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Financial Crisis Inquiry Commission Day One

by Caitlin Kenney
Jan 13, 2010

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Alex is down at the first day of hearings of the Financial Crisis Inquiry Commission. The day started off with testimony from some major bank heavyweights — Goldman Sachs chief executive Lloyd Blankfein, JPMorgan Chase Chief Executive Jamie Dimon, Morgan Stanley Chairman John Mack and Bank of America chief executive Brian Moynihan. Alex says the highlight was "a frisky exchange" between FCIC chair, Phil Angelides and Lloyd Blankfein." The exchange started with this question from Angelides:

MR. ANGELIDES: Based on the review of public documents, as you know, your firm sold a significant amount of subprime mortgage-related securities. And it appears, at least according to public documents and other reports, that you may have simultaneously betted against the securities you sold to clients.

According to the reports, you sold about $40 billion in 2006, 2007. December 2006, I think you came to the conclusion the mortgage market was heading south and you began to reduce your own positions. And many of the securities that you sold to institutional investors, other folks, went bad within months of issuance.

Now, one expert in structured financing said, the simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I've seen.

Do you believe that was a proper, legal, ethical practice, and would the firm continue to do that practice, or do you believe that's the kind of practice that undermines confidence in the marketplace?

Blankfein admitted the behavior was "improper" but said he considered it part of Goldman's work as market maker:

MR. BLANKFEIN: In most of these cases, the person who came to us came to us for the exposure that they wanted to have. The act — it wasn't as if we were creating product — that product existed, necessarily, and we were shorting it. The act of selling it reduced our risk.

We are not necessarily — I know, if you had looked into Goldman Sachs, we were not controlling our risk. When you listen to the testimony that's come by, the biggest problem that institutions had was the accumulation of risk. We weren't working —

A market maker doesn't manage its risk profile because it likes housing or doesn't like housing. Those are separate. We have various pockets of — excuse me — we have various pockets of Goldman Sachs that like a position or don't like it.

What we do is risk management. Because we had this risk, because we were accumulating positions — which, by the way, we acquire from clients who want to sell them to us — we have to go out ourselves and provide and source the other side of the transactions so that we can manage our risk.

And then things got heated:

MR. ANGELIDES: Well, I'm just going to be blunt with you. It sounds to me a little bit like selling a car with faulty brakes, and then buying an insurance policy on the buyer of those cars. It just — it doesn't seem to me that that's a practice that inspires confidence.

The markets, I'm not talking about your — (inaudible).

MR. BLANKFEIN: (Inaudible) — positions. Every purchaser of an asset here —

MR. ANGELIDES: I'm talking about betting against — (inaudible).

MR. BLANKFEIN: — is an institution, probably professional-only investors dedicated, in most cases, to this business.

MR. ANGELIDES: Representing pension funds who have the life savings of police officers, teachers —

MR. BLANKFEIN: These are the professional investors who want this exposure

BONUS: Read Mike Konczal of Rortybomb's take on the first panel.

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