Blankfein and Levin Spar Over Goldman Sachs's Market Maker Role

Goldman Sachs Chairman and CEO Lloyd Blankfein and Senate subcommittee Chairman Carl Levin, D-Mich., sparred Tuesday afternoon over whether market makers should have a duty to disclose to clients whether the company was taking short positions on securities it sold to its customers.

Levin, chairman of the Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations, listed numerous examples of collateralized debt obligations sold by Goldman that emails showed Goldman employees thought were not good value.

"In a deal where you are selling securities and you are intending to keep the short side of that deal, which is what happened here in a lot of these deals, do you think you have an obligation to tell the person that you're selling that security to in that deal that you are keeping the short position in that deal?" Levin asked Blankfein.

On the Opposite Side of the Deal

"I don't think we would disclose that," Blankfein responded. The Goldman top executive argued that its position as a market maker puts it on the opposite side of clients. "If a client came to us and asked us to buy something from him and we intended to hold the long position, I don't think we have an obligation of telling him that our intention is to hold it."

As a market maker, Blankfein said, "We are buying from sellers and selling to buyers." In the context of market making, he said, "That is not a conflict." Buyers are looking for exposure, and they should mainly be concerned with whether the security they are being sold provides the exposure that they want, he said. "They wouldn't care what our views are" on the security they are buying, he said.

Levin insisted that the company has engaged in gambling.

"You're going out and getting a default swap," Levin said. "You are betting against the very security that you are selling to that person." The senator said he wants to ensure that the financial service reform legislation Congress is considering contains provisions to deal with such conflicts of interest by investment firms.

No Big Profits for Us, Senator

Goldman has been charged by the Securities and Exchange Commission with securities fraud for not disclosing to clients that it allowed hedge fund Paulson & Co. to choose securities in a CDO that Goldman sold. Paulson chose the securities so that it could short them.

Like the other six Goldman officials who testified before the subcommittee's hearing Tuesday -- which is to be the last of the panel's hearing on the causes of the financial crisis -- Blankfein insisted that Goldman Sachs didn't net large profits from shorting the housing market in 2006 and 2007, but was primarily trying to hedge its position to control its risk. He said it was impossible to predict with certainty what was going to happen in the housing market.

Members of the subcommittee also criticized Goldman officials for getting large bonuses. "The idea that Wall Street came out of this thing just fine, thank you, is just something that grates on people," said Sen. Ted Kaufman, D-Del.

Congressional Responsibility

But Sen. Tom Coburn, R-Okla., ranking minority member of the subcommittee, said that Congress also bears responsibility for not overseeing regulators who were supposed to be overseeing the securities marke

ts. "Congress is 90% responsible," he said.

Blankfein didn't come before the subcommittee until late in the afternoon. The panel grilled four Goldman executives, including

Executive Director Fabrice Tourre, for more than four hours about Goldman's collateralized debt obligation deals in which it took short positions for securities it sold to clients. Tourre was also charged in the SEC case.

When that panel finally disbanded after 3 p.m., some members of the audience, dressed in striped prison costumes, were escorted from the hearing room for being disruptive.