WASHINGTON — A day after Lloyd Blankfein, the chairman and chief executive of Goldman Sachs, characterized as "improper" his firm's practice of betting that securities it was selling as safe would plummet in value, the company denied he said that to the Financial Crisis Inquiry Commission.
The following is the full Goldman statement and a transcript of Blankfein's remarks.
Goldman Sachs Clarifies Various Media Reports of Aspect of FCIC Hearing
NEW YORK, January 14, 2010 — The Goldman Sachs Group, Inc. (NYSE: GS): Today certain media reports have erroneously stated that, during testimony at the Financial Crisis Inquiry Commission in Washington, D.C. yesterday, Lloyd Blankfein said Goldman Sachs' practices with respect to the sale of mortgage-related securities were "improper." Mr. Blankfein said no such thing.
Mr. Blankfein was responding to a lengthy series of statements followed by a question that was predicated on the assumption that a firm was selling a product that it thought was going to default. Mr. Blankfein agreed that, if such an assumption was true, the practice would be improper. Mr. Blankfein does not believe, nor did he say, that Goldman Sachs had behaved improperly in any way.
In fact, his answer to the various statements explained the market making function and how our practices were entirely appropriate. As he stated in his testimony, the firm could not have known the future direction of housing prices.
The transcript of Blankfein's testimony on Wednesday:
PHIL ANGELIDES (the commission chairman): I want to ask you about a very specific instance as a way of getting to how things worked and how things might be changing in the future . . . And it appears, at least according to public documents and other reports, that you may have simultaneously betted against securities you sold to clients. According to the reports, you sold about $40 billion in 2006, 2007. In December 2006, you came to the conclusion the mortgage was heading south and you began to reduce your own positions. And many of the securities that you sold to institutional investors went bad within months of issuance. Now one expert in structured finance said, "The simultaneous selling of securities to customers and shorting them because they believe they are going to default is the most cynical use of credit information I've seen."
Do you believe that was a proper legal, ethical practice? And would the firm continue to do that practice? Or do you believe that's the kind of practice that undermines confidence in the marketplace?
LLOYD BLANKFEIN: Well, the way it's . . . let me . . . the short answer is this is the practice of a market maker. And I would like to explain this. 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, but I just want to explain — and this is a very important — and I appreciate the opportunity to do this because there's so much press swirling around this that I really want — I really need to explain . . .
When we sell something as a principle — which is what we are as a market maker — the next minute, that item will have gone up — in which case we'll wish we hadn't sold it that minute — or it will go down — in which case we'll actually be glad we did for own P&L and sorry for the person who bought it. We are market makers in that. In most of these cases, the person who came to us came to us for the exposure that they wanted to have.
ANGELIDES: But Mr. Blankfein, you are actually creating this securities. And let me just tell you, as someone who's been in business for half my career, the notion that I would make a transaction with you and then the person with whom I made that transaction would then bet that that transaction would blow up is inimical to me.
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