practices. what happened if the originators got through with it and then it went out. there was this great sucking from wall street to get more and more of these loans into the marketplace and you can see that it was an explosion. fair to say an explosion in these cdos and rnbss? >> well, senator, when we participated in the market and these deals are in the structured finance arena of the market, you would know from your participation in the market what type of investors wanted to buy what types of risk. >> you were selling, this is a product you were selling. it's like selling a car -- >> we would know what kind of investors wanted long beach or washington mutual loans to invest in so we knew what investors actually had demand for that product. >> what percentage do you think is a reasonable percentage? as you said, all of these went

bad. >> senator, i don't know what the right percentage is? >> would you say 10%, 15%? >> it depends on the deal and i don't know. >> suppose i told you in these deals that you were secureatizing, 90% on state income. would that be something -- >> this particular deal in hindsight was a second lien deal, so it did not perform well. >> 50% of them were stated on income loans. >> again, i think that many of those deals that we brought did not perform well and that is not a good thing for us or our clients. >> could it be reasonable to believe when the great perponderance of the mortgage in the package that you were selling to folks were stated income loans that there's a pretty good chance that a large percentage was going to fail? >> senator, at the time, things

happened in the market and were accepted in the market that in hindsight look very different than they did at the time in the market. >> i got two things out of these hearings. number one, nobody did anything wrong, this was like a natural disaster like a hurricane hit. the mortgage market fell and the second thing is that these things were just something that happened. basically, i'm just saying if you did some research into this, and i'm sure you had people in your organization, they were coming in. you were sucking them in. in order to sell them and make money. just a little bit of research into how these things were being funded. did you have concern during 2006 and 2007 that there were an awful lot of home mortgage loans being secureatized. >> yes, senator.

>> did you ever say what is going on with those loans? i wonder how many people coming forward that need these type of loans. >> when i said i was concerned -- >> that's what i'm saying. normally due diligence, again, i think the argument that everybody was doing is an argument that has been used over the years. these halls are full of folks who come before senate committees and said everybody is doing it. i am just trying to figure out. it is, when i say this to people, i'm telling you and i say what do you know what a state income loan is? do you know you can just walk into a bank and thel them what your income was and they'd give you a loan. do you know what happens next? they go to wall street and this is going to sound -- i totally

believe where some of the smartest people i know work. do you know what they did? they package these things up. did they ever ask how many were stated income loans? i don't know. how these loans are being put together and state income is the easiest one to explain to people. can you believe they did this and no one knew. no one knew at washington mutual. no one knew at standard & poor's and moody's and nobody knew at the premier banking house of america goldman sachs. >> senator, i didn't mean to imply that we didn't know anything. >> no, i mean -- >> we had a team who did diligence to understand loan packages that we bought. i would like to make a point, that team may have liked that risk and, in fact, did. >> liked the risk that somebody could go in and originate a loan that 90% -- this state income

started out for high wealth individuals. very small percentage. but starting around 2005, 2006, it grew and grew and grew. but when you're looking at 90% of the home prime equity loans, 73% of the option a.r.m. and 50% of the subprime, subprime loans were the basis for income for the borrower is what they say their income is. >> and, senator, we made a number of core business decisions, especially in hindsight. but at the time there were people in my business unit who actually wanted to be long in that risk and on that type of -- >> they had no idea that the risk was 90% stated income loans. i don't think anybody knew that. >> again, i would have to look at the particular deal. >> wrm just having a hard time, i'm trying to put myself back in your position, which is always a difficult thing to do. but i see these mortgages poring

in and i'd say, where are they coming from? especially the people in your operation that are originating these loans. the idea you can get away with it and i'm selling and they're taking their risks and people want to buy these things. i don't think anybody in america wants to buy a mortgage from somebody who states what their income can be. i don't think anybody wants to buy that. is that fair? >> today? >> no, any time? >> well, there were a lot of investors who had appetite in the period we're talking about, including a number of people in the firm and in my business unit. so, i think hindsight and your own investment view is an example -- >> i hate hindsight and connecting the dots and i

connected all this and i really don't feel on this one that i'm up here using morality that developed in the last 15 minutes in order to ask you questions about this thing and about issue. that's not what i'm about at all. i don't think anybody would say that it's unreasonable to expect that when you're securitizing loans is a problem. it is a problem in terms of risk. that language works a lot of places. i guess this is really for the folks that work for you down the line, but did you ever have a situation where you eliminated originators? >> wres. >> bob pisani on the floor of the new york stock exchange. important thing today was europe and what happened over there. we weakened around 11:00 eastern time and the initial catalyst

was the standard & poor's downgrade of credit rating that was to an a minus from an a plus and then 20 minutes after that we had greece, s&p also downgraded greece sovereign rating. and that, of course, dramatically affected those two events. you see moving down in germany and ended down 2.7%. the s&p 500 weakened as that happened and we have stabilized now that the european markets have closed. rick santelli in chicago, the big thing that i seem to notice here is that now greece had been able to use their sovereign debt as collateral with the ecb and now it seems they're going to be barred from doing that. that is important. >> it is getting important. why markets are getting crazy. some debate as to all the rating agencies have to bring. so, there's a collateral question. i wouldn't say it's a black and

white answer that it is for sure in good collateral and if it is deemed it isn't good the euro could change it with their euro agreement. it's been a wild day. if you start out with the currency. the currency is now a fresh low close going back to kind of april, may of last year. if we look at interest rates in the flight to safety and look at a boon to ten-year instrument, you could put up the longest chart you want. my database goes back over 20 years and we are flirting in the low 290s and i'm not sure there is lower yield than the low 290 and we want to pay attention to that. the bigger question how this is all affecting emerging markets. now, back to the hearings. >> that particular point. i don't know that i have a particular view on, but it appears that there were a number that actually was the case in hindsig hindsight. >> well, no, no. don't do the hindsight thing with me. i mean, come on.

at the time, if you knew at the time what was going on, you would say, there's a target investment for fraud. these things are poring out of the originators. i'm just talking about data that was available at the time. you would think that something was going on here. you have 90% of your state income loans. i'm just saying this information, do you know anything about thin files? have you ever heard of the term thin files? >> i don't recall the specifics of it. >> mr. birnbaum, do you know about thin files? >> i think i read something about that recently. >> so you understand what they are?

>> it's detailed in the book. >> did anybody at gold man sacks use thin files in putting together cbos? >> just to be clear, my job function had nothing to do with putting together cbos. i can't speak in terms of that. it is something i literally heard of for the first time last week. >> mr. swenson, as far as you know goldman sachs never used the thin file approach in order to make in organizing cdos? >> mr. sparks? >> again, i'm not flr with the approach, but i'd be happy if you'd describe it to me -- >> it you didn't hear it, you didn't use the process. you never heard about it goldman sachs anyone doing, it's thin files specifically. how about barbelling? mr. sparks, have you ever heard of barbelling? >> i have heard war barbelling

majority with positions. >> that term could mean a number of different things. >> did you just read it recently? >> i'll go with that. >> mr. swenson? >> i'm not aware of that term. what is alleged, what happened was people would take advantage of the fact that rating agencies went with an average. so they would go out and pick up fico scores of 550, which are almost guaranteed to fail mix them in with fico scores of 650 so they came out with about 615 and sold them. mr. sparks, you never heard of anything like that at goldman sac sachs, right? >> well, i know clients when we're putting deals together the

deal teams would work very hard to put together, you know, whatever the loan package was and work with ratings to come up with what the capital structure would be, that includes credit enhancement. so, i don't recall somebody coming to me saying, hey, we're going to barbell this, but there would be a mix of collateral. >> let me ask you a similar question. how about gaming the rating agency. people sitting around trying to figure out what can we get through here, through the rating agencies -- >> ne. >> as far as gaming, no. as far as working with the agencies to come up with a capital structure and, yes, there was constant dialogue and work together for that. >> mr. birnbaum, dealing with rating agencies, did you ever get the feeling that folks were

sitting around trying to figure out the best way to put this together for rating agencies so that we can make the most money on these rnb. . you never dealt with that? >> no, i did not. we were secondary traders. >> mr. sparks, how did you feel about dealing with the rating agencies? did you ever feel like sometimes you might pick a rating agency based on, you had two one give you triple a and one would give you triple a. >> there are times that was correct, senator. >> do you ever think there was subtle pressure on the rating agencies that they maybe ought to rate something triple-a? >> i think the rating agencies worked very hard and were under a lot of pressures. to analyze the pools that they

were rate in. i think they were under a lot of pressures. >> they were under a lot of pressures in order to keep their business alive. therefore they had to rate competitively against the other rating agencies. is that a fair assumption of what's going on? >> i think there was some competitiveness to it and i also, i felt like the rating season attempted to do their job. there was some moment of competitiveness but i think they were more honestly trying to do their job and rate the deals. >> mr. tourre, you dealt with rating agencies? >> i did, senator. >> did you work with them in such a way to try to turn double-a into triple-a. >> i nearly applied. a lot of documentation on how they rate all these transactions and compare to our rate dollars.

