Goldman Sachs Chairman and CEO Lloyd Blankfein gestures during his testimony before the Senate Homeland Security and Governmental Affairs Investigations Subcommittee hearing on ''Wall Street and the Financial Crisis: The Role of Investment Banks'' on Capitol Hill in Washington April 27, 2010.
Senator Carl Levin sparred with Goldman Sachs Group Inc Chief Executive Lloyd Blankfein over whether the investment bank was conflicted when it sold securities to clients and then shorted them.
Blankfein seemed puzzled by the line of questioning at a Senate Permanent Subcommittee on Investigations hearing. Levin seemed frustrated that Blankfein did not acknowledge that a firm may be conflicted if it is selling securities and betting on their demise at the same time.
Below is an abridged transcript of part of their sparring at the hearing:
Levin:
"We've heard in earlier panels today example after example where Goldman was selling securities to people and then not telling them that they were taking and intended to maintain a short position against those same securities. I'm deeply troubled by that, and it's made worse when your own employees believe that those securities are 'junk' or 'a piece of crap' or a 'shitty deal,' words that emails show your employees believe about a number of those deals.... Now there's such a fundamental conflict it seems to me when Goldman is selling securities, which particularly when its own people believes they are bad items... Given that kind of a history... how do you expect to deserve the trust of your clients, and is there not an inherent conflict here?"
Blankfein:
"...Our clients' trust is not only important to us, it's essential to us, it is why we are as successful a firm as we are and have been for 140 years. We are one of the largest client franchises in market making in the kinds of activities we're talking about now, and our client base is a pretty critical client base for us, and they know our activities, and they understand what market making is."
Levin:
"Do you think they know that you think something is a piece of crap when you sell it to them and then bet against it, do you think they know that?"
Blankfein:
"I want to make one thing clear... the act of selling something is what gives the opposite position of what the client has. If the client asks us for a bid, and we buy it from them, the next minute we own it and they don't... we can cover that risk, but the nature of the principal business in market making is that we are the other side of what our clients want to do."
Levin:
"When you sell something to a client, they have a right to believe that you want that security to work for them. In example after example... we're talking about betting against the very thing you're selling, without disclosing that to that client. Do you think people would buy securities from you if you said, 'you know, we want you to know this, we're going to sell you this, but we're going out and buying insurance against this security succeeding. We're taking a short position'... That's a totally different thing from selling a security and no longer having an interest in it... Is it not a conflict when you sell something to someone, and then are determined to bet against that same security, and you don't disclose that to the person you're selling to?"
Blankfein:
"In the context of market making, that is not a conflict. What clients are buying... is they are buying an exposure. The thing that we are selling to them is supposed to give them the risk they want. They are not coming to us to represent what our views are. They probably, the institutional clients we have, wouldn't care what our views are, they shouldn't care. We do other things at the firm... where we are fiduciaries."
Levin:
"And that's the part that's very confusing to folks..."
Blankfein:
"I know."
Levin:
"...because they think you're fiduciaries."
Blankfein:
"Not in the market making context."
Levin:
"Yeah but they are not told that not only are you not a fiduciary, you are betting against the same security that you are selling to them, you don't disclose that. That's worse than not being a fiduciary. That's being in a conflict of interest position."
Blankfein:
"The markets work on transparency with respect to what the item is. It doesn't carry representations of what a position the seller has. Just think of buying from... a stock exchange, or a futures market. You don't even know, you're not even supposed to know who's on the other side. You could have the biggest mutual fund in the world selling all its position in something, they could hate it. You would never know that if you were a buyer of a stock... Liquidity in the market demands transparency that the thing is supposed to do what it is supposed to do. The people who were coming to us for risk in the housing market, wanted to have a security that gave them exposure to the housing market, and that's what they got. The unfortunate thing... is that the housing market went south very quickly... and so people lost money in it. But the security itself delivered the specific exposure that the client wanted to have."
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