TUESDAY, APRIL 27, 2010

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Probe, suit force Goldman to defend actions in crisis

Senate subcommittee cites toxic investments and client betrayal

by Zachary A. Goldfarb

Most big Wall Street firms sold

investments that contributed to the financial crisis. And most suf- fered in the markets, with some forced out of business. But it’s Goldman Sachs, the bank that not only survived but prospered from the crisis, whose executives are being called before a congressional firing line Tues- day over accusations that the firm bet against the American home- owner, betrayed its clients and helped fuel the financial melt- down. Chief executive Lloyd C. Blank- fein and several current and for- mer deputies will answer ques- tions from the Senate Permanent Subcommittee on Investigations, which has concluded an 18- month probe of Goldman’s activ- ities. Like most other investment banks, the committee charges, Goldman turned high-risk loans into investments, then sold them to customers around the world. Unlike most others, however,

Goldman also profited by betting against the housing market as it began to falter and unloaded bad investments to other parties, ac- cording to the committee. Goldman says its strategy was guided mainly by a desire to hedge risks and avoid the costly fallout that hit other banks. The Senate panel’s findings — as well as a recent suit by the Se- curities and Exchange Commis- sion against Goldman for alleged- ly defrauding clients — raise the question of whether the bank’s actions moderated or magnified the financial crisis.

While it is no doubt true that

Goldman’s actions protected the firm, the Senate’s findings sug- gest they did so at the cost of oth- ers in the market. The panel is not charging that Goldman did anything illegal, but is looking to blame the firm for a role in the meltdown. “Goldman Sachs was slicing, dicing and selling toxic mort- gage-related securities on Wall Street . . . but its executives con- tinue to downplay the firm’s role in the financial engineering that blew up the financial markets,” said Sen. Carl M. Levin (D-Mich.), chairman of the subcommittee. “Goldman Sachs made billions of dollars from betting against the housing market, and it placed those bets in some cases at the same time it was selling mort- gage-related securities to its cli- ents. They have a lot to answer for.”

when it sold a specific mortgage- related investment to clients be- cause it did not disclose key infor- mation about the investment to the clients. Goldman disputes this. The second allegation is that

Goldman participated in activity that, although unregulated and legal, spread risk throughout the system and may have only been in the interests of the Goldman ex- ecutives earning fees. “Where does the right to en-

RICHARD DREW/ASSOCIATED PRESS

Lloyd Blankfein, chief executive of Goldman Sachs, will testify before a Senate panel.

In prepared testimony, Blank-

fein says the company was trying reduce its overall risk in the mort- gage market. He calls the filing of the SEC suit “one of the worst days in my professional life.” Blankfein says the firm never

“consistently or significantly net ‘short the market’ in residential mortgage-related products.” Internal e-mails, however, sug-

gest that the company’s actions to short, or bet against, the housing market yielded considerable profit.

A 2007 presentation by the

chief risk officer, Craig Broderick, says that “starting early in ’07 our mortgage trading desk started putting on big short positions . . . and did so in enough quantity that we’re netshort, and made money (substantial $$ in the 3rd quarter) as the subprime market weakened.” A summary of a Goldman board of directors meeting says that “although broader weakness in the mortgage market resulted in significant losses in cash posi- tions, we were overall net short the mortgage market and thus had very strong results.” An e-mail from a mortgage

trader named Fabrice Tourre urg- es his colleagues not to approach “sophisticated” hedge funds about selling them mortgage in- vestments because “they know exactly how things work.” Rather, Tourre suggested that

Goldman approach “buy-and- hold ratings-based buyers” who might not do as much research into the investment. Clients did not take well to Goldman’s suggestions.

An e-mail from an unnamed

Goldman employee to Daniel Sparks, head of the mortgage unit, says there is a “real bad feel- ing across European sales about some of the trades we did with clients. The damage this has done to our franchise is very signifi- cant.” The recent allegations facing

Goldman are twofold. The SEC al- leges that Goldman broke the law

Appeals court upholds right to sue Wal-Mart

Thousands of female workers claim discrimination

by Ylan Q. Mui

A federal appeals court ruled

Monday that thousands of female Wal-Mart employees can sue the world’s largest retailer as a single class over allegations that it paid them less than men and gave them fewer promotions. The 6 to 5 decision by the U.S.

Court of Appeals for the 9th Cir- cuit in San Francisco is the latest step in a nearly decade-long bat- tle to bring the case to trial. Wal- Mart said that it now plans to re- quest that the Supreme Court re- view the ruling. But attorneys for the women said they hope the case will go to trial by the end of the year.

“Our clients are determined to see this case through to its con- clusion,” said Joseph Sellers, a lawyer with Cohen Milstein and co-lead counsel on the case. The appeals court did not rule on whether discrimination oc- curred at Wal-Mart but on whether female employees could sue the company collectively. The original class covered women who have worked at Wal-Mart’s sprawling fleet of about 3,400 stores since 1998, initially esti- mated to number about 1.6 mil- lion, which would have made it the nation’s largest sex discrimi- nation case.

But the appeals court decided

to carve out female workers who left the company before the suit was filed in 2001. Sellers esti-

mates that the class still encom- passes more than 1million wom- en, but Wal-Mart said the num- ber has been whittled to roughly 500,000. The circuit court also referred to a lower court the is- sue of whether employees can seek back pay and punitive dam- ages. The decision upholds the ap- peals court’s 2007 decision ap- proving the class, which Wal- Mart had asked the court to re- consider under a larger panel of judges. Several business groups, including the U.S. Chamber of Commerce, also had filed amicus briefs calling for a reversal of the class certification. “We’ve always believed that this case presented issues that go far beyond the parties,” said Ted Boutrous of the law firm Gibson Dunn, who is representing Wal- Mart. “This formula is really a recipe for massive litigation against companies around the country.” The original case named six

plaintiffs led by Betty Dukes, a Wal-Mart greeter in California, who accused the company of pay- ing them less than their male counterparts, despite having higher performance ratings and more seniority. They also claimed that they received fewer promo- tions and had to wait longer for them. The women are represent- ed by the nonprofit Impact Fund and several other groups. Wal-Mart said it has made sig-

nificant strides to support female employees and noted that it was named one of the 10 best compa- nies to work for by Pink Maga- zine, which is aimed at women in business.

muiy@washpost.com

gage in profitable projects cross the line?” said Joe Mason, a bank- ing professor at Louisiana State University. “And what are the le- gal and ethical and moral respon- sibilities of the underwriter?” The recent focus on Goldman has been on whether it mistreat- ed its clients by taking out posi- tions against investments it had sold them. Some analysts say that misses the point. “In political terms, shorting the housing market makes Mom and Dad out there in Middle America very unhappy, and the politicians are responding to this,” said Christopher Whelan, an analyst at Institutional Risk Analytics. “It was really Wall Street’s creation of deceptive, opaque, impossible-to-value se- curities that was the problem.” Financial analyst Janet Tavako- li said Goldman’s defense that it was trying to hedge risks falls flat. “But what they were hedging,

they had reason to know, shouldn’t have been created in the first place,” she said. And she points out that in the process of hedging, Goldman put at risk other big financial firms, such as American International Group, which was on the other side of many of Goldman’s bets against the housing market.

goldfarbz@washpost.com

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