>> you never got into barbelling or thin filing or anything like that? >> each asset i did -- >> no, i'm just saying during those discussions you never, at gold man sacks, thin files or -- >> i don't know what thin files are. >> thank you, thank you, mr. chairman. >> thank you very much. >> i am going to take my privileges to make my opening statement now and apologize to the panel i wasn't here. i am working on another financial problem that is a little bit bigger than this one. we're going to go back to the goldman sachs hearing in a little bit. first ceo of ford on a day when you blew away estimates in terms of earnings. earning 46 cents a share, the street was expecting 31 cents. a little confusion on the revenue side.

$21.8 billion is what you reported. the stock sold off a little bit. clarify this for everybody in terms of what was there? >> we could have done a better job. in our numbers we had the volvo in 2009 but had it out in 2010. if you take out volvo that we sold and create our revenue by 20% sglp what do you say to investors on ford stock right now? a bit of low-hanging fruit is gone. you have shown us you can make money and can you do it consistently quarter after quarter? there are some skeptical that think you can do this. >> that is the rith question. we are on a very good trajectory for profitable growth and bringing out next year and next year and going forward. the real key is to just watch what we're doing on the performance of the strength of these vehicles.

>> clearly, you're hitting profit for vehicle sale and clearly much higher than the competition right now. you have debt right now at about $34 billion and some are looking at this and saying even though you have $24 billion in cash, you need to accelerate paying that down a little bit bitter. what was the plan? >> we planned to borrow the money from ortransporfagz and we're profitable and accelerating and just this month we just repaid another $3 billion of our debt. this gives us a lot of flexibility. >> but at this point you're not giving out concrete projections? >> no, not at this point because clearly we have many uses of the money and very good plan going forward to profitably grow. >> any sense how close you are

to get back to investment rate? >> no, that is a good way of asking the same question. use that profitability to improve our balance sheelt. >> you have changed your guidance for this year adding the world solidly profitable and used to be 2011. >> we pulled the profitability a year earlier and remember last year we pulled it, too. this is a very important update of our guidance that we will be solidly profitable and positive cash flow for 2010. >> big day here, company bringing in $2.1 billion for the first quarter of 2010. let's go back to the goldman sachs hearings. >> managers that are a bit more difficult should be used for trades like paulson. go goldman employees knew it could hurt the reputation if ever uncovered.

markets are complex but built on three separate concepts, truth, trust and transparancy. without them, the cost of doing business is too high and markets cannot function properly. i have several questions about these deliberations within dwoeld m goldmian sachs. some paints a firmly dark picture of what was going on inside investment banks. this is an opportunity to explain what happened and, again, i thank you for being here. now, i would like to move to my questions. >> mr. swenson, would you turn to exhibit 55. this is a copy of your own performance valuation for 2007. i want to spend some time with you on that. with your own self-assessment. and i have some question. you wrote this document, i believe. what was the purpose of this

document? >> the purpose of this document was to go over my accomplishments for that year. >> okay. you say it should not be a surprise to anyone that 2007 year is the year i can take credit of today. abs synthetic business two years ago. you go on to say you identified key market dislocations that led to tremendous profits. is that an accurate representation? >> yes, it is. >> later in this document, you run through some of your biggest trades including a $1.8 billion short on cdos. and you say you oversaw and directed the covering of $9 billion in short positions. is it fair to say you went extremely short and made a lot of money?

>> you weren't here for my opening statement. i went over a number of the trades that we did in a timeline, in a series of trades that we did over the course of 2006 and 2007. so, for others in the room, i'm sorry i'm repeating myself a little bit. we did a number of trades in 2006 and 2007 that made us put our abs desk, net shorth at various times with a short bias and at times flat and we added significant amount of risk where we went long at the end of the first quarter throughout the second quarter we added a lot of risk net long positions and in the third quarter, at one point, we had a short bias and we covered a substantial amount of risk over the course of that quarter into the end of august. >> thank you.

but you all did in 2007 go much more short than you did in 2006? is that an accurate statement? >> yes. >> that's your job as a marketmaker and i'm not a reading. you had a shorter position in 2007 than you did in 2006? >> yes, we did. >> mr. birnbaum reports that he likes to be driver of the business. would you agree with this statement? >> i'm asking this to mr. swenson. >> i viewed our business as being market makers for abs securities. >> but the question i'm asking you, do you agree with mr. birmbaum's statement. i consider myself to be the

leader of the trading business. do you agree with that? >> i don't know the context of those particular words. is it in a document here, sir? >> yeah, we can get that for you. mr. birmbaum, you are both taking credit for the same thing. i want to know who the driver is. who made the decision here. >> we work as a team. >> who led the team? >> we work as a team. >> who led the team? who was the leader of your team? >> are you implying you only have one person leading teams? >> you only have one lloyd blankfein. he is the ceo. who is the line responsibility for your team? >> mr. swenson was my superior.

>> and ultimately mr. sparkspen so, there was a leader? somebody is ultimately responsible, correct? >> correct. >> mr. birnbaum by buying every name, cdo and opportunity. is that the same thing that you were taking credit for, mr. swenson? >> yes. we worked together on the same desk. >> mr. swenson, you are saying it is clear to you that in early summer of 2006 the fundamentals was going to have a very unhappy ending. that's a quote from your self-assessment. did you share that knowledge with anyone else that read it with self-anounshment. >> sir, do you mind quoting where this quote is?

>> i understand. but what page? >> i'm try tog be helpful, sir. i'm asking about swenson. let's assume, i'll get you to where that is stated and my staff will find that and get it to you. >> exhibit 55 down on number two. that's where you made that statement. single name cdo short. so, the question is, did you

share that with other members of the firm other than those who read your self-assessment? >> no. >> you were obviously correct, weren't you, in your assessment? >> yes. >> all right. given your awareness, were you concerned that your mortgage division continued to market and some to the firm's clients? you are sitting here projecting what you see happening in the market. was there any concern that you were continuing to market into a market that looked like it was declining and you were recommending taking a position against it? >> dr. coburn, at that time in the summer of 2006 into 2007, the market was going up in price. we were very long abs assets and abx single name synthetics at that time.

