to impose on them until they pay back every dime of the money that they've got. [applause] >> but one of our proposals is to have some of that money used to help get small business owns out. and so this is going to be something we're going to be debating. if we can start loosening up credit for small businesses and helping smaller and community banks with their lending portfolios, that will make a huge difference in terms of the pace of our economic growth. so that is a top priority for our administration. thank you for the question. .

the child labor walls -- those things would not have happened if it had not been for unions fighting for those rights. even if you are not a member of the union, you have to appreciate what unions have

done. a lot of things that we to do not get a lot of notice. they do not always generate headlines. how was that the pavement -- the the part of labor operation to make sure that workplace safety rules are enforced, to make sure that if the federal government is helping to finance programs, that we have a project that assures that people are paid at least a decent wage and they are getting a fair deal, who am i appointing to the national labor relations board so that when a union tries to organize, it doesn't take five years before you can even get a ruling and then it turns out that the ruling conveniently always is against the union. there have been many things we're doing administratively to make sure -- that people get a fair chance to organize. some people do not want unions

and that is great. if you feel that you can look after your own interests, i respect that. but one of the things that we stand for as americans is the freedom to decide, i am going to join with my brothers and sisters at the workplace to try to get a better deal, not through coercion but just by agreeing to bargain. and we want to make sure that there is a level playing field in the process, that is something that i strongly believe in and and is part of the american tradition. sometimes people will say, unions are what is not making us competitive. that is just not true. unions are probably less than 10% of the economy. the notion that somehow that is what is creating competition with other countries that pay

low countries, that is not the case. the fact of the matter is that what is going to help us become competitive is that if we've got middle class people making middle-class wages with middle- class benefits who can go out and shop and support a family and buy a new car and pay their mortgage, which will create more business opportunities and maintain america as the greatest market on earth. if we do that, then we will be successful. there will be times where i have some differences of opinions on some interest -- issues, but those are arguments. i do think, for example, that it is important for us to reform our education system. i love teachers' unions that i have been supportive of them ever since i got into politics. but i do want to partner with teachers to make sure that we are improving constantly how

markets performed -- how our kids will form and progress in school districts all across the country, because i want young people all across america -- we can just graduate from high school, that is not enough. we need to go on to community colleges and a four-year education, because those of the jobs that will exist in the 21st century. i do not want our young people to compete simply on the basis of their willingness to work in a factory, because it is going to be very hard for them to compete over the long term in other countries were the wages may be a lot lower unless they have higher skills and they are bringing something different to the marketplace than some of these other workers. thank you for the question. ok, that gentleman -- let's say here we've got.

one of those ballplayers back there -- if you're asking whether i can be here, the answer is yes. those how're you doing? -- >> how are you doing? i want to pitch a few before you leave. can you make that happen, mr. president remarked >> i think that is within my executive power. [applause] all right. a young woman right there in the white shirt. >> i'm a student here in the hills. i thank you for healthcare, but i know you have your playful. i have a lot of undocumented france and immigration has been

in the news for many years, and nothing has been done about it. i was wondering what your plan was for our undocumented workers who helped establish our country. >> here is my plan. and by the way, it is not my plan, i think it will have to be a plan for all americans are arriving at a common sense consensus about responsibility when it comes to integration -- immigration. the truth is that if you talk to most americans, they probably have a similar concept. and that is, most americans recognize we are a nation of immigrants. very few of you -- very few of you are native americans, which means most of you came here from someplace else, either your family, and your great-great- grandparents came here.

we are a nation of immigrants founded on immigration. that's what the whole plymouth rock thing was about, immigration. so we're a nation of immigrants. but we are also a nation of laws. we expect people to follow the rules if they want to emigrate to this country. that is only fair. so the challenge we have now is to set up a system where we are welcoming new people to our country, which makes us stronger. one of the things that is a huge advantage for america is that we constantly are replenishing ourselves with hungry, driven people who are coming here wanted to work and start a business and our population is younger and more dynamic, and that is a good thing. we want immigration, but how do

we do it in a lawful way so that people who are waiting in line back in their home country, doing it the right way, and that we have some basic control over our borders? we do not have the right now. the system is broken. ever since i was campaigning i was saying the same things. what i want is a system in which a secure our borders, and by the way, this administration has made significant progress securing our borders. we start cracking down on companies that are purposely hiring undocumented workers to wonder kept the wages of u.s. workers. -- to undercut the wages of u.s. workers. as long as there are employers that want to love exploit undocumented workers, pay them lower wages with no benefits and no overtime, people will

continue to come. we can try to build as many fences as we want at the border, but the fact is, if folks are making $2 a day back home and they can make $10 an hour here, they are going to come here. unless we make sure that employers are doing what is lawful. we have to take that seriously. if we do those two things, we will still have 11 million to 13 million undocumented workers in this country and not all of them are going to go home. this law that you just passed in arizona, which i think it's a poorly conceived law -- [applause] you can try to make it relates tough on people who look like they might be illegal

immigrants, and one of the things that the law says is that local officials are allowed to have somebody to has a suspicion that they might be an illegal immigrant for their papers, but you can imagine if you are a hispanic american in arizona, you're great grandparents may have been there before arizona was even a state, but now suddenly if you do not have your papers and you took your kit out to get ice cream, you are going to be harassed. that is something that could potentially happen and that is not the right way to go. and we can try to crack down, but the truth is, that 11 million folks, we have to make them take responsibility for what they did. and the way to do that is to make them register, make them pay a fine, make them learn english --

