Senator Ensign Questions Goldman Sachs Executives

a couple other comments first of all I think that Wall Street definitely had a role in the financial crisis but I also think we have responsibility here on our end between the Community Reinvestment Act Fannie and Freddie the out of control that we let them get that that's certainly because without the real estate market doing what it was doing I mean that's where these bets were occurring and and everybody got the false idea that the whole real estate value was going to continues go up and up and up we're bubbles never continued to go up we we know that and unfortunately a lot of smart people on Wall Street got fooled by that the point that I want to make also is that you all have mentioned that your market makers and and I think part of this hearing is to find out whether you are actually market manipulators instead of just market makers and I think that that's you know key part of it and that's where I'm going to take some of my questioning here I want to start with talking about the role of the the credit rating agencies do did you personally or do you know of Sachs Goldman Sachs employees who actually spoke to the credit rating agencies and tried to influence how some of these tranches were rated go down the line just yes or no senator I personally didn't typically speak with them but people on my team worked with the agencies on new issues with respect to helping them understand it and how the deals would be rated okay thanks I didn't know anyone who would fit under that category I have the same answer as mr. Birnbaum okay I did work with rating agencies senator similarly to explain to those rating agencies the products that you need to be rated okay how do you how do you justify this the for B for mr. sparks center miss Tori how how do you justify taking triple B rated products repackage in them and getting the rating agencies to rear a triple-a rated products because that's what they did should I try to address derivation Center I mean ultimately rating agencies have their own you know models to to write products so we we were not you know influencing in no shape or form these you know the way they're rate these transactions at least their models we're just barely applying their modeling assumptions in their modeling assumptions which nobody supposedly knows about though you just you both said that you either did yourself or you know people who who did went to the rating agencies and tried to convince them about the products how can you justify taking triple B rated products repackaging those as Triple A products or trying to sell those as Triple A products I mean because that's what a lot of the CEOs did correct senator yes that is correct stories comedian senator the rationale that the agencies gave it I believe was because I'm an assumption of diversity which meant that certain deals would perform differently than other deals and so in that collection the assessment from the agencies and I think the market assessment at the time was that deal performance had less correlation amongst themselves mr. Tory we're about to answer and I would just add one more point which is that radiance ease rely on you know historical data to rate those transactions and when rating the products I think you're referring to as CEO products repackaging triple B securities they reliant on the store occult performance of triple B rated obligations to to rate the CDO products do you think that their ratings made sense I mean the methodology made sense there you believe their methodology made sense the mathematical methodology made sense the assumption that you know historical performance is a good indicator of future performance or certain asset classes proved to be not correct did you ever feel an obligation to people who were buying those products from you to let them know that these were triple B rated products that were repackaged as Triple A this would mean the the specifics of the products were always disclosed in the offering documents that's not what my question was did you feel an obligation at all this gets back to not necessarily a fiduciary obligation but did you feel you know just geez these people are buying this stuff for us and do you you understand that these are triple I mean did you tell them specifically that these were actually triple B rated products that were repackaged and you and the credit agency somehow in their wisdom repackage them re score them as Triple A rated products senator you're exactly right on point and that relates to a point I'm not sure if you're here for which is what the underlying assets are is what's material so that information would be disclosed at a new issue as to what underlies the security goldman sachs though is looked at i think by a lot of people one of the reasons that people want to do business with goldman sachs and some of the other major players on Wall Street is that they feel that you sort you know have a certain level of expertise and and I think that that's kind of what we're trying to get at up here is whether or not you know that's why I asked you if do you believe the modeling was was correct good modeling as far as radiant agencies were concerned mr. sparks I don't have the specifics of their modeling I think in hindsight the historical correlation was much higher than what the rating agencies assumed I think for anybody to defend what the rating agencies did would be ludicrous at this point and and I think there's plenty of evidence out there to show that what they did who do you do all pay the rating agencies typically that would be paid by people involved in the deal so it could be a deal expense it could be an it could be an issuer right it could go goldman sachs does pay large amounts of money to the rating agencies is that correct on those deals oftentimes it did and do you think that that maybe appear has at least an appearance of a potential conflict of interest with respect to maybe appearance of confidence me yes I think that there is that concern with respect to that particular point I want to go to a deal that Goldman Sachs did it has to do with the known as Hudson won it was a synthetic CDO that reference to two billion dollars in subprime triple b-rated mortgage-backed securities Goldman selected the referenced assets the purpose of the transaction appears to have been to get those assets off Goldman's own books basically Goldman was the only buyer when it to sell this CDO and then make a bet against it is that an accurate description of what happened with Hudson one senator I believe that deal was purely static synthetic which miss Gregg static synthetic is one of the things that that I think there confuses a lot of people is the definitions that you all put on things for instance you called something that was actually the first floor the bottom floor you described it as a mezzanine so I didn't sound so bad you know there's a lot of spin that happened in your in your terminology in dealing with all these financial