the market for the underlying securities in our mbs transactions was generally very tight and very robust with deals oversubscribed. so, at that time, there was a great deal of demand for securities and there weren't many players that had a negative view on the project or the housing market in 2006 that were buying a lot of these securities. those views changed, but over time, it was a great deal of debate on the direction of the mortgage market. through the third and fourth quarter there were opportunities when prices went down. and it brought in a tremendous amount of demand for people to buy securities at lower prices. no one was concern that these things were going to happen. >> part of your expertise was in terms of you put that in as a

statement of qualifications of a great job that you've done that year because you recognized the potential for it. so, let me go back. the market fundamentals and subprime and the highly levered nature of cdos was going to have a very unhappy ending. that's your quote. so, i go back. did you share that, your feeling, that you put in your own self-assessment with other principals at the firm? >> we debated the market as a group all the time. a number of traders on our abs desk. there were five or six and we discussed the nature of the performance of the underlying transactions. at that time, our desk was long. >> but you sold 1.8 short billion cdos. >> not at that point. over time through market making

and princepling was not put on in december of 2006. >> all right. go to exhibit 69, if you would. while you're looking for that, i want to follow up on something senator kauffman asked. you all packaged and sold mortgage-backed securities from long beach that were triple a rated that the vast majority were stated income loans. is that an accurate statement? >> i don't know sh answer percentage wise, but that that'spably. >> well over 50%. >> we did a number of deals with long beach. >> so, going back to follow up on what senator kauffman said, the raeth agen

the rating agency rated these triple a despite of the fact on their due diligence, they should have known that the majority were stated income loans. >> yes and, well, i don't quo exactly what they knew, but it would have been determined under the diligence that they did, but goldman sachs also many times invested in the equity of those deal. >> i'm going back to the question, do you have triple a rating on stated income loans on the package -- correct? >> yes. >> now, mr. swenson, again, exhibit 69. in october 2007 goldman sachs made quite a bit of money when moody's downgraded bonds. after you send this e-mail informing your colleagues of those downgrades, donald mullein says it sounds like we will make

some serious money. why was that? abs cdo synthetic that we have. what happened was when the rating agencies downgraded a number of the underlying rmbs securities it triggered an event which would mean that we would end up with an implied right down event that would shut off the coupons in a number of t

the -- we would eventually recoup the gains on that trade. >> so, i'm not stating that there's anything wrong with the hedging in your long position. don't get me wrong. i guess the thing that i would ask. did you, at any time, see any flaws in the ratings agency's assessments of the products that you were putting out there? >> i did not work on the construction of cdos. i was a market maker in abs, in abs securities. as a market maker, we are asked to take principal risk from our clients, whether it's a buy or a sell at various times. with that, it's for us to manage

our risk as principal because clients expect us to transact at the time they come to us and act to transact, not wait for us to find the other side. so, as principal, we manage that by incorporating a view or a bias in the way that we position ourselves. >> let's say somebody brought to you another package that was in, that you were making a market in. and you're making a market for a product that absolutely stinks. you know it stinks, the rating agents know it stinks and would goldman still make the money in that? >> we did -- our requirement for our desk is to bid on abs securities. when clients come to us, we give the market value bid or the offer for that security. >> so, you're a true market maker.

even if it's the worst possible combination of securities, there's a price at which the risk is worth taking, is that correct? >> that's correct. >> all right, mr. tourre. i know it's a very difficult time for you and in addition to the sec accusations against you and the media circus, your employer released some very embearing personal e-mails that are unrelated to this or any other investigation. do you have any feelings or reasons why that was done? >> these e-mails were personal e-mails that i deeply regret. they reflect -- >> i'm not making a judgment on it. i am asking you a question, do you have any thought on the motivation why they were released? >> i don't know, sir. >> how did it make you feel when they were released pub lackly? . >> as i will repeat again, i

regret these e-mails. reflect very bad on the firm and on myself and, you know, i think i wish i hadn't sent those. >> is there a large number of in-house goldman lawyers that have spoken to you prior to this hearing? >> spoken to lawyers prior to this hearing? >> how many? >> i don't remember. >> several? >> yes. >> it is true that they've hired an interpreter, a french interpreter to translate for reporters pf personal notes you had written to close friends, is that true? >> are you represented by lawyers paid for by goldmine sacks? >> yes. >> mr. chairman, my time is up. >> thank you. senator mccaskill. >> i want to make clear that i

understand. you all considered a marketmaker and by that you were trying to allow clients to bet on a certain outcome. for purposes of my questions today, i would like to limit this to synthetic cdos. i think they are the best representative of why most of america does understand what happened. we're not talking about a farmer trying to get certain on a commodity and not talking about an airline company trying to get jet fuel. which is why we have market makers to put predictability into a business model that will allow more informed risk taking as it relates to a business model. but the synthetic cdos were really about somebody really wanting to pay us a bet. i want to continue with the analogy with you all being the house or the bookie. most people in america

understand about a football bet. i usually vet on mu versus ku. i went to mu and care about mu, but the line is important, obviously, if you're going to be a serious better, you have to know what the line is, you have to know how many points you're going to get or how many points you're going to give. that's where i think we can start drawing the analogies of your all jobs. you all were trying to make a market and staying close to home was trying to get the line right. staying close to home was to not be too far out on one side or the other. when the bookie gets too many bets on mu, if mu is getting points he gives fewer points to mu. the bookie moves the line in order to even out the bets. so, the perfect bookie who makes a lot of money is somebody who just gets the vig. depending if you're voting in an

office pool that is illegal or betting in las vegas, it will vary anywhere from 5% to 10%. what is your vig, mr. sparks, on these deals? what is the vig you make assuming all you're doing, not playing in the market, but all you're doing is trying to stay close to home like a bookie would try to do in order to minimize their risk? >> senator, can i just instead of using the bookie analogy just talk about, i think your questions about profits and what we can make as a client? >> i want to know generally speaking the vig on the bookie bet. people are booking their bets with you, that's what a synthetic cdo is. it's just a bet, hats all it is. >> there is fee business, which i don't think what you're talking about. then there is market making

business. in this particular sector, typically, you would have to do trades where you assumed risk. when that wasn't the case there is an sec markup rule with a certain percentage. that's for risk free trades and at this time in this market that was not a typical thing where you would have a purely risk free trade. the amount of spread which would have been a term we would have used would be very dependent on the product, the rating, the liquidity of the product and, if i didn't mention liquidity, it was a huge issue. so, the bid offer spread could vary at various times, but one thing people expected us to dowas to make a market and have a bid offer spread. the great thing about making a market is when you do that clients can tell from your price, relative to the prices that other people are making in

that market on similar securities, if you are a better seller or buyer. and, so, you know, i actually, i'm a believer in markets and i think that's one of the nice things that price can affect both your risk and it can also help people know where to geo i they want to acquire risk. >> let's talk about what people are betting on. what i want to ask a couple questions about you call them different things whether it's timberwolf or abicus the asset selector or the asset selecting agent, i think you called it a different term. these, now, this is important. these are the folks that are figuring out what is going to be in the bet. right? what everybody's betting on. so, the compilation of what's in this thing you create for people to bet on is done by these asset selectors. who decides who the asset selector is for a deal?

>> senator, in cdos or synthetic cdos a number of different forms and that term, the importance is what the term was defined as. typically you will have or may have a manager for a cdo and that manager -- >> let me just ask specifically. let me ask, who decided what the asset selector was on timberwolf? who would decide? >> well, timberwolf is a client of goldman sachs called graywolf and they are an asset manager and had a desire to grow their assets under management by being cdo manager, that's one way for them to do that and we worked with them to help them with respect to growing their assets under management. wewould have chosen that client to do that deal with. >> who would have chosen the, i

think in the abicus the portfolio choosing agent. who chose? >> if i may answer it was a combination of goldman sachs and paulson who select ed selected. >> this is where i don't get it and a lot of the anger and passion and energy is coming from. paulson came to you and said i want to make a bet. i want to go short on all these really bad mortgage loans that are out there, that are all going to start going belly up. you want it help him make a market, right? is that correct, mr. tourre? >> yes. >> okay. so he comes to you and says i'm your curmist andstomer and i wa short. now, the weird thing is, i read

your statement carefully and you said i recall informed aca that paulson's fund was expected to buy credit protection on some of the senior on some of the ac-1 transaction. why wouldn't you tell him we're doing this because paulson wants to go short? >> i worded this carefully, number one, because i don't remember the exact words i used. number two, because we weren't sure at that time which ones paulson was expecting to buy protection on. number three, because goldman sachs ultimately was not under any obligation to resell protection to paulson. it could decide to keep that risk position for itself. >> okay, so, here's the weird thing, what's paulson doing in the room with the guy picking thes assets? what is paulson doing in the room? was ikb there? >> senator -- >> answer my question.