[applause] make them take responsibility for the fact that they broke the law. you make them get in the back of the line, but you also say, if you do with the right way, then you have the chance to become an american citizen. and if we have that kind o'clock comprehensive approach -- that kind of comprehensive approach, we can be a nation of laws and a nation of immigrants. i have been pushing for this. i want to happen. the only way it is for the happened is that the democrats and republicans come together to do this, because this is such a volatile issue. i will bring the majority of the democrats to the table in getting this done, but i have to have some help from the other side. i have to have some help from the other side because we're not going to solve this problem if it can be exploited for

political purposes, and the only way to rise above the politics and solve the problems for all is to make sure it is a bipartisan effort and that is what we're pushing for. i hope that we can do it sometime soon and i am going to continue to advocate on behalf of finally fixing the system so that we do not have either the kind of bad laws that we of seen in arizona or alternatively we have 500,000 people coming and arizona without any controls. we can have a common sense law but we have to work together across party lines before it will happen. it is the guy's turn. let's see. all right. well -- this gentleman right here. do i need to give you my microphone? are you going to give it back?

>> i work for the city of ottumwa, and we are under epa orders to have $160 million of sewer remediation. we are at the highest poverty level in iowa. we are trying to clean up the environment. we just need some time and financial assistance. we need some assistance through the federal government. we used to find sewers at 83% but in the 1980's they got rid of that. we need some help. [applause] one of the great things about being president is that you have these wonderful advisers, and one of my best advisers is my secretary of agriculture who has the benefit of being a governor.

i have seen a lot of former governors and my cabinet because governors cannot always play the political games that they play in washington. it's like being a mayor. the rubber hits the road. it does not matter whether you're a democrat or republican, but garbage has to be picked up, the source system has to work, etc. -- the sewer system has to work, etc. we talked about waste water management and in the recovery act we actually funded millions of dollars of prague checks across the country because we know that it is hard for a lot -- of projects across the country, because we know it is hard for a lot of communities to do what needs to be done. i don't know what the specifics are in ottumwa. that sounds like a lot of money to me and i am sure it sounded like a lot of money to you.

you look sad about the whole thing, like, where my going to find this money? -- where am i going to find this money? i am going to have my team investigate exactly what needs to be cleaned up and if there is some way that we can put this on a better funding track. all right remarqu? this will bear on how we think about our federal budget in the future. everyone dislikes washington right now, and everyone wants to lower their taxes, everyone hates waste in government, but at the same time government does some important things like helping to make sure if you get clean drinking water and your

roads are not full of potholes' -- i am not saying that it always succeeds, now. i think i've had a sore spot here, mr. mayor. making sure that you got teachers into classrooms that are getting decently paid. making sure that social security is going to be there for the next generation. making sure that medicare is solvent, so that our elderly are able to get proper care. i want everybody to remember this, because we're going to have a a very tough debate about how to do that. we're going to have to bring down our deficit. we cannot sustain it. and the steps that i have taken with a three-years freeze on

discretionary spending, pentagon reforms where we are eliminating weapons systems that the pentagon does not want, scouring the budget to end programs that do not work, even with all of those steps that we're taking on that front, and that will pay for everything that we did during the recovery at, so everything that has happened on my watch, we will have paid for. we will have paid for. but i inherited a structural deficit that is going to get worse in the years to go, because our population is getting older, health care costs have been going up faster than inflation, more people are on sosa security and medicare, -- social security and medicare, and we have two wars that we have to fight, and we combine that plus the interest on that deficit, if we do not bring it under control, we will be

burdening future generations and a way that is not acceptable. as this debate unfolds, i want people to pay attention to what folks are saying. a lot of times politicians will tell you why and when it cut your taxes, i am going to lower the deficit, i will expand medicare -- they will tell you what ever it is they want you to hear. and you should ask every politician when they say that they're going to balance the budget and deal with that deficit, what exactly are you going to cut? but spending are you willing to eliminate? are you going to eliminate funding for sewers? are you going to reduce the cost of medicare? because there is no such thing as a free lunch. and i think a lot of times the way it is talked about in washington, folks make out as if if we could just eliminate the waste and abuse in washington, somehow that would

fix the problem. now we have tough choices. let me give you one example. in foreign aid, if we'd just toss foreign aid, that would be a big help. let me tell you, foreign aid is less than 1% of our budget. if we eliminated port projects and earmarks -- now some are kind of ridiculous. and we should eliminate them because we do not have any money to be wasting, but earmarks are only 1% of the budget. if we could eliminate all foreign aid and earmarks, and we still have a huge problem, because most of our budget goes to social security, medicare, medicaid, defense spending -- those things account for about 70% of the budget.

everything from national forest to the agricultural department doe -- that is 30% of the budge. that is a tough set of choices that we have to make. so when you hear the next debate on how we are going to reduce our deficit, understand we're not going to do it overnight. he would be irresponsible for us to try to do it in one year or a few years. we're going to have to do it over a stretch of several years and we will have to make some tough choices. i have time for two more questions. i know that i did not get a lot of clapping about the hard choices things. but remember when i was running for office and i said, i will not tell you what you want to hear about what you need to hear. and you need to hear that we're going to have some tough choices around our deficit. i've got two more question.

