Goldman under investigation for its securities dealings

McClatchy NewspapersJanuary 22, 2010 

WASHINGTON — One of Congress' premier watchdog panels is investigating Goldman Sachs' role in the subprime mortgage meltdown, including how the firm sold securities backed by risky home loans while it simultaneously bet that those bonds would lose value, people familiar with the inquiry said Friday.

The investigation is part of a broader examination by the Senate Permanent Subcommittee on Investigations into the roots of the economic crisis and whether financial institutions behaved improperly, said the individuals, who insisted upon anonymity because the matter is sensitive.

Disclosure of the investigation comes amid a darkening mood at the White House, in Congress and among the American public over the long-term economic impact of the subprime crisis, prompting demands to hold the culprits accountable.

It marks at least the third federal inquiry touching on Goldman's dealings related to securities backed by risky home mortgages.

The separate, congressionally appointed Financial Crisis Inquiry Commission, which was created to investigate causes of the crisis, began holding hearings Jan. 13 and took sworn testimony from Goldman's top officer. In addition, the Securities and Exchange Commission, which polices Wall Street, is investigating Goldman's exotic bets against the housing market, using insurance-like contracts known as credit-default swaps, in offshore deals, knowledgeable people have told McClatchy.

Goldman, the world's most prestigious investment bank, has denied any improprieties and said that the use of "hedges," or contrary bets, is a "cornerstone of prudent risk management."

Asked about the Senate inquiry late Friday, Goldman spokesman Michael DuVally said only: "As a matter of policy, Goldman Sachs does not comment on legal or regulatory matters."

A spokeswoman for the Senate subcommittee declined to comment on the investigation, which was spawned by a four-part McClatchy series published in November that detailed the Wall Street firm's role in the debacle, which stemmed from subprime loans to millions of marginally qualified borrowers.

The subcommittee, part of the Homeland Security and Governmental Affairs Committee, is led by veteran Democratic Sen. Carl Levin of Michigan, who said last year that his panel was "looking into some of the causes and consequences of the financial crisis."

The panel has a history of conducting formal, highly secretive investigations in which it typically issues subpoenas for documents and witnesses, produces extensive reports and sometimes refers evidence to the Justice Department for possible criminal prosecution.

It couldn't immediately be learned whether the panel has subpoenaed Goldman executives or company records. However, the subcommittee has issued at least one major subpoena seeking records related to Seattle-based Washington Mutual, which collapsed in September 2008 after being swamped by losses from its subprime lending. J.P. Morgan Chase then purchased WaMu's banking assets.

Goldman was the only major Wall Street firm to safely exit the subprime mortgage market. McClatchy reported, however, that Goldman sold off more than $40 billion in securities backed by over 200,000 risky home loans in 2006 and 2007 without telling investors of its secret bets on a sharp housing downturn, prompting some experts to question whether it had crossed legal lines.

McClatchy also has reported that Goldman peddled unregulated securities to foreign investors through the Cayman Islands, a Caribbean tax haven, in some cases exaggerating the soundness of the underlying home mortgages. In numerous deals, records indicate, the company required investors to pay Goldman massive sums if bundles of risky mortgages defaulted. Goldman has said its investors were fully informed of the risks.

Federal auditors found that Goldman placed $22 billion of its swap bets against subprime securities, including many it had issued, with the giant insurer American International Group. In late 2008, when the government bailed out AIG, Goldman received $13.9 billion.

Goldman's chairman and chief executive, Lloyd Blankfein, appeared to acknowledge last week that the firm behaved inappropriately when he was asked about the secret bets in sworn testimony to the Financial Crisis Inquiry Commission.

Blankfein first said that the firm's contrary trades were "the practice of a market maker," then added: "But the answer is I do think that the behavior is improper, and we regret the result — the consequence that people have lost money in it."

A day later, Goldman issued a statement denying that Blankfein had admitted improper company behavior and said that his ensuing answer stressed that the firm's conduct was "entirely appropriate."

Senate investigators were described as having pored over Goldman's SEC filings in recent weeks.

Underscoring the breadth of the Senate investigation is the disclosure by federal banking regulators in a recent filing in the WaMu bankruptcy case.

In it, the Federal Deposit Insurance Corp. revealed that the Senate subcommittee had served the agency with "a comprehensive subpoena" for documents relating to WaMu, whose primary regulator was the Office of Thrift Supervision.

The subcommittee's jurisdiction is "wide-ranging," the FDIC's lawyers wrote. "It covers, among other things, the study or investigation of the compliance or noncompliance of corporations, companies, or individual or other entities with the rules, regulations and laws governing the various governmental agencies and their relationships with the public." The subpoena, they said, "is correspondingly broad."

The Puget Sound Business Journal first reported on the FDIC's disclosure.

Goldman's former chairman, Henry Paulson, served as Treasury secretary during the bailouts that benefitted the firm and while other Wall Street investment banks foundered because of their subprime market exposure, its profits have soared.

In reporting a $13.4 billion profit for 2009 on Thursday, the bank sought to quell a furor over its taxpayer-aided success by scaling back employee bonuses. It also has limited bonuses for its 30 most senior executives to restricted stock that can't be sold for five years.

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Check out McClatchy's politics blog: Planet Washington

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