was ikb there? >> no. >> was ikb going to be a betor, too? you put him in the folks with the folks who were deciding what they were going to bet on. who put him in the room? >> we hadn't discussed this investment yet. >> okay. so, when you did discuss the investment at ikb, did you say we had a client, by the way, we're the house. we're supposed to be the bookie, but you need to know that we decided to let the client who wanted to bet against this deal, we decided to put them with the people in the room. did you tell ikb about that? >> i didn't tell -- >> do you see how that seems weird? >> ikb knew it was a synthetic

transaction for which by construction there was -- >> i need somebody to acknowledge that that sounds weird. one side is coming to you to place a bet short and you put them in the room with the people who decide to bet short on and the people you sell the transaction to never gets to know that paulson is in the room picking the stuff? that just seems bizarre to me. >> senator, if i may say a couple things. aca selected the reference portfolio. so there were suggestions from many different parties. >> were they in the room with them or just paulson? i don't think there was anybody in the room other than paulson. let's be honest, this was a paulson deal. you put aca in there as some kind of fig leaf so you can do exactly what you're doing now. they are a repueitable firm.

it's all your alumni. it's all former go goldman sach. >> we were left with unsold risk in the ac-1 transactions. >> yeah y know. here's the thing, you have these two transactions and, by the way, they're very close in time. one was march and one was april. maybe i'll take time to go through. let me know through some of the timberwolf documents. i will read directly out of the documents and then you all, the record will bear out that i'm reading directly out of the documents. because i think it's important to get a sense of this. >> senator, can i make a point that might be helpful on disclosure in this sector?

these securities are backed by assets. there are years and years of input that regulators, internal and external counsel and investors and market have with -- >> you're talking about assets, subprime loans that you were buying from long beach that you knew already had to buy back half a million dollars worth of mortgages. are you talking about those assets? >> this is a broad topic about this industry and disclosure for securities when they were sold. and i do think it is relevant, if that's okay. >> i understand that there is -- but we're trying to hone in on why i have so many unemployed people in my state and why so many people that i work for in missouri lost incredible amounts of money in their pensions. that's what we're honing in on

today. i want to lock at these transactions and talk about timberwolf. in a document dated november 10th of 2006, this was the memorandum and you were cc'd on it, mr. sparks. this is basically where you go through and talk about the asset selector and that's where you learn that this firm that you picked on the asset selector on that, you had the greg who was a partner at goldman sachs and co-head of the product group. you had joe marconi a former managing director join graywolf and focus on structure opportunities. of the 26 members of the research investment team that were investing, that were researching this, these assets to go inthis, this synthetic derivative. by the way, this is the same one that your folks called later. 17 members of the research staff

are gold man sacks alumni. now they're not charging any management fees, gray wolf isn't and committing to 50% of the equity. you guys were sharing the warehousing risk, but, by the way, you were proving every asset going had to the asset. every single one. that is in november of 2006. keep in mind -- >> senator, i don't know what page it is, but that is correct that former colleagues of ours had started a firm or joined the firm and that we shared warehouse risk on that transaction, if that was the question. >> that was in november. and then in december we have an e-mail from deeb salim, no, from michael swenson. from michael swenson and it's to kevin and justin mahony and it says after initially passing at

65. 65.00. then deeb salim says this is worth 10. it stinks. i don't want it in our books. okay. this is all on timberwolf. keep in mind, this is december, before you tried to go out and sell this thing. >> senator, senator. i'm sorry, but i don't believe that e-mail is regarding timberwolf. could you please point us to the exhibit here in the book. >> sure. it is, i'm sorry, it is g -- >> senator, without the document, i cannot answer your question. i am sorry. i am trying to be helpful here. >> what document is it? it's under tab 98 and it's

immediately following it's immediately following the memorandum about the makeup of timberwolf. maybe 2 7? 277 is the page right in front of it? find it? >> no. i would like to -- the -- >> you know what? i'll come back to it. we'll have another time. i've got plenty more. >> um, senator, i think this e-mail does not have anything to do with timberwolf. i'm sorry. >> all right. we'll show it to you, and offense placed in the wrong place, that's fine, but in march, subject line does say timberwolf, great job cactus rossi is entirely out of our position. that's march.

then -- now, then we have some interesting representations in may, and this is also -- and this is document number 103. where there's a series of e-mails basically, where there's some worrying about misrepresentations. these are e-mails -- this is from donald sparks to donald mullen. there are some people working on timberwolf, blank has continued to work. blank sails person feels there's a decent chance, but it will be a week out as they are traveling. if we get strong bids, can't we hit them? and then the response back from don mullen to daniel sparks -- i doubt they will sell over the weekend and harvey is concerned about the representations we may be making to clients as well, how we will price assets once we sell them to clients.

i think we need to sort things out before we make sales. then the next one is from harvey schwartz to daniel sparks and donald mullen -- don't think we should slow or delay discussions. however, we need to huddle quickly before hitting bids, i think. this was all in may. then the next e-mail says, from donald sparks -- sounds fine. then the next e-mail is from tom moan tag to daniel sparks and others -- of course we should, but this is how we find value by showing asset and see where bid comes. they don't look to us for guidance, they pay what they think it's worth. is there a different issue? we will value where the mac shows us wheref we find a bid, won't we? the last one from donald mullen to sparks and moan tag -- agreed. we just need to make sure the proper communication occurs with clients, and we have thought through post-sale pricing. so what's clear -- and then you

have the one later about how -- it was. what's clear here is there didn't seem to be a great deal of confidence in the long side of this particular instrument. but the salespeople were being pushed to move it. and it just looks like you guys are not only making the market, you're playing in the market and mucking it up. do you understand that? >> senator, i just read this particular e-mail. the issue that was being discussed in this particular e-mail was, when you make a sale on a liquid asset, what's your bid price you show that client, because oftentimes you marked it or sometimes you had financed it, so there's a bid offer spread with respect to securities and market makers. my recollection of this particular point was what are we going to show them as our bid after that, and let's make she we've thought that through.

so on this particular e-mail, that's what i recall. >> okay. i guess what i would really like more clarity on, and i'll come back to this in my next questioning is, you know, where in the organization is there a deciding made about someone who is coming to you -- was somebody wanting to bet on one side or the other on timberwolf? in the memo, it says we have been approached. by gray wolf or by a client? >> well, gray wolf is a client, and gray wolf wanted to grow assets under management, so that's something money managers do. >> was gray wolf -- so agree wolf, they wanted to do this to grow their assets under management as a client of yours. >> correct. >> okay. so in that instance you didn't have a client wanting to bet one side or the other, you were helping them be part of the

house? >> i believe, and i would need to review it, but i believe they were willing to take an equity stake in their own deal. >> they did. they took a 50% equity stake. >> i would like to avoid the betting analogy, but, you know, that part of their goal was to earn fees by managing assets and we were trying to be helpful to them in that regard. >> okay. and who is it that picks aca? who picked aca? >> oh, aca, senator. >> i'm sorry. >> again it's a combination of goldman sachs and paulson. >> typically when somebody wants to make a bet, do they let them pick what's in it? >> from an aca perspective they achieved two objectives, one they grew their assets under manage and earned fees. two, they invested close to a billion of risk in the transaction as well for their insurance company.

so they achieved their investment objectives. >> but you didn't answer my question. typically do you let a client who wants to make a bet, wants you to do an instrument so they can make a bet -- that's what paulson wanted. he wanted a synthetic he could bet on. typically when somebody comes to you and wants to bet, do you let them help pick the assets that go into the instrument, typically? >> in every synthetic cdo transaction, the protection buyer has to be involved in some shape or form in the creation of the portfolio, otherwise there would be no transaction. if only the sort of protection seller could basically decide in its sole capacity as protection seller, you know, the end assets, you know, the protection seller would only select treasury securities and the transaction would have no risk, and no protection buyer could be in a situation to buy protection on such transaction. so even though in these transactions ultimately the

protection selection agent ends up selecting all the securities, there is always suggestions from different parties to, you know, what the portfolio selection, you know, how the portfolio gets constructed. >> you understand this doesn't make common sense, right? that somebody would want to go long on a fund that they were letting somebody who was going short pick the stuff in it? you understand that doesn't make common sense? >> once again, the portfolio selection agent approved every single security in the deal however, without a protection buyer, there is no deal. so goldman sachs and paulson had to also be okay on selecting protection on this portfolio. >> my time is up, mr. chairman. >> senator mccaskill, thank you. mr. sparks, i would like to follow up on a question that chairman levin asked you in his

first series of questioning. what he said was, do you have a responsibility to disclose to a client when you have an adverse interest, do you have a responsibility to disclose to a client when you have an adverse interest to the client? what's the answer to that? >> and senator, by adverse interest, you mean a position that is different than them? or tlg something that we could effect that could harm them? if it's the positions, our answer is no. if we can do harm to them, then the answer is absolutely. >> so you do have, at least in some contexts, but not all, a responsibility to disclose to a client when you have an adverse interest to the client? >> i mean, senator, i'm just trying to be careful with my words with respect to what "adverse interest" could mean.