i'm going to call on this young lady right here. yes, you. >> i'm in fifth grade. >> good to see. >> my parents wanted me to ask you what kind of high said, and my grandmother says hi. -- what kind of pie you had, and my grandmother says hi. >> i had rhubarb pie. and it was some tasty pie. some of you may occur that my cholesterol has gone up. it is because of pie. the white house along with air force one -- there's plenty of pie at the white house and that is one of the perks that you get

with being president. it is the chill in sturm -- the gentleman's turn. all right, i am going to call on a student. this guy right here. -- well, no, the guy beneath you. i did not see. you looked older. i am sorry for the guy in front of you, he is getting out. no, remember i said, boy, girl. >> i'm an 11th grader at ottumwa high school. we have the highest dropout rate in the state of iowa. i had this plan out with a two- part question. [laughter]

my mother is a teacher and you talk about in the recovery act about how if you will have student loans for kids to graduate high school to go to college, but what about those who do not graduate high school? >> first of all, thank your mom for teaching. where is she? is she here? i'm sorry. >> onewheshe won one ticket and she gave me her ticket. >> that is nice. or she interviewed you for the newspaper. >> tell her i said hi. i don't know about that. but i will answer your question.

you're absolutely right that we can do a great job financing community colleges and student loans and college education, but if we have not dealt with this we're going to have problems. and we are slipping behind. we used to have by far the best education system in the world, by a huge margin. and we do not now. we still have the best universities in the world, the best college system in the world, and we have some of the best schools and the world, but our overall education system is kind of in the middle of the pack in terms of advanced countries, especially in science and math, which is a huge problem because science and math is the future. that is what is going to allow you to integrate. i have this terrific secretary

of education and arne duncan, and one of the things that we have been trying to do is to figure out how we jumpstart more education excellence. first of all, the recovery act was also the largest investments in education by the federal government in history, above and beyond whatever annual funding folks get, and it helped to pay for new classrooms and laboratories, teacher training programs, and a whole host of things. but what we have to do moving forward, it is really emphasize teachers. we have to treat our teachers better, give them more professional development, we have to pay the higher salaries, we have to attract more young people to go into teaching, we have to put a

bigger emphasis on math and science teaching, so we've got to give teachers a lot more support than they are getting right now. now one exchange, teachers have to be accountable. i don't want teachers to be judged just how their kids do on a standardized test, because if teachers did kids to come from poor backgrounds, they may do worst on the test. it does not mean it is a bad teacher. but it has to be measures of how kids to your to your -- do year to year, to say that we have improvement in student performance over time. that is the bargain we're trying to strike with teachers. more support, more professional development, better pay, but we want to make sure that teachers helped to shape and accountability system so we know

our kids are learning. that will be the single most important thing we can do, and we've set something up called race to the top, which is a competitive fund where we take a local school district and state, if you can come up with great ways to train teachers, great ways to hold the whole school system accountable, focusing on not just the best it is but also the low performing students, if you did these things in terms of reform, then we're going to give you extra money and better incentives. we will allow you to compete for excellence, not just compete for mediocracy. and so far we've seen a couple of statements -- states when these race to the stock -- win these race to the top award, and

it would be great to see ottumwa in there. and this is about how we're going to succeed as a nation in this new century. we can have the best teachers in the world, beacon fund digressed -- the best programs of the world, we can get out scholarships, but if parents are not parenting their kids in emphasizing the importance of learning and education, then it is not going to make a difference. that is the key. so i want everybody here as parents, as community members, as church members to know that if we are supporting our kids, if we are supporting our kids and we are instilling the values of responsibility and hard work and excellence and second place is not good enough, that is how

america got bill. that is how we're going to build up for education system. that is how we're going to improve our economy. government can only do so much. we're going to be there to partner with you but you have to make it happen. becky very much, everybody. god bless the united states of america. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2010] >> next on c-span, a hearing on goldman sachs. later we will bring you janet napolitano. here is part of today's committee hearing would goldman sachs ceo lloyd blankfein. it is chaired by carl levin of michigan.

>> we ask you to stand and raise your right hand. do you solemnly swear that the testimony that you are about to give is the truth, the whole truth, and nothing but the truth, so help you god? >> yes, i did. >> thank you very much. i don't know if you heard the earlier testimony, but we use the system of lights, so you can give us our testimony if possible in five minutes. >> chairman levin, ranking member coburn, members of the subcommittee, thank you for the invitation to appear before you today as to examine some of the causes and consequences of the financial crisis. today the financial system is fragile but it is largely

stable. the stability is the result of a decisive and necessary government action during the fall of 2008. like other financial institutions, goldman sachs received an investment from the government as a part of the efforts to fortify our markets and the economy during a very difficult time. i want to express my gratitude and the gratitude of our entire firm. we held the investment for approximately eight months and repainted in full along with interest. until recently, most americans had never heard of goldman sachs or were not sure what it did. we do not have banking branches. we provide very few mortgages, and we do not issue credit cards or loans to consumers. instead, we generally work with companies, governments, pension funds, mutual funds, and other investing institutions.

