We are continuing to follow the Senate Hearing on Goldman Sachs. Earlier posts on the hearing are here and here.

One of the rhetorical tactics Goldman Sachs has used to answer the SEC complaint that it misled investors on the Abacus deals has been to argue that it had held a "positive" position holding the Abacus securities whose structuring it allegedly misrepresented.

In other words, Goldman is arguing that since it was itself heavily invested in the Abacus synthetic CDO, and in fact lost money by holding that position, it is not credible to claim it deliberately created an investment it wanted to fail. Why would it deliberately structure a deal to lose its own money?

But in questions from Senator Levin at today’s hearing, Goldman’s VP Tourre, the lone person in the SEC complaint, admitted that the only reason Goldman held that positive position is that it had wanted to lay off that positive position but was unable to sell it; it was thus stuck with the positive position and lost money on it.

This was, I believe, the first public concession from a Goldman employee about something smart financial bloggers (was it Rortybomb?) figured out over a week ago. But Goldman had continued to repeat the line that they couldn’t be accused of structuring an investment designed to fail because they invested in it themselves and lost money. Now we have a Goldman VP testifying under oath that the argument Goldman has been making was just baloney.

Making Lemonade out of Lemons

As the video from another part of the hearing shows, Levin also used another Goldman witness to read Goldman e-mails into the record. Several e-mails suggest that Goldman’s desire to create synthetic CDOs for the purpose of betting against them was the general Goldman strategy during 2007, the period that included the Abacus and several other such deals. As one Goldman e-mail described what the Goldman CDO makers were doing:

"They structured like mad, traveled the world, and worked their tails off, to make some lemonade out of some big ole lemons."

In the second session, which includes Goldman’s CFO Viniar, Levin continues to push the theme of Goldman moving, from late 2006 on, towards a net "short" position against the market for mortgage-based securities, including the syn-CDOs Goldman was structuring and marketing.

Levin: Was your risk biased, to be short?

Viniar: Yes it was.

That point alone is not controversial. What Levin and other Committee members are exploring is the extent to which Goldman was structuring investments for the purpose of facilitating its strategic decision to begin shorting the market as a means to offset its large positive position in mortgage-based securities, and whether it misled investors to enable that strategy.

Udpate: About 4:25 Eastern: During questioning in second session, responding to Levin, Goldman’s CFO Viniar appears to say that he has no problem with Goldman taking a short position against structured products Goldman is marketing to its customers. But he’d prefer Goldman didn’t leave e-mails around saying that! Oops.



John has been writing for Firedoglake since 2006 or so, on whatever interests him. He has a law degree, worked as legal counsel and energy policy adviser for a state energy agency for 20 years and then as a consultant on electricity systems and markets. He's now retired, living in Massachusetts.

You can follow John on twitter: @JohnChandley