Lloyd Blankfein Testimony: Goldman Sachs Senate Hearing Preview

Goldman Sachs CEO Lloyd Blankfein will claim Goldman Sachs did not profit from the subprime mortgage crisis in his testimony before the Senate on Tuesday.
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(Goldman Sachs story updated for Monday trading losses; Senate, Goldman comments)

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CEO Lloyd Blankfein's testimony scheduled for a Senate hearing on Tuesday shows a Wall Street CEO trying to reach out to the U.S. public, but at the same time refusing to bow to the argument that Goldman Sachs profited from the subprime mortgage crisis that sank the U.S. economy.

Blankfein will describe the day of the Securities and Exchange Commission fraud charges against Goldman Sachs as "one of the worst days of my life" in his written testimony.

However, on the most important point -- the allegations made by the SEC -- Blankfein is set to defend his firm, particularly against the claims that Goldman Sachs made massive profits from shorting subprime investments. The claims that Goldman profited heated up over the weekend when emails were released by the Senate purporting to show that Goldman itself wrote about the profits it made.

Lloyd Blankfein, CEO of Goldman Sachs

"Much has been said about the supposedly massive short Goldman Sachs had on the U.S. housing market. The fact is we were not consistently or significantly net 'short the market' in residential mortgage-related products in 2007 and 2008. Our performance in our residential mortgage-related business confirms this. During the two years of the financial crisis, while profitable overall, Goldman Sachs lost approximately $1.2 billion from our activities in the residential housing market. We didn't have a massive short against the housing market and we certainly did not bet against our clients."

The written testimony from the Goldman Sachs CEO also chimes in on the issue of the bailout funds received by the big banks. Blankfein will say in his comments that Goldman repaid the bailout funds in full to an annualize rate of return of 23% for U.S. taxpayers.

The Goldman CEO testimony also attempts to make the subtle argument that Goldman is simply misunderstood by the American public. Blankfein will say, " Until recently, most Americans had never heard of Goldman Sachs or weren't sure what it did. We don't have banking branches. We provide very few mortgages and don't issue credit cards or loans to consumers."

Blankfein will make an effort in the testimony to respond directly to Goldman's poor public image, and will say, "I recognize, however, that many Americans are skeptical about the contribution of investment banking to our economy and understandably angry about how Wall Street contributed to the financial crisis."

Blankfein's comments, not surprisingly, stop short of admitting any wrongdoing, though, and try to spin the crisis as complexity beyond the ability of any one firm to pre-empt.

Blankfein will say to the Senate panel: "As a firm, we are trying to deal with the implications of the crisis for ourselves and for the system. What we and other banks, rating agencies and regulators failed to do was sound the alarm that there was too much lending and too much leverage in the system -- that credit had become too cheap. One consequence of the growth of the housing market was that instruments that pooled mortgages and their risk became overly complex. That complexity and the fact that some instruments couldn't be easily bought or sold compounded the effects of the crisis."

Goldman CEO Blankfein also will say in his prepared remarks: "Our risk management processes did not, and could not, provide absolute clarity; they highlighted uncertainty about evolving conditions in the housing market."

Over the weekend, U.S. Senator Carl Levin -- in charge of the Senate panel before which Goldman's CEO will testify on Tuesday -- began his attack on Wall Street's most profitable firm when his office released a series of emails that Senator Levin says show Goldman admitting to having profited from the subprime mortgage market collapse while clients of the investment bank lost a bundle.

Goldman's defense of its practices also began ahead of the Tuesday testimony, too, and in direct response to the decision by Senator's Levin's office to release the emails. Goldman Sachs issued a statement Sunday saying that Senator's Levin's office had "cherry-picked" the emails to release, and more or less, decided that Goldman Sachs was guilty before even holding a hearing.

In a statement accompanying the release of the emails, Senator Levin wrote, "Investment banks such as Goldman Sachs were not simply market-makers, they were self-interested promoters of risky and complicated financial schemes that helped trigger the crisis."

Goldman Sachs documents released on Sunday indicate that profits for the investment bank from shorting subprime investments from 2007 were dwarfed by losses in 2008.

"Goldman Sachs did not have access to any special information that caused us to know that the U.S. housing market would collapse," the investment bank wrote in an executive summary of its defense released on Sunday. Goldman indicated that it had losses of $1.7 billion in residential mortgage products in 2008.

Senator's Levin's written statement attached to the damning emails echoed comments he made on April 23, comments that had already been met by a written attack from a Goldman Sachs outside counsel, Lee Blalack of O'Melveny & Myers.

The Goldman outside counsel wrote to Levin last week, "The statement suggests that you and the subcommittee have already drawn conclusions about the conduct of Goldman Sachs...We strongly disagree with your statement at today's hearing and believe that, if we were provided an opportunity to respond to your specific findings, Goldman Sachs could produce to you information that establishes that your findings are incorrect."

Goldman Sachs was losing the short-term battle of propping up its share price on Monday. Goldman Sachs shares lost 3.4% on Monday, and trading in Goldman shares was at twice the normal level of 16 million shares traded. The Goldman Sachs closing price of $152.03 on Monday represented a one-day deterioration of $5.37. Last Friday, Goldman shares had closed at their then-lowest price, $157.40, since the SEC fraud charges were filed on April 16.

The Goldman Sachs testimony is scheduled to begin at 10 a.m. ET time on Tuesday.

The first panel will question Fabrice Tourre, the Goldman vice president at the center of the Abacus series of subprime CDOs; Michael Swenson, a managing director in Goldman Sachs's structured products group; and two former Goldman executives -- Daniel Sparks, who was head of the mortgage department; and Joshua Birnbaum, who was a managing director in the structured products group.

The second group of Goldman executives to appear before the Senate panel will comprise two heavy hitters - Goldman CFO David Viniar and chief risk officer Craig Broderick.

Goldman CEO Blankfein is scheduled to appear alone before the Senate panel in the final installment of "Goldman Goes to Washington."

Lloyd Blankfein's Congressional Testimony

-- Reported by Eric Rosenbaum in New York.

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