these clients usually come to goldman sachs for one or more for the following reasons -- they want financial advice, they need financing, they want to buy or sell a stock, bond, or other financial instruments, or they want help in managing and bring their financial assets. for nearly 35,000 people who work to goldman sachs, the majority of whom work in the united states, they are hardworking, diligent, and thoughtful. through them, we help governments raise capital to fund the schools and roads, we held companies and provide them funds to help their growth, we work with pension funds and endowments to help build and secure assets for generations to come. and we can net buyers and sellers in the securities market, contributing to liquidity and the vitality of our financial system. these functions are important to economic growth and job creation. i recognize, however, that many

americans are skeptical about the contribution of investment banking to our economy and are skeptical about how wall street contributed to the economic crisis. we are trying to deal with the implication of the crisis for ourselves and the system. what we and other banks, rating agencies, and others failed to do was to sound the alarm that there was too much lending into much leverage in the system, that credit had become too cheap. one consequence of the growth of the housing market was an instrument that pool of mortgages and their risk and it became overly complex. the complexity and the fact that some instruments could be easily bought or sold compounded the effect of the crisis. while derivatives or an important tool to help companies and financial institutions manage their risk, we need more transparency so that the public and regulators and well as safeguards. that is why goldman sachs in supporting regulatory reform had made it clear that it supported

clearing houses for eligible derivatives and the higher capital requirements for non- standard instruments. as you know, 10 days ago, the f -- the sec announced a civil action against goldman sachs in connection to a specific transaction. it was one of the worst days in my professional life. we believe deeply in a culture that prizes teamwork, depends on honesty, and awards they know as much as saying yes. we've been a client-centered firm for 140 years, and if our clients believe we do not deserve their trust, we cannot survive. while we strongly disagree with the complaint, i also recognize how such a complicated transaction may look to many people. to them, it is a confirmation of how and control -- how out of control wall street has become. we have to do a better job of striking a balance between what an informed client is important

to his or her investment and what the public believes is over confidence in risky. they are focused on the more specific issues. it is important consider these issues in the context of risk management. we believe the strong conservative risk management is fundamental and helps define goldman sachs. our rich management could not provide for absolute clarity debate highlighted the uncertainty by the following -- a volatile conditions and housing market. there was an attempt to reduce the firm's overall record much has been said about the supposedly massive short that goldman sachs supposedly had on the housing market. we were not consistently short on the market in mortgage related products in 2007 and 2008. our performance on regulated businesses confirms this. while profitable overall,

goldman sachs lost a possible $1.2 billion from our activities in the residential housing market. it did not have a massive start against the housing market and did not bet against our client. we believe that we manage our risks with our shareholders were to get a way that people expect. thank you for the opportunity to to address these issues i look forward to addressing your questions. >> thank you very much, mr. blankfein. we heard from earlier panels today the example after example where goldman was selling securities to people and then not telling them that they were taking an intended to take a short position against the same securities. i am deeply troubled by that. and it is made worse when your own employees believe that those securities are jokes or a piece

of crap or a studentcashitty des that your employees believed about those that. about timberwolf, the goldman sales team was told it was a priority deal for six months. at the same time, they held a short position. they were betting against it. they rode that it went to junk status and about seven months and investors lost big time. but goldman profited on that deal. the $500 million long deal, goldman shorted it at the same time that it was selling it to clients.

securities defaulted within a few years with the 65% delinquency rate. the bad news in your own words was that the client loses money, but the good news is, goldman sachs made money on the deal. the next one, $700 million fremont deal. this was of subprime loans, a notoriously bad lender. your folks knew it. one of your client's cause your sales force about it, and your sales force among themselves call crap loans, they go out and sell them anyway, and at the same time your sales people are selling those items, they are shorting the deal. so you short them so that goldman makes money when the security fails as you did in 10 months. of the $300,000 anderson

synthetic loan, these are known to be shoddy loans, i think there was one in two of a list of babylon produce occurred i client as, how did goldman sachs get comfortable with this bill? goldman sachs pointing out that it was a new century. goldman sachs did not respond and did not say, we are not comfortable, we are shorting against it, betting against it. asked a direct question, how can you get comfortable with a deal involving those loans, and instead of responding honestly, we've got problems, too, we are not taking chances on this bill. we may be selling at but we are betting against it. the clamp was told that goldman was an equity holder, which it was at the same time, but that was a half truth, because it was betting against that same

security. that cdo failed within seven months. your client lost, goldman profited. the $2 billion synthetic cdo, the sole protection by air on this cdo, a $2 billion short. they were betting against it. goldman sales person described it as junk, not to the buyer, of course. the cdo employed within two years. your client calls, goldman profited. there is such a conflict to me when goldman is selling securities but particularly when its own people believe they are bad items, described in a wait these e-mails show that they were described and your own sales people, what they believed about them, could go out and

sell these securities to people and then bet against the same securities, it seems to me it is a fundamental conflict of interest, and it raises a real ethical issue. and i would like to ask you whether not you believe that goldman in fact treated those clients properly, and as you say, if clients believe we do not deserve their trust, we will not survive. those of the ringing words that you give us in your own statement. given that kind of a history here, going heavily short in the market, which you did and made a strategic decision to do that, but then on the specific examples to be betting against the very securities which you are selling to your clients, and internally, your own people believed that these are crappy securities, how do you expect to

deserve the trust of your client, and is there not an inherent conflict here? >> senator, there is a lot in your question. we could spend a lot of time on the different parts of it. our clients' trust is not only important to was, it is essential to a spirit is why we are successful as we are and have been for 140 years. we're one of the largest client franchises in market making in these kind of activities we are talking about now, and our client base is a pretty critical client base for us. and they know our activities and understand what market making is. >> do they know that you think something is a piece of crap and you are betting against it and you sell it to them? >> i do not know who this is. >> we went through this today.

>> i know, senators, and there are individuals e-mails picked out. >> i am asking you a question. if your people think something is a piece of crap and go out and sell that, and in your company bets against that, do you think that deserves your trust? >> i want to make one thing clear. when you say we sell something and then our customer bets against it -- >> you bet against it. >> we are principles. the act of selling something is what gives us the opposite position of what the client has. if the class asks us for a bit and we buy from them, the next minute, we own it, they do not. if they ask to buy from it, the next minute, they own it and we do not. we could cover that risk, but the nature of the principal business and market making is that we are the other side of what our clients want to do.

