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04.27.10

The Hearing From Hell

Grandstanding senators squared off against smug and evasive bankers. Tunku Varadarajan on how Goldman Sachs’ sorry performance on Capitol Hill proves Wall Street is on another planet.

Grandstanding senators squared off against smug and evasive bankers. Tunku Varadarajan on how Goldman Sachs’ sorry performance on Capitol Hill proves Wall Street is on another planet. Plus, watch the top moments from the hearing.

Piece of crap. Shitty deal. Junk.

These distinctly un-senatorial words slopped forth repeatedly from the mouth of Carl Levin on Monday evening, and anyone tuning into the Senate subcommittee hearing on financial reform could be forgiven for wondering whether this could really be C-Span, and not HBO or Showtime. Our political rituals, usually decorous and borderline-prissy, are seldom as coarse as this, and Levin’s performance alone (while not always enlightening) was worth the price of admission.

On the national stage was a cast from Goldman Sachs, facing an inquisition from a group of senators led by the bristling, frothing Levin. At one point in the late evening, an exchange between Levin and Lloyd Blankfein, the CEO of Goldman, was best characterized as scatology versus sophistry. The senator made liberal use of words (“shitty,” “crap,” “crappy”) gleaned from internal Goldman emails that described the quality of CDOs the firm was offering for sale to investors; while the CEO bunted these fecal fastballs with a defense that was too punctiliously tailored to win favor with an American public that wants an apology in plain English.

The gulf between ordinary Americans and those who work on Wall Street will have seemed vast, and not merely in terms of the amounts of money that the latter make.

Overall, the spectacle was depressing: There were grandstanding senators, no one more so than Levin (though John McCain, too, was shockingly mediocre, a cut-price populist who’d failed to do his homework on the subject); and evasive bankers who were sometimes smug, sometimes obsequious, and always unlikeable.

The two sides, for the most part, talked past each other. The senators were intent on establishing that Goldman operated with an unconscionable conflict of interest in the manner in which it conducted its CDO business. Blankfein & Co. was adamant that there was no conflict at all. Again and again the question was posed, by Levin, by McCain, by Claire McCaskill, Susan Collins, Ted Kaufman and Mark Pryor. The question took many forms, but always hit the same theme: Do you have the responsibility to a client when you have an interest adverse to that of the client? Can you sell to a customer, and then bet against him? When people buy securities from Goldman, does Goldman tell them that they’re going to short those securities?

Watch Highlights from Goldman’s Testimony

Wall Street Shrink Doug Hirschhorn: Inside Blankfein’s Head
Or, as Levin put it, “Does the customer have the right to assume that when you put your imprimatur on [a security], you don’t think it’s junk, you don’t think it’s crap, you don’t think it’s shitty?”

What most Americans watching would have found most distasteful—what most Americans watching would have found most immoral—was the answer they heard to all of these questions: Goldman believes that there is no conflict in play here, no obligation to disclose adverse interest to client, and certainly no right to assume that a Goldman imprimatur confers anything.

The recent SEC complaint against Goldman is that the firm defrauded purchasers of certain synthetic CDOs to whom it did not disclose that the entity that put the product together was betting that it would tank; this, the SEC, says, was “material” information, and its nondisclosure was illegal under Rule 10-b-5 of the Securities Exchange Act of 1934.

But here’s what Blankfein had to say about the matter, in the course of denying that there was any duty to disclose any more information to investors than Goldman did: “We are principals. The act of selling something means that we are the other side of what our clients want to do. They own it, we don’t.”

By which he meant, of course, that having sold the product—by touting its virtues—Goldman owed no fiduciary duties to the new owners of that product. “In the context of market-making,” Blankfein explained, “that is not a conflict. We gave them the risk they wanted...The unfortunate thing is the housing market went south very quickly. But the security itself delivered the particular exposure [to risk] that the client wanted to have.” Take that away, America, and do with it what you will.

Blankfein was serene when he said all this, certain that Goldman was entirely within the rules. And this is where there is a chasm between what the law permits—or would appear to permit—and what most Americans would regard as morally correct behavior. Earlier in the hearings, a quartet of Blankfein’s peons, the guys who put the CDOs together, had made similar assertions. Sen. Susan Collins had asked a simple question: “ Did you have a duty to act in the best interests of your clients.” The responses were telling in their casuistry, their amorality, their evasiveness.

Daniel Sparks (Former Partner, Head of Mortgages Department): “ I have a duty to act in a very straightforward way, a very open way, with my client…

Sen. Collins (repeating the question): “Did the firm expect you to act in the best interests of your clients, as opposed to the best interests of your firm?”

Sparks: “ I believe we have a duty to serve our clients well…

Michael Swenson (Managing Director, Structured Products Group Trading): “ I believe it’s our responsibility as market-makers to provide a market-level bid and offer it to our clients…

Fabrice “Fab” Tourre (Executive Director, Structured Products Group Trading): “ I believe we have a duty to serve our clients…to show prices to our clients, to offer them liquidity.

Sen. Collins (sounding exasperated): “ Should Congress impose a clear fiduciary obligation to act in your clients’ interests on broker-dealers?

Joshua Birnbaum (Former Managing Director, Structured Products Group Trading): “ Conceptually, that seems like an interesting idea.

So it was no surprise when Blankfein said, at the tail end of a very long day, that “as I heard it, everything [Goldman did] sounds correct.” As the American people heard it, by contrast, everything Goldman did will have sounded most disconcerting. The gulf between ordinary Americans and those who work on Wall Street will have seemed vast, and not merely in terms of the amounts of money that the latter make. On questions of morality, the hearings prove that the two sides inhabit entirely different planets. Wall Street, surely, will have to return to earth—with Blankfein and Goldman leading the way. One hopes they will lose in court, but if they settle, may the punitive clobbering be profound—and cathartic.

Tunku Varadarajan is a national affairs correspondent and writer at large for The Daily Beast. He is also a research fellow at Stanford’s Hoover Institution and a professor at NYU’s Stern Business School. He is a former assistant managing editor at The Wall Street Journal. (Follow him on Twitter here.)