Democrats Use Goldman to Push Bank Overhaul
By CARL HULSE
Copyright by The New York Times
Published: April 27, 2010
http://www.nytimes.com/2010/04/28/business/28bankers.html?th&emc=th
WASHINGTON — Politicians like nothing more than a convenient foil, and Democrats locked in a stubborn impasse with Republicans over new rules to govern Wall Street believe they have found a gold-plated one in Goldman Sachs.
From top, Adam Stoltman/Associated Press; Associated Press; Richard Carson/Reuters
From top, the former junk bond king Michael Milken, Charles Keating of the 1980s savings and loan crisis, and Kenneth Lay, the former chief executive of Enron. All three were convicted.
Democrats say the convergence of their push for an overhaul of financial regulation and a prominent federal securities case against the prestigious investment firm is a matter of coincidence, not planning.
But they have seized on emerging details about Goldman’s wheeling and dealing — recounted in a marathon bipartisan questioning of top executives from the firm on Tuesday during a televised Senate hearing — to put pressure on Republicans.
“If the disclosures at these hearings are not the final nail that persuades the American people to demand this be done now, I don’t know what would be,” said Senator Byron Dorgan, Democrat of North Dakota. “To bet against your clients, to bet against your country, all for the sake of big profits. The timing is serendipitous but it should increase the pressure on Republicans.”
Even as current and former Goldman executives defended themselves against charges of pillaging the economy, Democrats forced another procedural vote on the Wall Street regulatory measure. They knew they would come up short but were intent on juxtaposing the image of millionaire bankers parrying suggestions of greed and malfeasance with Republican determination to at least slow a bill calling for tighter regulation. Democrats said they would keep calling for votes to make their point.
“Republicans will have more opportunities to show whose side they are truly on,” said Senator Harry Reid, Democrat of Nevada and the majority leader.
If nothing else, the civil case filed by the Securities and Exchange Commission against Goldman has given Democrats a chance to highlight a cast of purported villains, embodiments of the forces that led to the financial crisis and the ensuing deep recession and faces at which the nation’s angry populist impulses could be directed.
For hour after hour on Tuesday, Democrats and Republicans interrogated Goldman’s mortgage men, including the chief executive, Lloyd C. Blankfein, and Fabrice Tourre, the employee named in the S.E.C. complaint, putting them on the spot over Wall Street’s questionable conduct at a legislatively propitious moment.
None of the Goldman executives have been found to have done anything wrong, but some Democrats were ready to place them in the same role played in past financial crises by high-fliers like Charles Keating, Michael Milken and Ken Lay, all of whom came to personify the excesses of the moment.
The hearings were the culmination of a Democratic strategy to take full advantage of the opportunity created by the S.E.C. civil case.
Top Democrats said it helped to put a face on an economic calamity that is as complicated as a synthetic collateralized debt obligation. But the real impact of the Goldman Sachs inquiry seemed difficult to gauge when it came to Republicans.
While Senate Republicans joined Democrats in pounding on the Goldman executives at the hearing and expressed comparable outrage over what they described as blatant conflicts of interest in the structuring of Goldman deals, they confidently trooped over to the Senate floor to vote again to block the bill.
They accused Democrats of trying to force through a partisan measure, sought to raise new questions about the measure’s reach beyond the titans of Wall Street and noted that many Democrats had benefited more from Goldman campaign contributions than Republicans.
Senator Mitch McConnell of Kentucky, the Republican leader, said he did not believe Republicans would pay a political price for their resistance to the legislation, even with the Goldman case playing out in the background, as long as Republicans could make the case that they were trying to achieve a better end result.
“What happens on Monday or Tuesday versus what happens later is something largely lost on the general public,” he said.
Some Democrats, despite being aghast at Goldman’s evident willingness to bet against investments it was selling to other clients, said it was in some ways inequitable to single out Goldman when they might have just been the biggest and best at what became a Wall Street routine.
“They were all doing this,” Senator Claire McCaskill, Democrat of Missouri, said. “This was lemminglike.”
Other Democrats said privately that the party needed to be careful in how far it goes in portraying Goldman Sachs as the chief bad guy in the financial collapse given the firm’s major presence on Wall Street, as well as in the world’s financial markets. Some Republicans have suggested that the Goldman developments are too much of a coincidence, implying that the S.E.C. lawsuit and Senate hearing were all elements of an orchestrated effort to provide momentum to the Wall Street overhaul and help Democrats break the Republican unity against the measure.
Administration and Congressional officials strongly deny any such coordination and note that the investigative committee headed by Senator Carl Levin, Democrat of Michigan, has been looking into the underlying causes of the financial crisis for months.
Still, Democrats were not about to let such a prime opportunity pass.
Moments after Republicans blocked debate on the bill for a second time, Senator Dianne Feinstein, Democrat of California, took the Senate floor to note that she had been following the Goldman Sachs hearing.