>> when you sell something to a client, they think presumably it is no longer in your inventory. >> not necessarily. >> but they have a right to believe that you want that security to work for them. that is the belief i think most customers have. in example after example, it is not that you sold something which ought surely meant somebody was buying it. that is not what we're talking about. we are talking about betting against the very thing that you are selling, betting against it, going short against it without disclosing that to that client. you think people would buy securities from you if you said, do know, we want you to know this, we are going to sell you this but we are going to go out and buy insurance against the securities exceeding. we are taking a short position. we're getting this out of our inventory and betting against the very thing that we're selling against you. that is a totally different

thing from selling a security and no longer having an interest in it. my question is, is there not a conflict when you sell something to somebody and then are determined that -- to bet against that same security and you do not disclose that to the person you are selling it to? >> in the context of market making, that is not a conflict. what clients are buying for customers are buying, they aren't buying exposure, the thing that we're selling to them is supposed to give them the risk that they want. they are not coming to us to represent what our views are. they probably -- the institutional clients we have to do not care what our views are. they should not care. there are parts of the money where we are fiduciaries. >> that is the part that is very confusing to of votes. they think that you are

fiduciaries. >> not in the market making context. >> they are told that not only your fiduciary, but betting against the very security that you are selling to them. you do not disclose that. that is worse than not being a fiduciary. that being a conflict of interest. >> i don't think our clients care or they should care. >> that you are betting against the security or selling to them? they should not care? you're going short -- you're holding a short position against the very security. i read you over and over again. you are selling securities, described as crab by your own sales force, and that makes it worse that there is -- there is an inherent conflict when you do not disclose to your client that the security that you are buying from us, we are the people who are keeping the short on this one. we are betting against the security succeeding. you do not think that is relevant to a client?

>> i know that we live in different contexts and this is a professional -- >> this is the human context. >> in the human context, the markets work on transparency with respect to what the item is. it does not carry representation just what the position a seller has. bank of buying from a stock exchange or a futures market. you do not even know -- you are not supposed to know who is on the other side. you could have the biggest mutual fund in the world selling all of its positions in something. they could hate it. he would never know that if you with the buyer of a stock who was selling at or why they were selling it. liquidity in the market demands transparency, as opposed to the people who are coming to us for risk in the housing market, wanted to have a security that

gave them exposure to the housing market, and that is what the guy. the unfortunate the -- and it is unfortunate that the housing market when south very quickly after some of the securities, not all, but they went and people lost money in it, but the security itself, it delivered the specific exposure that the client wanted to have. >> you do not believe it is relevant to a customer of yours, if you're selling a security to, that you are betting against that same security? you don't think it is relevant and needs to be disclosed. is that the bottom line? >> yes, and the people selling and in our firm would not even know what the firm's position is. >> oh, yes they did. >> we have 35,000 people and thousands of traders making markets throughout our firm.

they might have an idea, but they might not have an idea. it might be different. >> what do you think -- they have more than an idea in these cases. what you think about selling securities with your own people -- with your own people think are crap? does that are you? >-- does that bother you? >> is this a hypothetical. >> we heard it today. this is a shitty deal. this is crap. what is your opinion on that? >> i think there are a lot of opinions on how security would perform against the market is in. >> what about the sales person? >> i think the investors that we are dealing with on alongside or the short side know what they want to acquire, and if they ask our sales person his or her opinion, that salesperson has

the duty of honesty, but -- but otherwise a salesperson is representing what that security is and what that position will accomplish. and as far as whether something is a week security going bad, we are selling securities all the time that are weak, that we ourselves do not like, it is just a function of the price in the market. i bet some of those securities, and i do not know specifically, which are the subject of those comments, they can be bought today for a willing buyer and seller at cents on the dollar. i think that there are people making rational decisions today to buy a securities for pennies on the dollar because they think it will go up and the sellers of those securities are happy to pennies because they think they will go down. >> we understand that. we we would -- we're talking about when you or the seller of

the securities and you, goldman sachs, believes it is a piece of crap. it is part of the day. i'm not talking about you selling securities out of your inventories. i people -- i understand that. people come to you to buy securities. the deal is that you are selling, you take a short position and intending to keep that position, that is the deal. whether there is not an obligation then to disclose to the people you are selling to in that deal, hey, we, goldman, we may be selling it to you but we believe this thing is going the other direction. we are taking the short position. you don't see any conflict in that? >> in those transactions in which we underwrote, my understanding is that that is disclosed, that we can have a short or long position in the security. >> and when you take a short

position, if you think that should be disclosed? when you are betting that -- i guess the same security, yes or no, it you think it should be disclosed? the word you keep using the words "betting against." >> your taking a bet against the security. >> as a market maker -- >> just try my question. in a deal where you are selling securities and you're intending to keep the short side of that deal, which is what happened here in a lot of these deals, do you have an obligation to tell the person that you are selling that security to in that deal, that you are keeping the short position in that bill? that's my question. >> that we are not going to cover in the market? the bullet that you intend to keep that short position. >> no, i don't think that we would have to tell them. i don't even know that we would know what we were going to do.

