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"I Wouldn't Trust You"
Goldman Sachs CEO Lloyd Blankfein did his best to explain the firm's controversial trades in the mortgage market, but Senator Carl Levin and the other members of the Permanent Subcommittee on Investigations weren't buying it.
The issue, laid out in a civil fraud suit by the SEC, is whether Goldman was off base when it bet against mortgage securities that it issued at the height of the real estate bubble. Goldman took a short position against the securities, as did hedge fund manager John Paulson. Goldman didn't reveal to other clients that Paulson helped design the security and that he bet against it.
Blankfein argued that Goldman routinely sold securities that some of its 35,000 employees—bankers and analysts among them—didn't like. He explained that the firm had to bet against clients because that is what market makers do. If someone wants to buy a security, someone else has to sell, and that is often the market maker. "We are the other side of what our clients want to do," Blankfein said, appearing as the final witness in a day of hearings that began at 10 a.m. and extended into the evening. At times, it seemed as if most of Goldman's 35,000 employees were on the witness list.
Levin didn't buy it, insisting that there was a world of difference between routine market making and shorting a security that the firm constructed and was actively selling
"This isn't market making. You aren't just selling this stuff (to) people who walk in the door. You are making calls. You are marketing. You are not just selling from your inventory. That is not what I am talking about," Levin said.
"Are you not troubled by that?" Levin demanded. "And you want people to trust you? I would not trust you."
Blankfein stuck to his guns though, insisting that the company had no obligation to reveal its short positions. The argument didn't stick in the Senate hearings. Now the question is whether it will hold up in court as the SEC case moves forward.
Steve Rosenbush is the blogs/industry editor for Portfolio.com.
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