Thursday 25 May 2017

Senate panel says Goldman misled its clients on CDOs

Investment bank built short positions before the US housing market collapsed

US senator Carl Levin. Photo: Getty Images
US senator Carl Levin. Photo: Getty Images

Phil Mattingly and Clea Benson

Goldman Sachs designed, marketed and sold collateralised debt obligations (CDOs) that misled investors and created conflicts of interest as the company built short positions before the US housing market collapsed, a US Senate panel has said in its report on the financial crisis.

In the case of one CDO, Hudson Mezzanine Funding 2006-1, Goldman Sachs told investors its interests were aligned with theirs while the firm held 100pc of the short side, according to the report released yesterday by the senate's Permanent Subcommittee on Investigations.

Senator Carl Levin, the Michigan Democrat who leads the panel, urged regulators to review all of the structured finance transactions described in the report.

At a briefing yesterday, Mr Levin said he believed Goldman Sachs executives weren't truthful about the company's transactions in testimony before the subcommittee at an April 2010 hearing. He said he would refer the testimony to the Justice Department for possible perjury charges. "In my judgment, Goldman clearly misled their clients and they misled the Congress," Mr Levin said.

In a statement, Goldman Sachs denied the allegation.

"The testimony we gave was truthful and accurate and this is confirmed by the subcommittee's own report," said Lucas Van Praag, a company spokesman.

"The report references testimony from Goldman Sachs witnesses who repeatedly and consistently acknowledged that we were intermittently net short during 2007.

"We did not have a massive net short position because our short positions were largely offset by our long positions, and our financial results clearly demonstrate this point."

With the report, the senate panel completes a two-year investigation of mortgage firms, federal regulators and Wall Street banks highlighted by the expletive-laden interrogation of Goldman Sachs executives, including chairman and CEO Lloyd Blankfein, a year ago this month.

"Our investigation found a financial snake pit rife with greed, conflicts of interest, and wrongdoing," Mr Levin told reporters yesterday.

Failures

Mr Levin and Senator Tom Coburn of Oklahoma, the panel's top Republican, held four public hearings on the financial crisis last year, examining regulatory failures, the collapse of Washington Mutual, the role of credit-rating firms in fuelling bets on high-risk debt and the business practices of Goldman Sachs and rival investment banks.

The report comes less than a year after Goldman Sachs paid $550m (€380m) to resolve Securities and Exchange Commission claims that it misled investors in a CDO and its executives were called to testify before two congressional panels and a commission formed to probe the worst financial crisis since the Great Depression.

The senate report also faults Deutsche Bank, saying the Frankfurt-based company created a $1.1bn CDO with assets that its traders referred to as "crap" and then attempted to sell "before the market falls off a cliff". The subcommittee urged regulators to "identify any violations of law" in the investment-bank transactions described in the report.

Meanwhile, the cost to protect debt issued by Goldman Sachs jumped to a one-month high after the release of the report. Credit-default swaps (insurance) on the New York-based company climbed 5.6 basis points to 116.9 basis points in New York, according to data provider CMA. That's the highest level since 118.1 basis points on March 17.

Irish Independent

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