Current and former account managers at a major U.S. financial firm accused of fraud defended their actions on Tuesday at a contentious Senate hearing in Washington. The testimony came amid ongoing efforts to overhaul America's financial regulations after the 2008 crisis that struck an already-weakened U.S. economy and led to massive government bailouts of the private sector.
The U.S. economy might be rebounding from a severe recession, but aftershocks from the financial crisis continue to reverberate on Capitol Hill as Congress looks for ways to prevent a repeat of the 2008 economic crisis.
The Senate's Permanent Subcommittee on Investigations has a keen interest in Goldman Sachs -- one of America's best-known and largest investment houses.
At the start of Tuesday's hearing, subcommittee chairman, Democrat Carl Levin of Michigan, accused Goldman Sachs of packaging and selling financial products tied to risky home mortgages -- without disclosing that it was investing in financial instruments that would increase in value, if the mortage-backed securities failed.
"Its [i.e., Goldman Sachs'] misuse of exotic and complex financial structures helped spread toxic mortgages throughout the financial system. And when the system finally collapsed under the weight of those toxic mortgages, Goldman profited from the collapse. The firm's own documents show that while it was marketing risky mortgage-related securities, it was placing large bets against the U.S. mortgage market. Goldman did well when its clients lost money," he said.
All senators at the hearing expressed revulsion over Goldman Sachs' activities in the years leading up to the financial crisis.
Republican John McCain of Arizona called the firm's behavior "unethical." He said the financial giant would be judged by the American people as well as the nation's courts.
Lawmakers repeatedly asked current and former Goldman Sachs account managers how, in good conscience, they could sell products without telling company clients about the firm betting on their failure. "How do you view your responsibility? That is my question. If you have an adverse interest to your client, do you have a duty to disclose that to your client?," asked Senator Levin.
Republican Senator Susan Collins of Maine asked "Do you have a duty to act in the best interests of your clients?"
And Democratic Senator Mark Pryor of Arkansas. "Do you have a responsibility to disclose when you have an adverse interest to the client?"
At first, the former head of Goldman Sachs' mortgage department, Daniel Sparks, did not to answer directly. More than two hours into the hearing, he gave this response. "No. That is not something that is a responsibility of a market-maker, to tell your counter-parties, at all times, how you are positioned," he said.
Sparks and others on the panel seemed to dispute suggestions that their jobs entailed advising their clients on investments, viewing themselves instead as creators and vendors of financial products.
Another Goldman Sachs executive, Fabrice Tourre, put it this way. "I believe we have a duty to serve our clients, to show prices to our clients and to offer them liquidity. I do not believe we were acting as investment advisors for our clients," he said.
The federal government has accused Goldman Sachs of fraud and has named Tourre in the lawsuit. Tourre denied any wrongdoing. "I will defend myself in court against this false claim," he said.
America's once-booming housing market spawned numerous complex financial products tied to the mortgage industry. And these investments were sold to a wide range of institutions. When the housing market faltered, it triggered a wave of mortgage defaults. Investments tied to those mortgages plummeted in value, and many holders of those investments -- as well as firms that insured them -- faced financial ruin. Many of America's largest and best-known financial institutions collapsed, triggering a credit squeeze that accelerated the nation's plunge into a deep economic recession.