inside the Federal Reserve, Obama said that customers too often suffered large losses as a result of abusive business practices. And he laid out a vision of what might happen once the agency was in place:" "Instead of competing to offer confusing products, companies will compete the old-fashioned way: by offering better products," he said. "That will mean more choices for consumers, more opportunities for businesses, and more stability in our financial system."

Obama closed by offering the bankers in the room a history lesson, quoting from a Time Magazine article from June of 1933 -- in which bankers said that the recently created FDIC created a "monstrous system."

But the FDIC, Obama said, became "an institution that has successfully secured the deposits of generations of Americans."


Sources: Politico

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Bank CEOs Including (Brian Moynihan) Testify About Exec Compensation

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Blankfein Defends Goldman Sachs Amid Grilling by Crisis Panel



Lloyd Blankfein, chief executive officer of Goldman Sachs Group Inc., mounted a defense of his firm amid a grilling today by members of the Financial Crisis Inquiry Commission.

Goldman Sachs is a market-making firm that acquired securities, including mortgages, that were repackaged and sold to clients, and sometimes at a loss, Blankfein told commission Chairman Phil Angelides in response to questioning.

“We represent the other side of what people want to do,” said Blankfein, 55. “Because we had this risk, because we were accumulating positions which, by the way, we acquired from clients who want to sell them to us, we have to go out ourselves and provide and source the other side of the transactions so that we can manage our risk.”

Chiefs of Bank of America Corp., Morgan Stanley and JPMorgan Chase & Co. defended their firms’ actions and blamed the crisis on conditions such as low long-term interest rates and U.S. government policies that encourage and subsidize home ownership. Blankfein bore the brunt of three hours of questions on issues ranging from short-selling to its dealing with insurer American International Group Inc.

Angelides pressed Blankfein on Goldman Sachs’s sale of mortgage-backed securities, its requests to the credit-rating companies for the highest rating while betting the securities will later fail.

“It sounds to me a little bit like selling a car with faulty brakes and then buying an insurance policy on the buyer of those cars,” Angelides told Blankfein. “It doesn’t seem to me that that’s a practice that inspires confidence in the markets.”

SEC Probe

The Securities and Exchange Commission and brokerage regulators are examining how Wall Street firms bet against mortgage-linked securities to profit as their clients took losses, people familiar with the matter said in late December after report.

Blankfein and the other executives testified in the first day of hearings of the commission, led by Democrat Angelides, the former California Treasurer, and Bill Thomas, a Republican who is a former congressman from California. The commission was created by Congress to examine the causes of a collapse that roiled global markets and led to a $700 billion U.S. government bailout of the nation’s banks.

“Many firms were too highly leveraged, took on too much risk and did not have sufficient resources to manage those risks effectively in a rapidly changing environment,” Morgan Stanley Chairman John Mack, 65, said. “The financial crisis has also made it clear that regulators simply didn’t have the visibility, tools or authority to protect the stability of the financial system as a whole.”

Risk Management

JPMorgan’s focus on risk management and prudent lending, helped the firm avoid setbacks experienced by other companies, said Jamie Dimon, 53, JPMorgan Chase’s chairman and CEO.

The CEOs lead two days of hearings that include Federal Deposit Insurance Corp. Chairman Sheila Bair, SEC Chairman Mary Schapiro and attorneys general from Colorado and Illinois. The panel has six members appointed by Democrats and four by Republicans and has the power to subpoena witnesses and documents.

Blankfein said the firm’s practice of marking assets to market daily helped it decide to cut risk earlier than some rivals. Goldman Sachs was the biggest U.S. securities firm before it and Morgan Stanley converted to banks during the crisis, gaining lending support from the Federal Reserve.

By contrast, Bank of America CEO Brian Moynihan, 50, said mark-to-market accounting exacerbated the crisis as thinly traded assets often had to be recorded at fire-sale prices, triggering losses and further sales.

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Downward Cycle

“The market began to anticipate this downward cycle, and question companies or structures that would become subject to it, in a self-fulfilling way,” Moynihan said in his remarks.

Dimon echoed Moynihan’s concern about mark-to-market accounting.

“Although we are a proponent of fair-value accounting in trading books, we also recognize that market levels resulting from large levels of forced liquidations may not reflect underlying values,” Dimon said.

Congress is considering a financial regulatory overhaul, with the Senate crafting legislation after the House passed a measure last month with rules for derivatives, powers to break apart financial firms whose collapse would threaten the economy and a Consumer Financial Protection Agency. The banking industry and the nation’s biggest business lobby have fought to scale back the legislation.

Financial Profit

Profit at financial institutions, which kick off earnings season with JPMorgan’s fourth-quarter report on Jan. 15, has rebounded and may triple by 2011, according to analyst surveys compiled by Bloomberg News. Charlotte, North Carolina-based Bank of America, the biggest U.S. lender, said last week that it expects to pay record bonuses to some investment bankers. Goldman Sachs, JPMorgan and Morgan Stanley are all based in New York.

All of the executives provided prescriptions for how regulators and the government should deal with banks whose failure could put the economy at risk -- the so-called too-big- to-fail institutions.

Blankfein, who heads the fifth-biggest U.S. bank by assets, proposed that regulators require firms to submit to continuing public “stress tests” to examine whether they have adequate capital. Regulators may require companies to raise so-called contingent capital if stress tests deem they need more capital.

Automatic Re-capitalization

“Making recapitalization automatic if capital levels fall below a public threshold would minimize systemic risk and force shareholders and bondholders to bear the burden of the firm’s mistakes, not taxpayers or the economy,” Blankfein said.

Dimon called for a regulatory authority that would manage failures of large financial institutions in such a way that shareholders and creditors would be at risk.

“A regulator should be able to terminate management and boards and liquidate assets,” Dimon said. “There is much that can be learned from the process by which the FDIC closes banks today,” he said, referring to the Federal Deposit Insurance Corp.

Moynihan said the size of banks shouldn’t be limited and legislation to separate consumer and investment banking -- like the Glass-Steagall law that was overturned in 1999 -- shouldn’t be revived.

“Those arguing for a return of Glass-Steagall are effectively arguing that Bear Stearns was a more stable entity than JPMorgan Chase,” he said. “I don’t see how that is tenable.”



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