if we were positioned a certain way, that's one thing. again, we could have positions, there could be other positions at the firm. >> do you have a responsibility to tell them what your positions are? >> no. >> why not? >> market makers will have positions all the time. that's not something that is the responsibility of a market maker to tell your counterparties at all times about how you're positioned. >> but why not? shouldn't there be more transparency there? >> i -- that's a perspective question? or a current question? >> either way. >> well, currently that's nottage obligation. >> should it be? >> um, i -- i mean -- >> i mean, you've been in this business for close to 20 years. >> i think it would create a number of issues, because those positions change a lot, and frankly you don't always know what the positions are with

respect to the person making that transaction. so i think functionally it would be very difficult. i also think that there are some things about it that could create other problems. such as, if you -- let's say you sold something to somebody and you were long, and you told them you were long and then you went short. do you need to call them back and tell them i am not short or call them before you go short in i think there's a lot of issues that could raise with respect to that. >> but at the moment when one of your clients, one of your customers is making their decision, don't you think you owe them all the information that you have, including where your company is and how your company is positioned? >> i think we owe them all of the information with respect to that instrument they're going to take a position on. that's not necessarily where we are, including because how we're positioned isn't going to affect

how that instrument performs. >> well, it may not affect how it performs -- i mean, it could, but it may not, but it does indicate how you understand the deal and if you think this is a good investment or not, or if you're anticipating it doing one way or the other. shouldn't they know how you internally evaluate this? >> senator -- >> put your money where your mouth is. you put your money somewhere, shouldn't they know that? >> senator, we could be long a deal and not think it's a great deal, and we could be short a deal and like the deal, but have it that position. so i don't think it's the obligation currently to disclose what your position is at that time. >> thank you. >> well, let me ask about the rules of the road, because you just said you don't think it's responsibility. is there a -- is there an established set of ethics in

your industry? of certain things you have to do or cannot do? >> well, again, i'm not in the industry anymore. i do know, senator -- >> but you were in the industry for, what, 18 years? >> about 19 years, yes, sir. >> so -- >> there are things -- and the comment about investment adviser and fiduciaries, there's also rules with respect to research that i know that market makers in the investment banks industry are very careful to make sure that they follow. but market making itself, so long as people understand what they're investing in, i don't think that knowledge of the position of their counterparty is something that has to be disclosed, and i don't think it currently is disclosed by market makers. >> so you're saying there's a time in which you put on the market maker cap and the rules change for you?

>> we are -- in my business, we were market makers. >> okay. but let me ask this. when you're selling a security, such as a cdo, my understanding is you're not a market maker. isn't it true that you're a placement agent? and as a placement agent you have a duty of full disclosure? >> senator, that's correct. it might be helpful if i talk about, in our department we had a number of business activities with two major business activities. one was an aggregation and distribution business, where we aggregated assets, loans, securities or synthetics, and distributed them in new issue type situation. in those situations u. disclosure with respect to the asset and the deals -- and that's very specific disclosure with years and years of input from regulators, counsel and other investors, that's that

business. >> and those disclosure rules work well? >> um, well, those disclosure rules are meant to provide an investor with what they need to make their decision in investing in that particular product. the second part of the business is a market-making business, which is a trading business. now, there are risks in both those businesses, but i thought it might be helpful for you to understand how we approach -- >> but the marketing -- or the market-making business doesn't have the same disclosure rules as the other does. >> because it's not creating new securities. there's disclosure on new securities that is -- if it's registered, it's dictated by the s.e.c., if it's not, it's not. but usually they follow guidance for similar types of transactions. in secretary trading, it's just trading products that were already created. >> let me go back to mea question earlier about ethics.

you know, lawyers have to follow certain ethical standards, doctors have to follow certainly ethical standards, cpas, most professions have some sort of manual or some sort of code of ethics that they follow. are you saying that that is not the case in all asects of your industry? >> no, senator, i -- i know where i worked, ethical standards were very important. >> were those done by the company or done by the industry? or done by the government? >> um, at goldman, ethical standards were a focus. numerous times there would be various off-site -- when i say off-site, i mean you take people out of the what they were currently doing, to go and discuss ethics, how important it is and how you deal with complex issues. >> were those goldman standards or some sort of national

standard? or some industry standard? when you talk about ethics? what are you talking about? >> those were goldman standards, but they factored in industry standards, and i would say, i guess national standards, but i think goldman sacks had its own view of what those standards should be, and i found them to typically be very well thought out and, you know, probably more robust than what a number of people in the industry would have had. >> think this goes back to senator collins' question, where she asked you do you have a duty to act in the best interests of your clients? and based on what you've just said, it just depends on the circumstances. >> well, i was trying to be careful with the concept of fiduciary, and we should work with clients to help them achieve their objectives. that doesn't mean we're always

going to have the same view on a particular investment, and they may want to sell something that we want to buy, or vice versa, and i don't think that's -- i don't think there's a problem with that in the role of a market maker. >> okay. i'm snoot sure everyone agrees with you on that, but i'll take your answer. let me ask now about a statement. i've just jotted something down here, and it says -- goldman sold a collateralized dead obligation, cdo, without disclosing that a hedge fund manager, john paulson, helped design the cdo and was betting against the cdo. is that true? >> i think you're referring to the aca transaction, been referred to as the abacus, that's been discussed. any cdo -- at goldman sachs,

when cdos were constructed, they weren't constructed in a vacuum. typically we need people that had investment criteria that they wanted to fill and invest in various parts of the capital structure, with various underlying assets at various prices. at the same time, we had to get that risk, which means somebody had to sell the risk to create it. that could be done in cash form, it could be done in synthetic form. so i think it's helpful to note that these deals weren't created in a vacuum. in that particular transaction, the function of providing the risk to it is from goldman sachs capital markets i believe is the correct entity. i would like to check it, but i'm pretty sure that's correct, that goldman actually provided the risk, mean bent short into the abacus/aca transaction. goldman sachs, in its hedging of positions laid that risk off to

a client that goldman knew wanted to take that. i'm trying to be specific on that question, senator. >> let me ask you again, goldman sold a synthetic collateralized debt obligation without disclosing that a hedge fudge manager, john paulson helped design the cdo and was betting against the cdo. did you disclose to your customers there that john paulson was on the other side of this transaction that he helped put together? >> i didn't close -- i wasn't specifically involved, but i would tell you the disclosure documents would show what had been industry standards and what were material to that deal, which were the assets and how the deal worked. how the assets got in there, who was short it or long it other than goldman, because goldman was technically shorted into that deal, in making the investment decision, what people should focus on and was relevant to focus on were the assets and how the deal worked, not necessarily whose idea it was or

various people who might have had input, because in the asset-backed business, the focus and what determines of outcome of those securities are the securities themselves and how the deal works. >> okay. let me ask this. do you believe that goldman's actions contributed to the financial downturn we experienced in 2008? >> um -- >> we had clients who lost money. that's not good for our clients, that's not good for us. but when you look at the overall economy, there were a lot of individuals out there who were

harmed because of the financial crisis, and although we didn't deal directly with them, i know that i do and i think that my colleagues do, or my former colleagues do, have sympathy for them. with respect to regrets, which i think may be what you're asking -- >> i didn't ask about regret. i notice, though, from the record that -- >> senator if i could -- >> go ahead. >> if i could finish, you know, regret to me means something that you feel like you did wrong, and i don't have that. what i do have, though, is we made mistakes in our business, like i think any business does, and we made some poor business decisions in hindsight. >> so do you think you contributed -- your actions contributed to the financial downturn that we experienced in 2008? >> do i think my personal