>> that is my question. you intend to keep the short position. >> i do not think we would -- i don't think that we would disclose that. and i do not know, again, the intention for a market maker -- >> you are investing in the market. you have made a decision strategically -- you have made a decision to bet against, to take the short side of a security that you are selling. and you do not think it is any moral obligation here, put aside the one -- the legal obligation, it you don't have a moral obligation to tell the person you are selling this to that you're betting against the security by maintaining a short position? it's a straightforward question. >> i do not face up. if a client came to us and asked us to buy something from him and we intend to hold long

positions, i don't that we have the obligation of telling him what our intention is to hold it. >> how about the opt -- that is not the opposite side of the client. it's the same side. you say that a client comes to you and you decide whether the site -- by a arcella are not. >> i think it is important -- and i am not trying to be resistant. we are as a market maker buying and selling. >> you're not selling to anyone else. you are selling to someone and you're taking the opposite position. you are betting, if you're going out and getting a default swaps. you are bidding against the very security that you're selling to that person. you don't see any problem? you don't see that you have to disclose, when you put together a deal and you look for someone to buy securities, when people think that is a pile of junk,

the underlying injury is that you have determined that you're going to keep the opposite position from the securities you're selling to someone, you don't see any obligation to disclose that? >> i do not believe that there are disclosure obligations, but as the market maker, i am not sure how market would work if it was premised on the assumption that the other side of the market shares what your opinion was about the position that were taking. >> do they have an opinion -- i believe at least when you're going out selling securities, that you want the security to succeed? don't they have the right to assume that if you're going out selling securities, that you have a belief that that is something that would be good for the client? >> we have to have a belief, and you to have a belief that someone wants an exposure to housing -- >> you are out there selling it to them.

you are out there selling these securities. you're picking up the phone and calling these people. you don't tell them that this is a security which incorporates or in some way references all whole lot of bad stuff in your own inventory, battle lemons, i think the word was called. you are out there looking around, over and over again. you have e-mails out there looking around for buyers of stock, whether junker not, where you are betting against what you're selling. you are intending to keep the opposite side. this is not where you're selling something from your inventory, but where you are bidding against the very product you are selling, and you're just not troubled -- troubled by it. that is the bottom line. >> again, i cannot endorse -- i am sorry. i cannot endorse your characterization. >> it is a question, not a characterization. you are not trouble. >> i am not troubled that when

somebody sells, they sell to us, or when they buy, they buy from us. >> and when you are betting, keeping a betting interest because the security. it is not that they are buying from you. that is not my issue. they are buying something from you where you solicit them to buy and did you are betting against, if you're keeping the short side, you're going out and getting a default swaps. in some way you are taking a position against the very security that you are selling, and you are not troubled. >> center, again -- >> and you want people to trust you. i would not trust you. if you came to me and wanted to sell me securities, and you did not tell me that you have a bet against the same security -- you don't think that affects -- >> we could do a public issue of

an oil company tomorrow, and ipo of an oil company that goes out and searches for oil, and when we sell that company and as an underwriter we make sure we do due diligence for disclosure and it is very well established. but we can tell our investors if they want exposure to an oil company with understandable risk, and we do a good job and due diligence and do all the disclosures are required by ourselves and all the regulators, we can sell that security and we will not necessarily disclosed and will not even know and the buyer will not care, we could be negative on the company and the oil market. >> i am talking about the security, the oil security, i don't care what type it is.

you were betting against that same security that you're selling. i am not talking about generally in the market. you have a short bet against that security. you don't think the client would care? >> i cannot speak to what people would care. i will say that the obligations of a market maker are to make sure that your clients are suitable. we are a part of a market process. we do hundreds of thousands, if not millions of transactions a day as a market maker. >> this is much more than the market maker. you're keeping a proprietary position in something that is exactly opposite. we're going round and round on this. i don't think we're going to get an answer from you and you have any concern about that. senator mccain. .

>> we were a part of a group of banks that were brought in and at the same time had an investment made by the government in order to

stabilize what was a, maybe it is too strong a word, a panic of sorts that caused a lack of confidence in the course you did not make any direct home loan mortgages. >> but since it was a housing market collapse, you needed $10 billion. the recovered rather nicely i guess. you declared earnings for 2009 of some $13 billion. >> roughly. i do not know the exact number but that would be in the ballpark. >> your bonus was? >> um, about $9 million. >> $9 million. and you are doing pretty well

this year according to your earnings and your stock. doing pretty well this year? >> financially, yes. >> how do you think the committee banks are doing, mr. blank fun? >i think they are doing very poorly. they are being closed all the time. they are the ones that make the loans for the mortgages. think they are doing ok? >> i think there is a recession -- whether or not the recession has ended, most people believe it has ended, the consequences of it are still going on and creating substantial hardships. >> but goldman is doing pretty well. one of the reasons obviously why goldman is doing pretty well

before they got the $10 billion of tarp money, the taxpayer money, there was a november, 2007, e-mail from you that stated "of course we did not dodge the mortgage mess, we lost money and then we made more than lost because of shorts." that is a quote from your e- mail. how much did you make? >> in residential in this market, we made for the entire year of 2007, less than $500 million of revenue and in the succeeding year, 2008, we lost $1.70 billion. we did not make big money. of what i was referring to in my e-mail was, and this was on the back of a message that was looking at a part of our

business and saying that they made a lot of money when i knew that we had a lot of longs and a lot of shorts of that connected to very small positions as our goal during this period was just to manage our risk down. >> mr. blank fine, there is a lot of animosity out there. i am sure you have seen that. we find, in my state, for example, 48 percent of the homes are under water, that is they are work -- they are worth less than the payments being made. the community banks continue to struggle and have great difficulties and you received a $10 billion in tarp money and the community banks are the ones that are going under.

