Goldman Sachs CEO defends actions, says investors got risk they sought in buying securities

Goldman CEO denies wrongdoing in crisis

WASHINGTON — The CEO of Goldman Sachs is testily defending his company’s ethics and business practices during the nation’s financial crisis, saying that customers buying securities from the investment house came looking for risk and that’s what they got.

Lloyd Blankfein told a Senate investigatory panel that clients wanted a security that would give them exposure to the housing market. He said that “unfortunately, the housing market went south very quickly … so people lost money in it.”

Blankfein was the final witness in a daylong hearing on Goldman Sachs’ behavior leading up to a government civil fraud charge earlier this month.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP’s earlier story is below.

WASHINGTON (AP) — Blistered by lawmakers for “unbridled greed,” Goldman Sachs executives on Tuesday unflinchingly defended their conduct and denied the huge Wall Street investment bank helped cause the near-meltdown of the nation’s financial system.

While the famous firm fights for its reputation, senators said the company’s behavior leading up to the financial crisis clearly demonstrated a need for stronger regulation, and Democrats hoped to use the daylong hearing to build support for legislation now before the Senate. Republicans have so far succeeded in blocking debate, but more test votes are expected.

The legislation would crack down on the kind of lightly regulated housing market investments that helped set off the crisis in 2007.

Through hours of testimony to a Senate investigative subcommittee, present and former Goldman officials disputed, sometimes testily, the Securities and Exchange Commission’s recent fraud allegations against the company.

They strongly denied that the firm cashed in on the housing crash by crafting a strategy to bet against home loan securities while misleading its own investors.

“I will defend myself in court against this false claim,” said Fabrice Tourre, a French-born 31-year-old Goldman trader who, along with the firm, was charged with civil fraud by the SEC. “I deny — categorically — the SEC’s allegation.”

Investors seemed unimpressed by the tough talk at the Capitol: Goldman’s stock rose $1.01 per share, to $153.04, on Tuesday, a day in which the Dow Jones industrials had their worst drop in nearly three months, down 213 points.

At the hearing, senators from both parties verbally pounded the Goldman executives, accusing them of financial gambling that helped nearly derail the entire U.S. economy.

“As we speak, lobbyists fill the halls of Congress, hoping to weaken or kill legislation aimed at reforming these abuses,” said Sen. Carl Levin, D-Mich., the panel’s chairman. “Wall Street is on the wrong side of this fight.”

Levin accused Wall Street firms of selling securities they wouldn’t invest in themselves. That’s “unbridled greed in the absence of the cop on the beat to control it,” he said.

At least in Las Vegas, said Sen. John Ensign, R-Nev., “people know the odds are against them. They play anyway. On Wall Street, they manipulate the odds while you’re playing the game.”

The SEC says Tourre marketed securities without telling buyers they had been chosen with help from a Goldman hedge fund client that was betting the investments would fail. The commission alleged that Tourre told investors the hedge fund, Paulson & Co., actually bought into the investments.

Tourre said he didn’t recall telling investors that.

Hour after hour, the executives stood their ground, rejecting accusations that Goldman helped fuel the financial crisis that plunged the country into recession, only acknowledging bad business judgments.

“We did not cause the financial crisis. … I do not think that we did anything wrong,” said Michael Swenson, who runs Goldman’s structured products group trading.

Tourre said: “I am saddened and humbled by what happened in the market in 2007 and 2008. … But I believe my conduct was proper.”

At times, the senators and the hearing’s witnesses, who have long marketed complex mortgage investments like collateralized debt obligations, seemed to struggle to explain themselves to the other side. The senators cast Goldman’s efforts to bet against securities as a contributor to the crisis. By contrast, the Goldman officials described their use of such trading tools as a way to reduce risks for the company and its clients.

In a brash January 2007 e-mail, Tourre had called himself “The fabulous Fab … standing in the middle of all these complex … exotic trades” that he had created “without necessarily understanding all of the implications of those monstrosities!!!”

Tourre told the panel: “I regret the e-mails. They reflect very bad on the firm and myself. I wish I hadn’t sent them.”

At one point, about a half dozen protesters entered the committee room, dressed in prison stripes with names on signs around their necks of Tourre and Goldman CEO Lloyd Blankfein, who was scheduled to testify late in the day.

“Fabulous Fab is not so fab when he takes from the poor,” the protesters spoke as a chorus before the hearing started. “We want to see these guys behind bars.” They quietly hissed at times during the testimony.

When the first panel of Goldman officials got up to leave, one of the protesters ran toward them and shouted questions. “You have no ethics, Fab,” the protester said. They later were taken out of the room by a Capitol Police officer.

Sen. Susan Collins of Maine, the top Republican on the panel, said Goldman officials were “celebrating the collapse of the housing market when the reality for millions of Americans is loss of homes and disappearing jobs.”

Sen. John McCain, R-Ariz., said that while there may not be proof that Goldman did anything illegal, a reading of e-mails from Goldman officials bragging about profiting from bets against the housing market showed “there’s no doubt their behavior was unethical and the people will render a judgment as well as courts.”

Levin pressed Daniel Sparks, the former head of Goldman’s mortgages department, on whether the company felt it had a moral obligation to disclose to clients that it was making side bets against the same investments it was selling them.

Sparks said clients “should look at the assets themselves” that make up the mortgage-based securities they are buying. “Clients who did not want to participate in that deal did not,” he said of one particular transaction.

Levin shot back: “I don’t think you want to answer. You’re not going to answer the question, it’s obvious.”

Levin also asked Sparks about a $1 billion product called Timberwolf that Goldman sold to investors while betting against it. Levin cited an e-mail sent to Sparks from another Goldman executive using an expletive to describe Timberwolf as “one s—-y deal.”

“Your top priority is to sell that s—-y deal,” Levin said. “Come on, Mr. Sparks, should Goldman Sachs be trying to sell a s—-y deal?”

“I didn’t use that term,” the Goldman executive responded.

Blankfein, Goldman’s CEO, said in his prepared testimony that Goldman didn’t bet against its clients — and can’t survive without their trust.

Blankfein repeated the company’s assertion that it lost $1.2 billion in the residential mortgage meltdown in 2007 and 2008 that touched off the financial crisis and a severe recession.

He also argued that Goldman wasn’t making an aggressive negative bet — or short — on the mortgage market’s meltdown.

“We didn’t have a massive short against the housing market, and we certainly did not bet against our clients,” Blankfein said. “Rather, we believe that we managed our risk as our shareholders and our regulators would expect.”

Goldman has fought back against the fraud charges with a public relations blitz aimed at discrediting the SEC’s case and repairing the bank’s reputation. Some big clients are publicly backing the firm. But its stock has yet to recover from the fall that followed the SEC lawsuit on April 16.

Associated Press writers Stevenson Jacobs in New York and Jim Kuhnhenn and Michael Sandler in Washington contributed to this report.