actions did? >> goldman sachs' inch i don't know. i'd like to think about that and respond. i haven't thought about that specifically. >> let me ask the rest of the panel. mr. birnbaum, do you believe that goldman sachs' actions contributed to the downturn? >> i think it's important to distinguish our role in terms of the products we were trading versus making broader judgments about goldman sachs. so i want to be clear. are you asking about our specific role with the products that we traded, or are you asking us to sort of editorialize about the financial system and how investment basics played a role? >> well, i was asking about goldman sachs, but if you want to editorialize, you can, but i was asking about goldman. >> i think that not working in a

lot of areas in goldman, there's things that may have happened that multiple investment banks and commercial banks may have provided too much credit and that may have contributed to a bubble. i would second what mr. sparks set. we're all sympathetic to the negative impact of that bubble. there's a lot of human pain and suffering that came from the bursting of the housing bubble. to the extent that investment banks and commercial banks may have extended too much credit at certain periods of time -- and again that's just -- you know, i don't have any personal witnessing of that, then it's possible. >> i guess what i'm hoping to hear is that you all take responsibility for your actions. i haven't heard that so far in the first two, but i would like to ask the third. mr. swenson? did -- >> i don't think -- which actions are you referring to

that i took that i'm not taking responsibility for? >> and just to clarify, i do take responsibility for my actions. i want to be clear, i do take responsibility for your actions. >> do you think your actions at goldman's and goldman's actions generally contributed to the downturn that we experienced in '08? you just think goldman wasn't part of the problem here? sap what you're telling the committee? >> i think the purpose of the committee is to talk about what the problem is. i think it's clear that credit standards overall got loose. >> got what? >> loose, too loose. >> okay. >> and there were assumptions made and i think risk overall wasn't respected across the industry, and we participated in that industry. so i don't know -- i'm not trying to avoid your question, senator, but you know, i

mentioned mea feelings of what i did, and i don't have regrets about doing things that i think were improper, but we were a participant in an industry that got loose. >> mr. swenson? >> i think the reservation here is on the contributed part versus the -- versus what maybe caused. we did not cause the financial crisis specifically to the mortgage desk, which is what i'm hear to speak about. you have two panels in subsequent meetings to speak about that, about goldman sachs and our businesses. i do not think we did anything wrong. there's things we wish we could

have done better, in hindsight, but at the time of the decisions, i didn't think we did anything wrong. >> mr. tourre? >> i would equal some of my colleagues'. first, i take responsibility for my actions. i'm sad and hum abled by what happened in the market in 2007 and 2008, but i do think my conduct was proper. to the excess credit contributed to the bubble, which ultimately magnified the crisis, you know, goldman sachs was involved in some of these products that potentially could have, you know, excessive credit extension, but, you know, again, i firmly believe that my conduct was correct. >> yeah, i think that's one of the problems here, mr. chairman.

>> rick santelli here. i'll tell you, we just had a two-years note action, a yield of 1.024, but consider there's a grease fire going on with respect to their sovereign debt, one would have expected the demand to be more, but there's a flight to safety in emerging markets or in the european sector outside the actual euro. now, let's go to bob pisani and see how this is affecting the equities. >> take a look at the s&p 500. the important thing is the s&p stabilized around 11:30 eastern time, when the european markets closed. as rick said, that downgrade of greece to junk, as well as lowering sovereign credit over portugal a bit before that were the main factors. look at the volatility index, measure of fear and cost of buying options. that's up 20%, the biggest jump

in a long time. volume here celted, tape is approaching 5 billion shares down here. that's very high volume. so definitely some selling involved. this was not just pulling bids. all of this, of course, on europe. let's go back to the hearings right now. >> all of you have said basically throughout the course of this hearing that really there's not a real clear ethical standard, not real bright lines on what you can and can't do, and you wear different hats and it's complicated. and, you know, the fact that, as senator mccaskill said, you are market makers, but also playing in that market. whether that's truly a conflict of interest or not, whether you have a truly fiduciary responsibility or not, i just think that we need to spend some time, as the senate and subcommittee and various committees in the senate thinking through that. anyway, some of the things we heard today are very troubling.

i do sense that you all are not taking full responsibility for your actions at goldman's and also goldman's actions and the industry's action that helped contribute to this financial melt jowl. with that, mr. chairman, thank you. >> thank you, senator. senator ensign? >> thank you, mr. chairman, for this incredibly important hearing. i want to make a couple comments before i get into the questions. first of all, senator pry yor, i think most people in vegas would take offense at having wall street compared to law, because in law actually people know that the odds are against them. they play anyway. on wall street, they manipulate the odds while you're playing game. i would say it's actually -- it's much more dishonest, because it's almost like somebody was playing a slot machine and the guys on wall street were in there kind of

tweaking the odds while you were playing it, and in their favor in the vast majority of time. >> that's a fair point. also in las vegas, people are betting their own money. that's not always the case here. >> that's very good. a couple other komts. first i think 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 we let them get. without the real estate market doing what it was doing, that's where these bets were occurring, and everybody got the false idea that the whole real estate value was going to continue to go up and up and up where bubbles never continue to go up. we know that. unfortunately a lot of smart people on wall street got fooled by that. the point that i want to make also is that you always have mentioned that you are market makers, and i think part of this hearing is to find out whether

you are actually market manipulators instead of market makers. i think that's a key part of it, and that's where i'm going to take some of my questions here. i want to start with talking about the role of the credit rating agencies. do -- did you personally -- or do you know of 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. >> i didn't know anyone who would fit into that category. >> okay. >> 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 needed to be rated. >> how do you jeff taking triple b-rated products, repackaging them and getting them rerated. >> they have their. >> in their model assumptions, which nobody supposedly knows about, you both said you either

did yourself oknow people who did, went to the ratings agencies and tried to convince them about the products. >> how can you justify taking triple b-rated products, repackaging those as triple-a products and trying to sell those as triple-a products? that's what a lot of the cdos did, correct? >> that's correct. >> senator, the rationale that the agencies gave it, i believe, was because of an assumption of diversity, which meant that certainly deals would perform difficultly. 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. tourre, you were about to

answer. >> i would just add one more point rating agencies rely on historical data. when rating the products i think you're referring as cdo, triple packagi packaging, they rely on the historical performance to rate the cdo products. >> do you think that their ratings made sense? >> you mean the methodology made sense? >> you believe their methodology made sense. >> the mathematical methodology made sense, the assumption that it's a good indication of certain performance proved to not be correct. >> did you ever feel an obligation to the people who were buying the products from you to let them know they were we are repackaged as triple-a? >> i mean, the specifics of the

products were always disclosed in the offering of the products. >> that's not what my question was, did you feel an obligation at all -- this gets back to -- just, geez, these people are buying stuff for us, and 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 the crediting agency somehow in their wisdom repackaged them or rescored them as triple-a-rated products? >> senator, you're exactly right on point, and that relates to a point which i'm not sure you were here for, which is what the underlying assets are is what's material, so that information would be disclosed at new issue 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 field that

you have a certain level of expertise, 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, do you believe the modeling was correct -- good modeling, as far as rating 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 anyone to defend what the ratings agencies did would be ludicrous at this point, and i think there's plenty of evidence. do you all pay the rating agencies? >> typically that would be paid by people involved in the deal. so it could be -- >> on thoughs deals, oftentimes

it did, and do you think that that may be -- at least has an appearance of a potential conflict of interest? >> with respect to may be an appearance of conflict of interest, yes, i think there's a 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 1. it was a synthetic cdo that referenced a $2 billion in subprime triple b-rated mortgage-backed securities. goldman selected the referenced assets, the purpose of the transaction appears to have been 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 1? >> senator, i believe that deal was purely static synthetic. >> describe static synthetic. i think one of the things that confuses people is the definitions you. you actually called what was called the first floor, the bottom floor, you described it as a mezzanine. it doesn't sound so bad. there was a lot of spin in your terminology to make them sound better than others. could you please explain just for other people listening? >> yes, senator. the term "static" meant the assets 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 choose to change the assets in the pool under certain parameters. so in this particular case

static meant here are the reference notes, the obligations you're exposed to, and this is what it's going to be. synthetic meant there were no actual cash securities in there, so goldman didn't sell those securities into that, because there weren't securities with respect to the reference on that. >> but it operated the same way, didn't it? >> correct. it had the risk of that, and that deal -- my recollection is that it had a combination of single-name cds, and molest risks related to the abx index outright. >> and goldman obviously recognized there was significant risk. >> there were a lot of investors in '06 and there continued to be investors in '07 who wanted