“Goldman Sachs will have their day in court,” she said. “But the allegations against the firm cry out for greater transparency at giant Wall Street banks.”
Panel’s Blunt Questions Put Goldman on Defensive
By LOUISE STORY
Copyright by The New York Times
Published: April 27, 2010
http://www.nytimes.com/2010/04/28/business/28goldman.html?th&emc=th
WASHINGTON — Even before the first question was leveled inside the Senate chamber, Tuesday was going to be uncomfortable for Goldman Sachs.
But then the questions kept coming — and coming and coming.
Through the day and into the evening, Goldman Sachs officials met with confrontation and blunt questioning as senators from both parties challenged them over their aggressive marketing of mortgage investments at a time when the housing market was already starting to falter.
In an atmosphere charged by public animosity toward Wall Street, the senators compared the bankers to bookies and asked why Goldman had sold investments that its own sales team had disparaged with a vulgarity.
“The idea that Wall Street came out of this thing just fine, thank you, is just something that just grates on people,” said Senator Edward E. Kaufman Jr., a Democrat from Delaware, said. “They think you didn’t just come out fine because it was luck. They think you guys just really gamed this thing real well.”
But throughout a subcommittee hearing lasting more than 10 hours, current and former Goldman officials insisted that they had done nothing to mislead their clients. Time and again, the senators and the Goldman executives, among them the chairman and chief executive, Lloyd C. Blankfein, seemed to be talking past each other.
Among the Goldman retinue was Fabrice P. Tourre, a vice president who helped create and sell a mortgage investment that figures in a fraud suit filed this month by the Securities and Exchange Commission.
Mr. Tourre defended his role in the sale of the investment. In his opening remarks to the Senate Permanent Subcommittee on Investigations, Mr. Tourre declared: “I deny, categorically, the S.E.C.’s allegation. And I will defend myself in court against this false claim.”
Senate investigators are building on the S.E.C. case, which accuses Goldman of defrauding investors in a transaction called Abacus 2007-AC1.
The hearing was held against the backdrop of a debate about overhauling financial regulation. During the questioning, senators highlighted the need for greater openness and questioned the ethics of the financial sector.
At one point, the Goldman witnesses were asked what they would change in the regulatory system.
“Clearly some things need to be changed,” said Daniel L. Sparks, a former partner and head of the mortgage trading department in the Goldman Sachs Group, who was one of the four initial witnesses.
Steering away from financial jargon, the senators tried to put a human face on the questioning. Senator John Ensign, Republican of Nevada, declared that more transparency was needed “so we don’t end up hurting the little guys out there on Main Street.”
A Republican member, Senator Susan M. Collins of Maine, turned from one witness to the next as she asked repeatedly whether they felt a duty to act in the best interest of their clients. Only one of the four witnesses she questioned seemed to affirm such a duty outright.
In what almost added up to a light moment, Senator Mark L. Pryor, Democrat of Arkansas, said the public wanted to know what went wrong and “how we can fix it,” adding that Americans feel that Wall Street contributed to the financial crisis. “People feel like you are betting with other people’s money and other people’s future,” he said. “Instead of Wall Street, it looks like Las Vegas.”
Senator Ensign said he took offense at the comparison, saying that in Las Vegas the casinos do not manipulate the odds while you are playing the game. The better analogy, he said, would be to someone playing a slot machine while the “guys on Wall Street” were “tweaking the odds in their favor.”
The gap between Wall Street and the rest of the country was a recurring theme, with senators occasionally pointing out how much Goldman, and indeed the witnesses, had profited as the overall economy was headed for a plunge.
Senator Claire McCaskill, Democrat of Missouri, mentioned during her questioning that she was trying to “home in on why I have so many unemployed people” and lost money in pensions.
The questioning Tuesday put the Goldman witnesses on the defensive, with the senators expressing exasperation that they were deliberately dodging questions or stalling for time.
It was at 10:01 a.m., one minute late, when the session began with opening remarks from subcommittee chairman, Senator Carl Levin, Democrat of Michigan. The public galleries, accommodating roughly 100 people, were full and included four people dressed in mock striped prison jumpsuits who jeered at the Goldman officials.
“How do you live with yourself, Fab?” one shouted as Mr. Tourre was ushered out of the chamber after his testimony.
A tone of confrontation was set at the beginning, with Senator Levin’s opening remarks. He said the questioning would focus on the role of investment banks in the financial crisis, and particularly on the activities of Goldman Sachs in 2007, which “contributed to the economic collapse that came full blown the following year.”
While the hearing had ramifications for the entire sector and the activities of lenders to make more money from risky mortgage loans, Senator Levin added, it was focusing on Goldman as an “active player in building this mortgage machinery.”
