Now it's the Senate's turn to take on Goldman, Moody's

McClatchy NewspapersApril 19, 2010 

WASHINGTON — A special Senate panel over the next week will begin to unveil the results of yearlong inquiries into the roles of Goldman Sachs and credit ratings agencies such as Moody's Investors Service in the subprime mortgage meltdown.

The hearings, with Goldman Chief Executive Officer Lloyd Blankfein as a star witness, are expected to heighten pressure on Congress to adopt new curbs on risky Wall Street behavior.

The Permanent Subcommittee on Investigations announced the hearings Monday. Moody's executives are to appear at a hearing Friday on how risky mortgage securities won the top investment-grade rating, giving investors the false impression that they were safe.

Separately, California Attorney General Jerry Brown held a news conference Monday in Los Angeles to announce that he'd sought the help of the courts to force Moody's to comply with a subpoena he's issued.

The subcommittee will focus at an April 27 hearing on Goldman's sale of securities backed by subprime mortgages to borrowers with shaky credit, including its use of exotic instruments to insure them.

Three days after the Securities and Exchange Commission lodged a civil fraud suit against Goldman, the world's most prestigious investment bank, the developments intensified a media mania as Congress weighs whether to impose new rules on complex securities.

Bloomberg News reported that the SEC split 3-2 along party lines in deciding to file the civil suit, with the Democratic majority prevailing. A commission spokesman didn't respond to requests for comment.

The SEC suit alleges that Goldman allowed the hedge fund Paulson & Co. to heavily influence the selection of subprime loans in a $1 billion offshore deal without telling investors that Paulson would be wagering that the securities would default. Paulson reaped a $1 billion profit while the investors lost as much.

Goldman has denied the suit's allegations and vowed to vigorously contest it.

Fabrice Tourre, the young Goldman vice president who put together the deal and is named as a defendant in the suit, "remains employed with the firm, but he's decided to take some time off," company spokesman Michael DuVally said. Tourre has so far declined to comment publicly on the case.

The SEC formally notified Goldman last July that a civil suit was being considered, said a person familiar with the investigation who declined to be identified because of its sensitivity. Goldman said in public filings in the ensuing months that government agencies had requested information about its dealings in exotic securities like those described in the suit. The firm did not tell shareholders about the notice because company lawyers didn’t consider it to be "material," the individual said.

Goldman Sachs' secret bets.

In a related development, Reps. Elijah Cummings of Maryland and Peter DeFazio of Oregon, both Democrats, drafted a letter Monday asking SEC Chairwoman Mary Schapiro to investigate two dozen other deals marketed by Goldman in a series known as Abacus.

They said that seven of the deals were backed by insurance-like contracts with the American International Group — contracts that the government paid at full face value after rescuing the company in late 2008 — and asked the SEC to determine whether any of the money paid to Goldman was "fraudulently generated."

Meanwhile in California, Brown accused Moody's of refusing to explain how and why it gave its top ratings to complex securities that turned out to be junk. For seven months, he said, Moody's has ignored his office's subpoena and its interrogatories.

"They're not going to get away with it, that I promise you," said Brown, a Democrat and former two-term California governor who's running for that post again. "When you get an interrogatory from the attorney general, most law-abiding citizens say, 'Okay, I'll answer it.'"

In a statement late Monday, Moody's denied that it wasn't cooperating.

California's action isn't challenging the underlying merits of how particular pools of subprime mortgages got top ratings, Brown said. Instead, it seeks facts about who signed off on ratings for securities that failed to live up to the top billing.

"What did they know? When did they know it?" Brown said, adding that "we're going to take this as far as we have to, to get answers."

"Moody's has been working with the California Attorney General's office for many months to provide documents related to his previously announced investigation, and we are committed to continuing to do so," the company said Monday. "In fact, Moody's has already provided the Attorney General with tens of thousands of pages of documents in response to his requests, and we are continuing to provide additional materials."

How Moody's contributed to the economic collapse

California state officials are looking at the ratings agencies in connection with losses suffered by the state's pension fund, though Brown stressed that his probe was unrelated to that issue.

In March, Connecticut Attorney General Richard Blumenthal, a Democrat and a U.S. Senate candidate, sued Moody's and its competitor Standard & Poor's, alleging that they misled investors about the quality of securities backed by U.S. mortgages.

Friday's hearing includes Moody's Chief Executive Ray McDaniel, who's kept his job while other top Wall Street executives haven't. He's said little publicly about the deterioration of the securities given top ratings by his firm, but in a 2008 hearing by the House Oversight and Government Reform Committee, documents showed that he admitted to his board of directors that Wall Street investment banks such as Goldman pressured his firm into giving favorable ratings, acknowledging that sometimes the firm "drank the Kool-Aid."

ON THE WEB

Brown's complaint

Moody's response to subpoenas

Where was Moody's board when top-rated bonds blew up?

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