do you think, in the minds of a lot of americans, there is a real contradiction there? you are doing fine. you are paid millions of dollars in bonuses. perhaps you earned them, i am not qualified to say. meanwhile, community banks, the ones that were the bill or act -- that were the direct lenders, not you, that the homeowner's relied on, are the ones that are struggling and still having enormous difficulty, including my home state of arizona? do you understand why people might think there is that the economy? -- there is a dichotomy? i understand life is not fair but a lot of americans did not understand what quite went on. >> absolutely. community banks play a very important role. they are not necessarily, again,

i am not saying in general or specifically, maybe some helped of their situation by making it prudent judgment but i am sure for many, they conducted their social purpose and went out monday against housing and if the people that cannot pay them back and the housing they have in collateral or goes down, they may be will -- they may well be victims and i share your concern for the situation. >> i know you are not a charitable organization. i know why you are in business. had goldman sacks done anything to try to help these community banks? >> senator, you did get $10

billion of taxpayer money. >> yes, we did. we understand our obligations to not end there. we have always been a philanthropic organization. we are sometimes invisible. in the last year, 2009, we allocated, and not just occurred, we delivered $1 billion of the firm's funds to philanthropy, including $500 million to a program to support small businesses by giving education to small businesses through the medium and delivery mechanism of community colleges and with a view to providing financing for some of the graduates of the program that we have for those small businesses in order to make them bigger businessmen and to involve all

people with that. bridget our people with that. these are not enough for the suffering existing in the world but we are trying to do our part. we think in the main conduct of our business, we are doing important things for the capital market but we do take account of communities and institutions that we normally do not reach at goldman sachs. >> what about community banks? >> we may, i just do not know. >> explain for the benefit of the committee and the record, what is a whatcdo? -- synthetic cdo? >> 8 cdo -- acd cdo pool of

mortgage assets that are pulled together and can be sliced in a way that will yield a particular credit exposure. the reason one would want to pool mortgages is because it gives the versification so that you can pool mortgages for not just one community but distributed over the entire country. the reason one would want to slice it is so you can pick your place on the credit spectrum and say i like the more senior mortgages, where the more junior risks. a synthetic mortgage, you do not pool the actual mortgages, you pool securities that are indexed to specific pools of mortgages. courts in other words, -- >> in other words, you do not really have any ownership. you are just betting on the fortunes of that cdo.

is that correct? >> yes, you are doing it to get a specific risk in a specific place at a specific level of the spectrum without necessarily having to assemble a particular security so you could do it more quickly and more precisely. >> how does that differ from going out to caesars palace and making a wager on the outcome of an athletic contest? >> i think the people that are participating in the synthetic cdo market are specifically trying to take particular risks with respect to the housing market, for long, -- short or long, and the one to initiate that exposure or use that exposure to hedge themselves or

adjust their risk profiles in the case of somebody who already has accumulated risk. >> in the case of the attic is -- abacus transaction that the credit agency was not informed that a hedge fund client was taking a short position. is that true? >> i think the specific complaints was a lack of disclosure that a short, somebody taking the short side of the position had an influence on the selection agent and that should have been disclosed. >> should it have been disclosed? >> we do not think so, no. that is in dispute. >> the credit rating agency, --

>> there is also and again, this is an alternative, and there is also, and again, this is litigation and one side thinks one thing and another thinks another is also a belief on our side that the selection agency did know. >> let's assume that the agency did not know. you would know whether you informed the rating agency or not, would you not? >> i personally would not. the person was here testifying asserted that he believes the other side of the transaction did know and their allies the factual dispute. >> the rating agency would know whether they were told or not. the hedge fund, so where there

is a difference of opinion between the hedge fund clients and goldman. >> i did not think there is a difference of opinion between the hedge fund client and goldman. >> the rating agency rates to the cdo, correct? >> yes. >> and it is alleged that the rating agency was not told that a hedge fund client was taking a short position. >> this may be a different point. this is not the subject of the legal proceeding to the best of my knowledge. >> a lot of these things are fairly complicated, mr. blankfein, and a lot of americans do not understand what happened but they do understand

that they are still hurting very badly across this country. they believe that your handling, and other financial institutions, of the housing market and this complicated transactions were a direct contributor to the meltdown that america experienced and they have not recovered. you have done pretty well. i do not think that is the vision that most americans have of how this nation and its economy should function. thank you, mr. chairman. >> a good afternoon. in your testimony, you said that goldman has been a client- centered firm for 140 years.

clients come to the firm because they want financial advice, they need financing, they want to buy or sell a stock, bond or other financial instrument, or they want help in managing and growing their financial assets. >> yes, sir. >> is it fair to say i the lessn 30 years that goldman has focused more and more of its resources and gained more revenue from trading without the need for clients? >> uh, we have focused more and more in trading as a principle but that is the way the client business has evolved. >> it has evolved away from investment banking and got more into trading. >> i would say that increasingly, and this is a change in the sociology of business that took place over the last 15 or 20 years, i am

not sure it was precipitated by the fall of glass-steagall or it caused glass-steagall to fall as u.s. institutions had become more competitive with global institutions but somewhere along the line, clients used to ask you for advice and if you were an investment bank and went to other institutions and asked them for financing and to take principal risks. somewhere along the line, they stopped asking necessarily to do things for them but to do things with them, in other words, be the other side. today, and this evolved over a long period of time, to be effective for your planned -- clients, you not only have to give them advice but you had to have the financial wherewithal, in other words the balance sheet