He said that while the S.E.C. suit and the courts would address the legality of its activities, “the question for us is one of ethics and policy: were Goldman’s actions in 2007 appropriate, and if not, should we act to bar similar actions in the future?”
In addition to Mr. Tourre and Mr. Sparks, Goldman executives testifying included Joshua S. Birnbaum, a former managing director in the structured products group trading, and Michael J. Swenson, another managing director in that group.
A second panel included David A. Viniar, executive vice president and chief financial officer, and Craig W. Broderick, the chief risk officer.
At one point Mr. Viniar prompted a collective gasp when Mr. Levin asked him how he felt when he learned that Goldman employees had used vulgar terms to describe the poor quality of certain Goldman deals. Mr. Viniar replied, “I think that’s very unfortunate to have on e-mail.”
Senator Levin then berated Mr. Viniar for not saying that he was appalled that Goldman employees even thought their deals were of poor quality, much less put it in e-mail. Mr. Viniar later apologized.
As the hearing stretched into the evening, Mr. Blankfein, Goldman’s chief, entered the chamber with an almost angry demeanor. In a brief prepared statement, he held tight to Goldman’s defenses.
Later, asked if he knew the housing market was doomed, Mr. Blankfein replied, “I think we’re not that smart.”
Mr. Blankfein was asked repeatedly whether Goldman sold securities that it also bet against, and whether Goldman treated those clients properly.
“You say betting against,” Mr. Blankfein said in a lengthy exchange. But he said the people who were coming to Goldman for risk in the housing market got just that: exposure to the housing market. “The unfortunate thing,” he said, “is that the housing market went south very quickly.”
Senator Levin pressed Mr. Blankfein again on whether his customers should know what Goldman workers think of deals they are selling, and Mr. Blankfein reiterated his position that sophisticated investors should be allowed to buy what they want.
Mr. Blankfein was also pressed on the deal at the center of the S.E.C. case. He said the investment was not meant to fail, as the S.E.C. claims, and in fact, that the deal was a success, in that it conveyed “risk that people wanted to have, and in a market that’s not a failure.”
To which Senator Jon Tester, Democrat of Montana, replied, “It’s like we’re speaking a different language here.”
Christine Hauser contributed reporting from New York.
Senate GOP blocks action on financial regulation bill again
By Brady Dennis and Shailagh Murray
Copyright by The Washington Post
Tuesday, April 27, 2010; 5:18 PM
http://www.washingtonpost.com/wp-dyn/content/article/2010/04/27/AR2010042702144.html?hpid=topnews
Senate Republicans on Tuesday blocked for the second straight day efforts to begin debate on a sweeping overhaul of financial regulations, saying the bill represented a "dramatic overreach" of government power.
A procedural vote to bring the measure to the Senate floor for full debate fell short of the 60-votes required for passage. Fifty-seven senators voted in favor of advancing the bill, while 41 voted against it. Two senators did not vote.
Majority Leader Harry Reid (D-Nev.) had scheduled the vote after a similar attempt failed on Monday. Democratic aides said another vote was planned for Wednesday if the Tuesday tally also fell short.
"We need to keep the pressure on to get a deal as quickly as possible," Reid spokesman Jim Manley said.
Democrats say they want to hold an open debate on the bill on the Senate floor, but Republicans insist that the measure still needs substantial revision that would better handled in private negotiations before making.
Monday's 57 to 41 vote in favor of beginning debate, short of the 60 needed, was expected, although Democrats did suffer an unanticipated defection when Sen. Ben Nelson (Neb.) joined Republicans as a no.
About two-thirds of Americans supported stricter regulations on the way banks and other financial institutions conduct their business, according to a Washington Post-ABC News poll. Majorities also backed two main components of pending Senate bill: greater federal oversight of consumer loans, and a proposed fund paid for by the financial industry that would go toward dismantling failed firms that put the broader economy at risk.
Given the public support for tougher Wall Street rules, the unanimity that Republicans demonstrated Monday may not endure. GOP negotiators said their goal remains a final bill that includes enough changes that it can win broad support from both parties. But Democrats are looking to limit their concessions and say they will probably win a few conversions among Republicans who have expressed support for the overwhelming majority of the bill in its current form.
Democrats say they believe about half a dozen GOP lawmakers are open to switching their votes. They include Sens. Olympia J. Snowe and Susan Collins of Maine, Sen. Scott Brown (Mass.), and Sen. Charles E. Grassley (Iowa).
Grassley, a conservative who is up for reelection in November, surprised colleagues recently in voting to support strict new rules for derivatives, one of the most complex but fundamental parts of the legislation.
The 1,400-page bill would also create an agency to protect consumers against abusive lending practices, establish a council of regulators to monitor potential risks to the financial system, and give the government authority to shut down large, failing firms before they collapse.