exposure and risk in certainly forms, and so, you know, i had mentioned that these deals -- >> is that unusual, though, for goldman sachs to be the only part of it that did the entire deal on the short? >> most of the time, not all the time, 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 one of the points that needs to be made is this is an incredibly complex area of not only our markets, but our law. mr. chairman, i think the hearings you are holding are very valuable, but i think we're

just scratching the surface, and i think it's one of the reasons -- and i believe very strongly we need to fix the markets, we need more transparency, and we need to make sure the people aren't being market manipulators, you know, that some of the lines of questioning today that have come out actually are probably some good suggestions in there, but a lot more research needs to be done. i hope the senate takes its time so one is that we don't end up hurting the little guys out there on main street and we actually go after the people that -- whether it was aig, goldman sachs, you know, any of the other big traders, whether it was fannie mae or freddie c mac, i hope that's where the reform focusing on. i hate to keep harping on this, but i think it will be an important part of what comes out, and that is, do you believe

that -- and i'll just since the two of you are the only ones in a responsibility the spongeded -- do you believe that goldman sachs improperly influenced the rating agencies? >> no, senator. >> mr. tourre? >> no, senator. >> appreciate having that on the record. >> kind of an interesting point, when everything was going up, markets were going up, everyone was fat and happy, you all and people at your firms and other firms on wall street made a heck of a lot of money in bonuses. would you agree with that? i mean, large amounts of money. pretty factual statement, wouldn't you agree? >> you're asking me, senator? >> yes. >> i -- >> interesting when everything kind of came to a crash,

incredible bonuses were still paid out, even in firms where people where their actual investors lost huge amounts of money, lost everything. do you think that the incentives that are set up 1/2 firms like goldman sachs are the probably incentives to have folks engage in ethical behavior? each one of you, down the line. >> sneer, i i think goldman sachs works hard to engage in ethical behavior. >> i didn't say that. do you believe the way the pay structure and bon uses are set up lead to the proper incentives to have the people at goldman sachs and other folks who do what you do on wall street, do you think that those incentives are there that lead to ethical behavior?

>> well, again, josh and i don't work there anymore, so joe exactly what their -- >> that's why i'm asking a general comment. obviously when the bon uses are paid, when everybody is making money, that kind of makes sense to me, but when all your -- you know, the people buying things from you, who have bought if the past, all of a sudden they lose huge amounts of money and folks still get paid 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? >> i don't know currently what those are, so i don't want to -- >> the way you were paid in the past, how about that? >> i believe consistent, yes. i believe in the past at goldman sachs -- >> you had proper incentives, the bon us structures were improper. >> i believe that goldman sachs in the past i had every reason

to be ethical with respect to what the firm did with me, including compensation. >> mr. birnbaum? >> just to give background on how people at goldman -- and i can't speak for the way it works today, because i'm not there today, but the way people are paid there and 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 of a qualitative nature. it has to do with the culture of the firm and has to do with ethics, and has to do with how one works within a team. i can assure you thattic have enormous financial performance, but if you weren't cognizant of ethics, you would not be promoted, you would not be paid, in fact you would probably be fired. >> okay. mr. swenson? >> i echo the comments that josh said. the simple answer is yes. >> okay.

mr. tourre? >> i would echo some of the comments. it's based on the firm's performance, business performance and personal performance, at least at goldman sachs were in line with incentive correctly. >> thank you, mr. chairman. >> thank you, senator ensign. >> as all the questions have gone today, i think we're seeing the problems. >> thank you, senator tester. >> thank you plrks chairman. i appreciate you holding this hearing, and it's been a pretty long morning. i don't know if anyone will come after me or not, but i want to thank you folks for being here today. i appreciate it vich. mr. birnbaum, why, how and when were you convinced there was a housing bubble on the verge of collapse? >> i don't believe i used those words. >> okay.

you guys have a bevy of attorneys that have briefed you on everything. if you don't want to answer my questions, you don't have to -- >> i want to answer your questions precisely. >> but i'll rephrase it. why, how and when did you become convinced that there was a housing bubble that was in decline? >> my sentiment expressed in my opening statement is there was a market in residential mortgage-backed securities that i thiol was overvalued. >> so it was based on -- the housing bubble and its decline or collapse, however i want to put it -- >> well, i didn't say that, though. that's how you put it. >> okay. did you not think the housing market was in decline? do you think the housing market is in decline right now? >> at that point in time, housing was in decline already. >> at what point in time?

>> you were referencing my opening statement, i think. >> i was just asking you a question. >> okay. >> when do you think the housing market started in its decline? when did you come about that is it. >> when did housing start to decline? >> when did you become aware. >> when was i aware that hous g housingle values were declining? >> it depends on how you track these things. >> and you base that middle or end of 2006. and i don't want to put put words in your mouth, you base that on the subprim market? >> no, you asked me about housing. >> okay. how did you base -- what did you base that decline upon? >> well, typically when people are talking about the housing market, declining or going up, they're talking about housing prices. so we all have available -- we all have publicly available information on housing prices that's released typically

monthly, sometimes quarterly, and if that's what you're referring to -- >> so -- so, the housing decline was based on housing prices around the middle to end of 2006, it wasn't based on subprime or -- it was based on that pattern? i'm not trying to set you up for anything. >> no, i just want to understand the question. >> look, a lot of these vehicles that were developed were based on housing. you guys are smart guys. particularly i want to know from you, mr. birnbaum when you saw the downturn, the potential collapse, i was wondering what you base that on, and you said the value of housing at that point in time? what did you say? >> well, we had all seen a desell rice -- first a deceleration and then decline in housing values. that was one of many things that i think concerned people.

>> did this change your view of mortgage-backed securities? >> mortgage market is a big market. you have agency markets, nonagencies, prime mortgages, subprime, i believe what i referred to was the subprime market. >> okay. so based on subprime, did it change your view of the mortgage-backed securities? >> it changed my view of the likely direction of the market. >> okay. did you share your thoughts with others at goldman or keep them to yourself? >> i did socialize my thoughts with some people. as you mentioned, there was a vigorous debate at goldman about that issue. >> okay. given that knowledge, were you surprised by mr. tourre's statement that the abacus deal was similar to others in terms of quality? >> i wasn't surprised by that

statement. >> you weren't surprised by it? >> no. >> should we be reassured the abacus deal was worse than others -- >> i didn't work on the deals. i couldn't be surprised, because i didn't work on those deals. they always say you want to know the answer to a question before you ask it, i'm going to start with you, mr. sparks.know before you ask it, i'm going to start with you, mr. sparks. do you think that goldman sachs did anything wrong in this whole process of the synthetic cdos? >> well, i don't think goldman did something wrong -- >> so you don't think goldman did anything wrong. >> but that doesn't mean that we didn't do deals that were bad decisions to do and didn't

believe like we wanted them to do, and it doesn't mean we didn't periodically make mistakes, but wrong to me has some qualitative comment about doing something inappropriate. that doesn't mean we didn't make mistakes or do deals that didn't turn out the way we hoped they would. >> okay. what's your definition of a synthetic cdo, so we know if we're on the same page? >>. >> sure, it would be a collection of -- well, it could be a number of -- basically a cdo where there's no cash references involved, so though it's listed as a bunch of assets, it's clear it's not that, it's done by shorting some sort of derivative from that, and from that you can create cash instruments or synthetic instruments. >> do you know, when was this idea thought up?

