The firm, charged by the Securities and Exchange Commission with securities fraud, also reportedly sold mortgage-related investment products to clients and then “bet” that those products would fail by taking what are called “short” positions in the market – a decision that reaped the company billions of dollars when the housing market did indeed collapse.
Senator Collins noted that top-tier investment banks such as Goldman Sachs do not have a fiduciary responsibility to their clients, something that financial advisers do have. The results, she said, “are conflicts of interest” that helped create the economic damage that ensued.
The hearing was the latest before the Senate’s Permanent Subcommittee on Investigations, headed by Sen. Carl Levin (D-Mich.), which is examining the roles of various industry sectors in the collapse of financial markets. Senator Collins gave an opening statement at the start of Tuesday’s hearing. That text is below:
“Mr. Chairman, thank you for leading this investigation into the root causes of the Great Recession of 2008. You and the Ranking Member, Senator Coburn, have cast a bright light into the dark corners of financial institutions that helped to inflate the housing bubble and then reaped billions of dollars when it burst, leaving millions of Americans in debt and jobless, with destroyed dreams and financial insecurity.
“This investigation raises two overarching issues. First, we must recognize that the dynamic innovation of our capital markets can have a downside. It can produce pain rather than prosperity. Financial markets require updated and effective regulation to help prevent excesses that can inflict great harm on wholly innocent Americans — be they workers, retirees, or small business owners.
“The lack of regulation of the trillions of dollars in credit default swaps is a prime example. That is why it is so important that financial regulatory reform legislation include a council of regulators whose job it will be to assess systemic risk and to identify regulatory gaps.
“I recognize that even measured regulation may limit the potential benefits that unfettered markets can produce. The question, however, is whether those benefits are outweighed by the terrible harm such markets can cause. Recent history certainly suggests that is the case, that the combination of lax or absent regulation plus unbridled greed can produce devastating results.
“Second, even legal practices may raise ethical concerns. Assuming Goldman’s role as a market maker and its desire to hedge its risk provided legal justification for some of its practices — a question that must ultimately be decided by the courts — there is something unseemly about Goldman betting against the housing market at the same time that it is selling to its clients mortgage-backed securities containing toxic loans.
“And it is unsettling to read emails of Goldman executives celebrating the collapse of the housing market when the reality for millions of Americans is lost homes and disappearing jobs. That is especially the case in light of Goldman’s decision to opt for status as a bank holding company to secure benefits effectively underwritten, at least in part, by those same Americans.
“During its previous hearings on the financial crisis, this Subcommittee revealed the reckless, and at times predatory, lending behavior of some mortgage brokers and banks like Washington Mutual. These banks discarded decades of reliable and pragmatic lending practices. Instead, they opted to offer high-risk loans to borrowers whom they knew could not afford to repay them.
“The system must be reformed so that Wall Street banks are not seen as unscrupulous operators who seek to profit from the public’s misfortune, even as they are pitching toxic investments and even as hard-working, struggling taxpayers are left to pick up the tab.”