products to make them sound a little better than others so could you please explain as we're going on just for other people listening yes enter the term static meant that the assets that were set in the deal could not change the reason that's important is there were other CDOs that were done where an asset manager or someone else could could choose to change the assets in the pool under certain parameters so in this particular case static meant here the reference notes the reference obligations that you're exposed to and this is what they're going to be synthetic meant that there were no actual cash securities that had been put in there so you know Goldman didn't sell those securities into that because there weren't securities with respect to the reference on that yeah but it operated the same way as what cash being in there didn't it correct it had the risk of that and that deal my recollection is it had a combination of single name CDs and some of the risk related to the ABX index outright and Goldman obviously recognized that there was some significant risk with that particular product and that's why they sold them short correct well again they're this deal I think was done in October oh six was I made if I might I don't have the date for me there were investors a lot of investors no.6 and there continued to be investors in a7 who wanted exposure and risk in certain forms and so you know I had mentioned that these deals did not that a little unusual though for for Goldman Sachs to be the only part of it that did the entire deal on the short well many most of the time not all the time on synthetics Goldman would provide the synthetic short into the deal for a number of reasons some of which included the fact that we were involved in the deal but then what we did with our risk on the other side could vary I think that one of the points that needs to be made first of all is and I think as evidenced by the hearings that this committee has been having is is that this is an incredibly complex area of not only our markets but of our law and mr. chairman I think that the hearings that you're holding are very very valuable but I think that we're just scratching the surface and and I think it's one of the reasons that that I believe very strongly we need to we need to fix the markets we need to have a lot more transparency and and we need to make sure that people aren't being market manipulators that that you know some of the the lines of questioning today that have come out actually probably some good suggestions in there but a lot more needs to be done on a lot more research needs to be done and I and I hope that the Senate actually takes its time so so one is that we don't end up hurting the little guys out there in Main Street and we actually go after the people that whether it was a AIG Goldman Sachs you know any of the other big traders whether it was Fannie Mae and Freddie Mac I hope we'll hope that that's what the financial regulatory reform focuses on I do want to get and just I hate to keep harping on this but I think this is going to be an important part of of what comes out and that is do you believe that and and not just since since the two of you are the only ones who respond to this earlier on getting back to the rating agencies do you believe that Goldman Sachs improperly influenced the rating agencies no senator miss Tory no senator appreciate having that on the record the other point that I think that needs kind of an interesting point that when everything was going up markets were going up everybody was fat and happy you all and people at your firms and people at other firms were on Wall Street made a heck of a lot of money in in bonuses would you agree with that I mean large large amounts of money pretty factual statement when you agree asking me yes interesting when everything kind of came to a crash incredible bonuses were still paid out even in firms where people were their actual investors lost huge amounts of money lost everything do you think that the incentives that are set up in firms like Goldman Sachs are the proper incentives to have folks engage in ethical behavior each one of you down the line well senator I think Goldman Sachs works hard to engage in ethical behavior and I didn't say that didn't say that I said did you do you think the way that the pay structure and the bonuses are set up lead to the proper incentives to have the people at Goldman Sachs and other other folks who do what you do on Wall Street do you think that those incentives are there that that lead to ethical behavior again Josh and I don't work there anymore so I don't know exactly what they're and that's why I'm asking you just to general comment about the way the bonuses are paid on Wall Street obviously when the bonuses are paid when everybody's you know making money that kind of makes sense to me but when everybody's all your you know your people who are buying things from you who bought in the past all of a sudden they lose huge amounts of money and and folks still get paid huge bonuses that doesn't make sense that doesn't make sense to a lot of Americans that's what I'm asking do you think the incentives are the proper incentives to have ethical behavior on Wall Street yes it's just your opinion I don't know currently what those are so I don't but you know I don't want the way that you were paid in the past how about that I believe consistent yes in the past I believe at Goldman Sachs that you had you had proper incentives bonus structures were proper I believe at Goldman Sachs in the past I had every reason to be ethical with respect to what the firm did with me including compensation this rare mom I mean just to give some background on how people at Goldman and what a night can't speak for what way it works today so I'm not there anymore the way people are paid there and the way people were promoted there it's a function of performance and a lot of that performance is indeed financial but a huge component of performance at a place like Goldman is as of a qualitative nature it has to do with the culture of the firm and it has to do with ethics and it has to do with how one works within a team and I can assure you that you could have enormous financial performance but if you weren't of ethics he would not be promoted he would not be paid in fact you would probably be fired okay miss Swenson hey echo the comments that Josh said simple answer to your answer is yes your question is yes okay mystery yeah I would echo some of my colleagues comments that the the compensation structure which is based on the firm's performance the business's performance and the you know personal performance at least at Goldman Sachs I think we're aligning incentives correctly okay thank mr. chairman I think the Thank You senator ensign as all the questions have gone today I think that we're we're seeing some of the problems thank you

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Length: 16min 13sec (973 seconds)

Published: Tue Apr 27 2010