this synthetic cdo idea? is this a fairly new phenomenon? has it been around for decades? >> i believe it would have been -- and i can't give you an exact date, but i believe it would have been in the early 2000s. it happened to a larger degree in the corporate market. >> this was just to give folks that had money something to gamble on? you can say what you want, but it is gambling. i'm not going to go down the bookie line, but you're basically gambling on something that has -- you aren't going to get any money out of it through the synthetic cd: >> no, sometimes you can create cash bonds by putting in some collateral, but i think your question is, why? >> yeah. >> there are -- there are and were investors who wanted to invest in these types of structures at those market levels. they actually desired to get more exposure or exposure

tailored to something that they wanted. >> and from letting people know how they're designed and what's in them, does anyone have obligation to let those investors know what's in -- what's in that financial instrument? >> yes, and at new issue, disclosures provided that both what the underliers are, how the deal would works, and then how the cash flows actually will work, because typically thosele transactions would be tranched with risk layer, but not always. >> so the chairman in his questioning asked -- i think it was you, mr. sparks, how you got comfortable with seals. i'm going to bring three of them

up -- four of them, actually, four that came out of documents the subcommittee did. there was a hudson 2006-1, synthetic cdo, sold december 2006, 18 months later it was -- these were triple-as downgraded to junk. there was an andersen 2000-1, set up the first quarter of 2007. seven months later it was downgraded to junk. there was the timberwolf talked about here before march 2007, triple-a, downgraded to junk in less than a year. that was the bad deal one. there was the abacus, closed end of april 2007, within six months it was rated down by 84%. now, going back to the answer that mr. birnbaum gave, that we could see some things happen in the middle of 2006, middle of

2007, all but one of these capes after that effect. my question is, how -- how can you in good faith set these aside and sell them out and collect the fees and make the dough? >> well, is that to me, sir? >> sure. >> i want to clarify, the things i was referring to are things that every market participant observed. >> that's okay. i'm not assuming that you were brilliant in that assertion. i think it's spot-on. i appreciate that answer. i'm just asking mr. sparks after the fact, we saw things happening and every one of these were, it looks like, a wreck waiting to happen, because they were all downgraded to junk in very short order. >> senator, at the time we did those deals, we expected those deals to perform. now -- >> perform in what way? >> perform to go to junk? >> to not be downgraded to junk in that short a time frame. in fact, to not be downgraded to

junk. so if i could finish -- >> keep going. >> i mentioned we made some bad business decision, okay? these deals performed horribly. that's bad. >> and this is a pattern of it. yeah. >> okay. that said, at the timeses -- just because one person in my business unit, or a few people might have had one view, i can tell you there were a lot of other people in my business unit that had a very different view, and there were a lot of other investors that had a very different view. >> do you feel confident that the information about each one of these that was about these was given to the investors, all the information that was out there, and the credit rating agencies, too? >> well, i generally feel that the disclosure for the new issues that goldman sachs brought was good. >> how about these? >> including these. >> okay. i think there was a credit rating agency that testified, and correct me if i'm wrong, mr.

chairman, and i know you're busy, so you may not be able to, but in the abacus deal they didn't know anything about paulson. it could have changed it dram lick. who has the obligation to tell the rating agency? >> i do have a comment, and early i said i found that the rating agencies worked hard, but in that comment, they rate the deal, what the assets are in the deal, and whatever the assets are, they are. so i found -- i was surprised by that comment, because the deal is the deal. the agency understood that, and so that was a surprising comment to me. >> yeah. it doesn't -- and this has happened before, but it really doesn't click going back to senator mccaskill's question, it doesn't click that there was something fundamentally wrong with paulson being ability to pick these? >> well, goldman sachs -- just senator, i want to make sure you

understand mechanically how that type of deal worked -- >> are you saying mr. paulson didn't have any role? >> nose nose, i'm not. >> paulson had a role in picking these securities, and you don't see anything wrong with that. in fact the credit rating agencies say it would have fundamentally changed the way, you can't associate yourself with those comments, because you don't think they're right? >> well, goldman sachs provided the short risk to that transaction. a very specific set of names. whatever goldman did with those names, how that affects what a rating agency rates that, that to me doesn't make any sense. >> okay. we've got a -- well, we've got a -- i don't know what you call it, a faultline, whatever it might be. maybe a wrong term. i want to go back to a previous

question, and you all kind of skirted it except for mr. birnbaum, but it's been brought up several times by the ranks member also, and that is who do you consider yourself working for? the client or the firm? i don't want to go back and forth and go through the same questions that were asked before, but the question is, you have to work for one or the other when push comes to shove. you can't be for both. there are certainly times that you can't be for both. am i wrong in that assumption? >> go ahead, summer sparks. you have the mike on, so go ahead. >> that's a very complicated question, but if you don't prudently manage your risk, you won't be around to work for your clients. >> okay.

>> i would say clients are extremely important to goldman sachs and market makers that i think will have a chance to succeed, but that doesn't mean that you should be imprudent with respect to risk. >> okay. i think everybody -- i shouldn't speak for everybody on the committee, but i'll try and they can correct me later if i'm wrong, but i think everybody irchdss there needs to be some level of regulation, mainly because from my perspective because of the t.a.r.p. bailout is probably why goldman is still here because of the taxpayers and because congress did what they did. but i guess the question here

is, as we moved forward and i list anderson, timberwolf, abacus, where i think they were clients of yours that bought this stuff, it went south in a regular pattern. it just wasn't one, and you guys made some dough on it, and paulson made out like a bandit on this thing. >> senator, on each of those deals -- >> i don't think the firm did well on every one of those deals. in fact, it's possible, and more likely that on those particular deals, the firm lost a fair amount of money. i would have to do the math on each one, but on those deals that you picked out that performed very poorly, and they did, goldman sachs i think lost a fair amount of money, because goldman retained a fair amount of risk on those deals. >> even including the short selling you did on them? >> that's why i would need to go back and net them off. >> i think the chairman asked for that information, so we'll be looking forward to that.

>> if you were in my shoes and on the verge of potential doing wall street reform, what would you change? anything? >> senator, i think clearly some things need to be changed. i have not read what's proposed. >> you really don't need to read what's proposed. you're in the business, okay? i'm a farmer, and if you asked me what we need to change in agriculture, i could tell you pretty quick. i'm assuming you're a smart guy in the financial services, and i don't mean that as a drogue tiff comment. as you look at the regulations that fell in, and some people made a lot of money, some people lost a lot of money. i don't know if it was because people didn't get told the whole story or not. if they durant, i think there's a problem there, but is there anything in the regulatory as you looked at, as you worked, what would you change? >> well, again, i don't work at

goldman sachs anymore. >> but they haven't changed the regulatory structure since you worked there. >> i feel like we worked hard to manage our risk prudently. think think it's a very hard question, and i think when you look at what gradually became too much credit available in the syst system, and there were many people who participated in that system, and actually so long as that was going, it was good for those people. the kind of regulator, not meaning technically regulator, but there wouldn't a defuse valve to monitor that.

>> senator ensign talked about t. let me see if i can find the exact statement, you guys did pretty well. 2009 goldman stacks report states the firm did not generate enormous net revenues but bet against -- documents indicate two top goldman mortgage, michael swenson and josh birnbaum discussed their evaluations as a very profitable year and extraordinary profits. so you made money going both directions. >> senator, i would like to clarify -- >> and there's a lot of guys that lost their retirement, they lost everything they've got. when it dropped off. >> senator tester, one of the clarifying points is, even if goldman sachs didn't make it, the executives did. >> yeah, yeah, they made huge bon uses. >> i'm with you. we're together. >> there are two things that i

thought, just to clarify, one on the graph that was shown iismgtsds i ran the mortgage department and i was responsible for the risk. i don't think that's reflective of the risk i managed. number two, goldman -- i've heard a lot of numbers about what goldman sachs made. my department, which included these guys and other businesses including commercial mortgages, where we made money, the number was $1.1 to $1.2 billion in 2007. that's the revenue number. so that's the number i know, that was roughly 20% to 25% more than the year before. the reason i give you that, i thought the firm managed it well. but that wasn't that atypical a year in that business. i wanted to make sure the numbers that i know -- because i

had heard some numbers that i felt like weren't accurate. >> first of all, i -- i do want to thank you all for being here, and i mean that. i also would like you to have go out and have pop and leave the attorneys out of this thing, because i know you have to cover yourselves. the fact is, i think we've got a problem, and i think we've got a problem with what's gone on on wall street, and. a lot of that good information came from you guys. i think you had to temper it, i think it's pretty obvious, but that's okay. that's what you were instructed to do, but the fact is we can't let this happen against, or if it does happen, the chances have to be slim. when you have folks betting basically on the weather or whatever it might be, i just think it can put the whole thing into a turmoil unless it's tightly controlled. that's my own