Snowe has outlined two main concerns about the current version of the bill, including a proposed $50 billion fund to be used in liquidating distressed financial firms and restrictions on community banks that engage in certain types of small-business lending.
"There are some concerns about the legislation, and I want to make sure they're addressed," Snowe said. But she added: "We're not going to have unanimous support for this legislation."
Brown said he voted "no" Monday to allow the Senate banking committee's chairman, Christopher J. Dodd (D-Conn.), and the panel's ranking Republican, Sen. Richard C. Shelby (Ala.), more time to rewrite several major provisions. "People want this area addressed," Brown said. "They don't want to have problems like they had before, including me."
But even as Reid pledged to hold vote after vote, some Democrats warned privately that the strategy could backfire if he appears to be short-circuiting negotiations. Snowe and Brown, along with other GOP lawmakers, complained that the Monday vote was premature.
"It's clear that they're trying to score political points," Brown told reporters after the vote.
Nelson said he had opposed starting debate on the bill because he objected to consumer-protection provisions that could harm "Main Street businesses" back home, including dentists, whose patients often borrow to finance major procedures that their insurance policies don't cover, and auto dealers.
But after talking with Nelson, Dodd said, "Dentists and auto dealers did not come up."
Instead, Dodd said, Nelson had spoken with him about making a change to the derivatives portion of the bill. Nelson favored including a provision that would exempt owners of existing derivatives contracts from having to post additional collateral, as required in the legislation.
This requirement could force companies that use derivatives to set aside large sums of money to cover possible losses, and these set-asides could eat into profits by depriving the firms of resources they could use in another way. Critics of the requirement say firms should not have to redo existing contracts.
Dodd said he was not willing to insert the exemption Nelson wants in his bill.
In the latest Washington Post-ABC News poll, respondents were evenly split on President Obama's handling of financial regulation, with 48 percent of those polled approving of his performance and 48 percent disapproving.
But compared with congressional Republicans, Obama has a clear advantage. A slim majority -- 52 percent -- of Americans said they trust Obama over the GOP on the issue; 35 percent favored congressional Republicans. Independents preferred Obama by 47 to 35 percent, with 16 percent trusting neither side on the issue.
Dodd and Shelby have said in recent days that they are on the cusp of a bipartisan agreement, and they have expressed optimism that further negotiations will end with consensus.
Shelby aides said Monday that although the two men have continued to talk by phone and meet periodically, their staff members have not met to hammer out specifics for more than a week.
"We need to be in a room, at the staff level, nailing down the language, and that's not happening," one Shelby staff member said. "They stopped talking to us."
To illustrate the work that remains, the aide said that if Dodd and Shelby "met today and resolved every issue, it would still take us days to get it all together."
Shelby aides repeated previous criticisms of the Democratic legislation and said Republicans probably would introduce their own version of the bill.
"We have been drafting an alternative approach since the very beginning," said one staff member, who like others spoke on the condition of anonymity to discuss the situation more frankly. "It may come to the point where Republicans decide, 'Let's just put out specifically what we're for.' That decision hasn't been made yet."
Aides declined to talk in depth about how a Republican alternative bill would differ from the legislation sponsored by Dodd. But they said it almost certainly would include language to overhaul the government-sponsored entities Fannie Mae and Freddie Mac.
Staff members on the Senate banking and agriculture committees huddled through the weekend with Obama administration officials to merge competing measures aimed at reining in the $600 trillion derivatives market. Derivatives are private contracts that allow traders to bet on the direction of the prices of stocks, commodities and other assets. Many companies also use such deals to lock in prices for goods, such as oil, which often fluctuate in value.
Dodd and Sen. Blanche Lincoln (D-Ark.), who chair the respective committees, said late Monday that an agreement had been reached. Key provisions put forth by Lincoln's committee remained largely intact, including a measure that could force big Wall Street banks to spin off their derivatives operations.
The bill also aims to increase transparency by requiring nearly all derivative contracts be traded in public on exchanges and approved by a separate body called a clearinghouse. In addition, the measure imposes a "fiduciary duty" on dealers, like the one required of investment advisers, to look out for the best interests of clients such as municipalities and pension retirement funds.
The legislation provides exemptions for commercial businesses and manufacturers that use derivatives to hedge risk, such as an airline seeking certainty on fuel prices. But Dodd and Lincoln said the bill gives regulators the authority to close loopholes so financial firms cannot claim exemptions. The two senators said the measure also gives regulators "broad enforcement authority" to punish bad actors.
In the latest poll, support for federal regulations of derivatives draws an even split, with 43 percent supporting federal regulation of the derivatives market and 41 percent opposing. Nearly one in five -- 17 percent -- express no opinion on the complicated topic.
Staff writers Renae Merle and Ben Pershing and polling director Jon Cohen contributed to this report.
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