A U.S. senator probing America's 2008 financial crisis says one of the nation's best-known investment houses marketed complex financial products to clients, while investing in instruments that would rise in value if those very same products failed. Democratic lawmakers seek to advance a bill to overhaul the U.S. financial industry after a crisis that accelerated the nation's plunge into economic recession and led to massive government bailouts of the private sector.
Investment firm Goldman Sachs, already facing charges of fraud by U.S. financial regulators, now finds itself targeted by a Senate investigative panel probing the actions of financial firms leading up to the 2008 crisis. On the eve of testimony by Goldman Sachs executives before Senate Permanent Subcommittee on Investigations, Chairman Carl Levin of Michigan gave a preview of evidence the government has collected against the firm, and laid out allegations the executives will be called on to answer.
Wielding copies of hundreds of emails between Goldman Sachs executives, Levin painted a picture of an investment house packaging and selling financial products tied to a risky segment of America's home mortgage industry.
The emails seem to show that beginning in 2007, Goldman Sachs lost confidence in the profitability of those financial products, but continued to market them while simultaneously placing bets that the products would plummet in value.
Levin said that when America's housing market declined and mortgage defaults soared, Goldman Sachs reaped huge returns while many of its clients - from individual investors to universities and other institutions - faced financial ruin.
"The evidence shows that Goldman Sachs helped build and operate a conveyor belt that fed toxic mortgages and mortgage securities into the financial system," said Carl Levin. "It then made large bets against the market that it helped create, reaping the profits from it. In doing so, it sold to its clients products it clearly no longer believed in."
Levin said the subcommittee's goal is to uncover facts, not to assess the legality of Goldman Sachs' alleged actions. He stressed that Goldman Sachs was not the only financial firm to engage in questionable dealings surrounding high-risk mortgages.
"The ultimate harm here is not just to the clients that were not well-served by their investment bank," he said. "The harm here is to all of us. The toxins that Goldman Sachs and others helped inject into our financial system have done incalculable harm to people who have never heard of a 'synthetic CDO' [a financial security that manages the risk that an obligation will not be paid] and have no defenses against the harm that such exotic Wall Street creations can cause."
Goldman Sachs has denied wrongdoing and pointed out that in some transactions involving high-risk mortgage products, it too lost money.
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Levin spoke as fellow Democrats worked to bring a financial reform bill to the Senate floor for debate. The legislation seeks to boost consumer protections in the financial industry, strengthen regulation and oversight of financial firms, limit the risk-taking ability of banks and other institutions and establish a procedure for the federal government to liquidate insolvent financial corporations.
The bill faces opposition from Republicans, who say it would give the federal government leeway to authorize future financial bailouts, and that it does not mandate preemptive action to break up institutions that are so large that, if they were to fail, could cripple the national economy.