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Senate panel says Goldman inflated housing bubble

WASHINGTON: The conduct of Goldman Sachs Group Inc during the financial meltdown was assailed on Tuesday, April 27, by a US Senate panel, which accused the Wall Street powerhouse of inflating the housing bubble earlier this decade and then profiting from its collapse in 2007.

Goldman Sachs officials -- facing accusations that they had hurt clients, lenders and the overall economy -- sought to defend themselves in the firm's biggest showdown with the government since it became a public company a decade ago.

Fabrice Tourre, the sole Goldman employee charged in a government fraud lawsuit against the firm, said in testimony that he did not hide material information from clients.

Senior managers also said they were not prescient about the housing market, just diligent about limiting its risk.

The subcommittee, examining the causes of the financial crisis, launched a broad fusillade against investment banks.

Goldman helped to package toxic mortgages into bonds for fees from 2004 to 2007, and then repackaged those bonds into complex securities known as collateralised debt obligations, magnifying the risk from the mortgages, the subcommittee said.

Goldman Sachs then shorted the mortgage market, betting on its decline throughout 2007. It did not disclose its position to clients, the subcommittee said, and sold securities it wanted to get off its books to clients.

The subcommittee also pointed to a particular trade in which Goldman failed to disclose key information to a ratings analyst and investors. The Securities and Exchange Commission (SEC) charged Goldman with civil fraud for the same transaction, known as "Abacus 2007-AC1".

"Goldman's actions demonstrate that it often saw its clients not as valuable customers but as objects for profits," said Senator Carl Levin, chairman of the Permanent Subcommittee on Investigations. "Its conduct brings into question the whole function of Wall Street," Levin said.

In a packed hearing room, the Goldman officials looked impassively as politicians vilified them.

When Senator Claire McCaskill accused Goldman officials of gambling with little oversight, three of the four witnesses briefly looked down into their laps.

The SEC sued Goldman and Tourre on April 16.

It contended that Goldman had failed to tell investors that it had allowed the hedge fund firm Paulson & Co to choose securities for the Abacus 2007-AC1 transaction.

Paulson was betting that the securities would fall in value, and thus wanted the Abacus deal to generally founder.

Paulson & Co is believed to have made US$1 billion (RM3.19 billion) from the transaction, roughly the same amount lost by investors including bond insurer ACA and German bank IKB. -- Reuters

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