Tuesday's Senate Hearings On Goldman Sachs

Tuesday's post, written midday, didn't take into account the later appearances of Goldman Sachs' CFO, as well as its CEO, Lloyd Blankfein.

By now, some of the shock of the day-long hearings featuring former and current Goldman Sachs employees of varying degrees of seniority has worn off. For me, several things seem clear through the calmer hindsight of the Senate hearings.

First, the Goldman employees were very well coached and, being very intelligent, did an amazing job of both carefully responding to over-reaching, deliberately entrapping questions, plus a few of them actually adapted to the questions over time, becoming increasingly more adroit at finding ways to make positive statements either about Goldman's role or actions, or the process of the securities markets in which the actions took place.

Second, the Senators themselves behaved differently toward more senior Goldman officials. By the time Blankfein appeared, well into the evening, after markets had closed, Senators were going out of their way to give him the benefit of the doubt in answering their questions. Nobody bullied nor attacked Blankfein the way they had lower-level employees, such as Swenson, Sparks and Birnbaum, earlier that day.

Third, the entire context and process of such a Congressional investigation sub-committee hearing should give any business person pause about doing other than relying on fifth amendment protections when appearing, as ordered.

For example, Carl Levin used a particularly obnoxious tactic. He would ask a heavily-contexted, detailed question about a single exhibit from a book literally several inches thick which had been provided to each Goldman witness. When any, which is to say, all, of the Goldman employees would either take time to verify the proper exhibit, or ask a clarifying question, Levin would explode with anger, declaring that the witness was either simply wasting time, in order to 'run out the clock,' or deliberately avoiding giving a direct response.

Never mind that Levin would often ask questions, the answers to which were simply not within the capability of the witnesses to answer with known veracity. Knowing they were under oath, and that their testimony could be used in civil and criminal legal actions, each Goldman witness had to allow themselves to become whipping boys and appear guilty of whatever behavior of which a Senator decided to accuse them. Most Senators would end their question time with a non sequitor, constituent-oriented summary statement which typically accused Goldman's actions of rendering 'millions' of either US residents or their constituents homeless, penniless and jobless.

Fannie Mae and Freddie Mac were never, of course, mentioned by any Senator of either party, at least while I watched.

The very nature of these investigations leaves business people looking guilty of something, if only attempting to be profitable during whatever crisis may have been occurring. It's a near-perfect coincidence of defenseless business witnesses and omnipotent politicians who control the agenda. There is simply no way any witness from a business which Congress has decided to crucify is going to be able to leave an impression of innocence in that venue.

Finally, despite all the posturing, biased and wrongly-framed questions, and other tricks calculated to make Senators look serious and concerned, even crusading for 'the truth,' and Goldman and its employees look guilty of something, if not clearly anything actually illegal, a few things did become clear.

First, despite Blankfein's insistence that the firm went public reluctantly, and only to remain competitive, much of the root of Goldman's current predicament stems from its going public, then skating to the edge of solvency, and, then, falling upon the Fed to allow it to become a chartered commercial bank, and taking TARP funds.

Much of what transpired Tuesday would have been unremarkable had Goldman been either, or both, a privately-owned investment bank and had not taken TARP funds.

In discussions with a colleague yesterday, I noted that Blackstone did not need a TARP-funded bailout.

I suspect much of Goldman's conflicts of interest, due to their proprietary activities, will not be avoidable without the firm splitting itself into pieces, so that underwriting and proprietary activities aren't co-domiciled. That said, there will always be sophisticated counterparties and even underwriting clients who don't have problems with Goldman's internal conflicts of interest. Those firms are capable of making their own decisions regarding risks and positions with respect to all manner of asset classes.

Rather, it is most likely a large group of less-sophisticated clients, including, perhaps, many state and municipal entities, which will now shy away from Goldman Sachs.

In any case, Goldman has not just a public relations problem to manage, but a real problem of conflicts to manage. Not conflicts among clients who may be competitors, both of whom for which Goldman Sachs wants to do underwriting or advisory work.

No, the conflict is that, on one hand, Goldman may represent the firms to the market, underwriting their securities, while, in proprietary activities, explicitly selling the same securities which another part of the firm is soliciting the firm's clients to purchase.

There's no way even Lloyd Blankfein can convince most of America that this is a viable combination. He can talk until he's blue in the face about how clients wish to purchase risk and take positions opposite those of Goldman. But that won't convince most people that Goldman's mix of businesses puts it in a position to, quite often, sell from its own account, because of a belief that the value of an instrument has peaked, that which it is, elsewhere, convincing its clients to purchase and hold.

The Senators' grilling of the various Goldman employees may well be the most extreme example of hard questions regarding Goldman's actions. They may have been over the top, poorly-framed, asked from positions of near-total lack of understanding of the businesses involved.

But the questions did raise discomforting issues for Goldman. Being exposed for selling securities which were thought, internally, to be of poor quality, just looks very bad, and is hard to explain.

Clearly, per yesterday's lead staff editorial in the Wall Street Journal, regulatory 'reform' can't seriously require underwriters or brokers of securities to guarantee that the value of those securities will rise.

But it's hard to see how such reform won't, and probably shouldn't, attempt to force underwriters to disclose opinions about the quality of the securities. Perhaps requiring all underwriters to hold some minimal percentage of the securities for a specified amount of time.

In the final analysis, Goldman Sachs brought the SEC suit and Senate investigation upon itself as a result of having run into the arms of the government for help in 2008. Having made that pact with the devil, it is now having to pay the price.

Perhaps, in retrospect, Goldman would have been better off filing for bankruptcy, as it faced imminent insolvency when credit lines would have been curtailed, in order to have had time to reorganize, restructure funding, and emerge in a better-financed condition.

There's no denying that the firm is now paying for its poor judgement in asking the federal government to rescue it when it was on the edge of collapse.