Bailout

The Goldman hearings

By Felix Salmon

The Goldman Sachs hearings today are making for fascinating theater. The official Goldman statements are strong, especially that of Fabrice Tourre:

I never told ACA, the portfolio selection agent, that Paulson & Company would be an equity investor in the AC-1 transaction or would take any long position in the deal. Although I don?t recall the exact words that I used, I recall informing ACA that Paulson?s fund was expected to buy credit protection on some of the senior tranches of the AC-1 transaction. This necessarily meant that Paulson was expected to take some short exposure in the deal…

If ACA was confused about Paulson?s role in the transaction, it had every opportunity to clarify the issue. Representatives of Paulson?s fund participated directly in all of my meetings with ACA regarding the transaction. I do not ever recall ACA asking me or Paulson?s representatives if Paulson?s fund would be an equity investor. Indeed, ACA and Paulson had several discussions about the transaction and at least one meeting without any Goldman Sachs representatives present. Quite frankly, I am surprised that ACA could have believed that the Paulson fund was an equity or long investor in the deal.

As for the testimony of the rest of the Goldman executives, they’re all clearly singing from the same songbook: that although they might have been long at certain times and short at others, the main directive they were given was not directional, but was rather just to reduce the amount of risk on their books.

But in the actual hearings, the members of the Goldman mortgage desk are looking decidedly weak. They don’t answer questions, they keep on asking to double-check documents to run down the clock, they give narrow and unhelpful answers, and they generally act in a slippery and unsympathetic manner. Interestingly, Fabrice Tourre is the most straightforward and cogent of the lot.

I can see why it’s working out this way: the Goldman team has been briefed by their lawyers to be very careful about what they say, while the Senators are interested in grandstanding and scoring points.

Disappointingly, no one seems to have got any clarity on the biggest point of contention here. Goldman Sachs claims that it made less than $500 million on mortgages in 2007, while Senator Levin claims that it made $3.7 billion. That’s a big difference, and I’m not at all clear on how either of those numbers are calculated or which one is more reliable. Certainly a trade which made $3.7 billion wouldn’t come from an overarching strategy of trying to get “closer to home” at all times, as the Goldman executives are suggesting they did.

But whatever the truth of the matter is, these hearings are clearly bad for Goldman. Look over Fabrice Tourre’s right shoulder whenever he’s on camera: the other face in the frame is that of Goldman spokesman Michael DuVally. And it’s not a happy one.

Full post as published by Macroprudential on April 27, 2010 (boomark / email).