In a letter to Attorney General Eric Holder sent Wednesday, 62 members of the House asked the Justice Department to begin a criminal investigation of Goldman Sachs and other firms that possibly committed fraud.
“If both global and domestic confidence in the integrity of the U.S. financial system is to be regained, there must be confidence that criminal acts will be vigorously pursued and perpetrators punished,” the House members, led by Rep. Marcy Kaptur (D-Ohio), wrote in the letter.
The Securities and Exchange Commission (SEC) filed a civil suit against Goldman Sachs on April 16 accusing it of securities fraud, accusing it of selling mortgage investments that it was betting would fail without telling its clients. Though these were first intended to protect Goldman from losses if the housing market soured, it created more of these securities over time to make large amounts of money as the market worsened.
Goldman earned a record $4.79 billion in the last fiscal quarter of 2009.
The SEC alleges that Goldman created the investments – known as collateralized debt obligations (CDOs) – and then bet on them based on the advice of John Paulson after paying him $15 million to devise such investments that were likely to decline.
Paulson, a hedge fund manager, also made $3.7 billion in 2007 from betting on the failure of the housing market. His fund later made $1 billion betting against the mortgage investments while two European banks lost that amount.
The SEC named only one individual in the suit – Fabrice Tourre, a Goldman vice president. In an email to a friend, he boasted that he started putting these trades together in 2007, when the market had begun to decline, calling himself “the fabulous Fab standing in the middle of all these complex, highly leveraged, exotic trades I created without necessarily understanding all of the implications of those monstrosities!!!”
At an Senate hearing Tuesday, Tourre said that he “categorically” denied the SEC’s claim.
In a statement, Goldman said the charges are “completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation.”
Earlier, the firm argued in a letter in its annual report that it did not intentionally sell securities it knew would fail. “We certainly did not know the future of the residential housing market in the first half of 2007 any more than we can predict the future of markets today,” the letter said. “We also did not know whether the value of the instruments we sold would increase or decrease.”
At the hearing, where Goldman officials were grilled for 11 hours, senators from both parties harshly criticized Goldman for its actions.
In Las Vegas, said Sen. John Ensign (R-Nevada), “people know the odds are against them. They play anyway. On Wall Street, they manipulate the odds while you’re playing the game.”
Referring to an email between two Goldman executives describing one investment that called it “one shitty deal,” Sen. Carl Levin (D-Michigan), the subcommittee chairman, repeatedly questioned one witness about it.
“Your top priority is to sell that shitty deal,” he said. “Should Goldman Sachs be trying to sell a shitty deal?”
The executive responded that he “didn’t use that term.”
Levin also called how Goldman sold its clients securities that its own employees derided while quietly betting against them a “fundamental conflict.”
“They’re buying something from you, and you are betting against it,” he said. “And you want people to trust you. I wouldn’t trust you.”
Lloyd Blankfein, CEO of Goldman, said in a pre-prepared statement, “We have been a client-centered firm for 140 years, and if our clients believe that we don’t deserve their trust we cannot survive.”
At the hearing, however, Blankfein fumbled when attempting to respond to Sen. John Tester (D-Montana). Earlier, four former Goldman traders were asked whether they worked for the firm or its clients; they responded that they were “market makers.”
After saying he wished he was “better [able] to explain it,” Blankfein said, “There are parts of the business where you’re a money manager, where you owe a duty to the client…. you have to know that the product you do delivers what they expect to have. But the markets couldn’t work if you had to make sure it was good for them.”
Statements from other Goldman officials also conflicted. Daniel Sparks, the former head of Goldman’s mortgage department, said, “I believe we have a duty to serve our clients.”
Tourre, however, said, “I do not believe we are acting as investment advisers for our clients.”
“I don’t know if Goldman has done anything illegal,” said Sen. John McCain (R-Arizona). “There’s no doubt their behavior was unethical and the American people will render a judgment as well as the courts.”