to accomplish their objectives, not just advise them, and so goldman sex -- and so goldman sachs 12 for 13 years ago actually had to reverse many years of being a private partner and become public partner so we could frankly survive in the evolving world of needing to be a principle to accomplish our client's objectives. >> it was also very profitable. this has been one of the most profitable institutions on the face of the earth. it was not just the move of society. it was also that when you sat down, he said this is the way to go. i am not saying that is a negative. >> i know that by just for the history of it, it was a very famously -- and observed a decision by the world of what

goldman sachs was doing, done very reluctantly, not so much, and the real rationale was not for profits, it was done in order for us to survive as the leading financial institution. had we not done it, if we were not effective for our clients in order to allow them to accomplish those objectives, goldman sachs would be around but not an important company. >> i think you were one of the leaders in doing this. >> we were the last of the firms to do this. >> does proprietary trading activity ever run in counter of the interests of your clients? by not saying -- one thing that bothers me most about society today is it you say there is a conflict of interest, it is like you are being courted.

does proprietary trading activity ever run counter to the interests of their clients? >> the fact that we are -- when you say proprietary, you made a business totally separate from the client business. no, i did not think so. when we do proprietary trading, it is separate. >> i know it is separate. >> separate people. >> i know it is separate people but your firm, and not saying anybody is doing anything wrong. somebody in department a is talking to department b, but if jones is doing one thing and smith is doing something else, there is the potential of conflict of interest. when you are doing out of one firm these kind of transactions, there is a conflict of interests. whether you handle it well,

whether you have a wall down or not, it seems to me that when you are trading, the potential for conflict of interest as opposed to clients is great. >> i think in our principal activities which is more than our prep -- proprietor activity, i think there is always that and we have to manage that. if you are a principal, you are on the other side. our proprietary businesses have much less, although the perception of its, if you are asking the question, the perception of conflict but we keep those very separate. >> i am just trying to get at the fact that this is a business where there is conflict of interest when there did not used to be. when you were 100% client, you

were not doing proprietary trading. to go back to with the chairman said, in the first half of 2007, goldman sachs sold long positions cbos's to clients. >> 2007, we reduced our risk which largely started out as long. we sold some of our long positions and put on other short positions. >> you sold positions and while goldman created the market and took short positions to manage risk. you were selling cdo's the same time you were taking short positions on the same cdo's. >there is say idea where you were selling cdo's into the

marketplace at the same time when you were selling the same ones short. >> i did not have any knowledge of that. >> you believe that could happen. >> i believe that we can have -- that some people can own on the first day, to go and you could sell it short. >> yes. >> we could sell more the day after we sold our inventory. >> and this case, you were selling cdo's as part of the plan, you bundle together these mortgages and you were doing that on a regular basis through 2006 and 2007 and at some point, you decided that you had risk and therefore you started selling them short in order to

solve this risk. >> i know that we've reduced our risks per the instructions. the risk started out long. i do not know to what extent, how much it was, selling certain securities, shorting certain securities, but i cannot tell you. some of it was the new abx index. i just do not know. >> we established that you do not think there is anything wrong with that. >>if you're asking me if we were long or short a specific security and what proportion, i do not know. >> you do not allow the possibility that that did not happen. >> i cannot rule out. i do not know. >> i am not going to ask you 20 times, does that have the

appearance of a conflict of interest? >> that we were short the good that you were selling cbo's, according to this mezzanine you were doing it, you basically packed them come sold them, and at some point, you were concerned about this and decided to short some others and offset the risk. do you not think that has the appearance of a conflict? >> again, i -- i do not no. if we have pools of security in our inventory and we are trying to reduce our risk, we are going to be selling those, selling -- >> you were not here. the last panel we talked about

this. you decided you did not want to sell those. what most people do if they are in a position where you have a lot of stock that you now think may be risky, you did not sure them. people to short things. most people just cut back. if they have 500 shares, maybe they sell 100 shares. the previous panel said it was illiquid so you went out and goldman sachs sold short and the courts may i speak generally? the best way of reducing your risk is to sell what you have. sometimes you cannot because it is illiquid or it is unattractive. what people are doing sometimes is i am sure this thing, what i

will do is sell something similar to it but did little lower in quality because -- >> i got it. i am talking about when you are actually out selling at. this is where the concern is. and every other business, if you are coming to me and saying buy this car for me and at the same time, these are good cars, but i just sold month because i know it is a clunker. that is where the concern is. and let me tell you why this is so important and why york oil analogy does not work. at what point did goldman sachs decide the housing market was going south and we want to get out? that is really at the heart. this is not like the oil deal. this is specifically, we are now, in 2007, and people are starting to see the market is

bad and goldman sachs sold a lot of stuff short and they made a lot of money on that but it is just a business deal. do you see where the concern is? at what point, what did you know and when did you know what? if you were still selling mortgage-backed securities, after you really had decided this was a down market, as evidenced by selling short, that is what people are wondering about. " i realize that. we are very much in formed and would not be here but for the fact that there was such a collapse in the housing market. but to go back to that oil analogy that i gave, if we were sitting here and had under written a new security like i described instead of housing and after we put it into the market, three months later, we were

short of that security, that sounds ok. that is okay because you are not intending to sell the security at the same time. >> but it is the same security. >> i understand that. but the world has changed. i do not think people have a problem with you selling a series of securities and later on, let's say i sold everyone, and six months later, i seldom short but nobody has a problem with that. things happen. there is nothing inherently wrong with that. what is inherently wrong is if you start selling securities, a series of securities, and at some point you decide these are really bombs. we heard earlier that you were selling washington mutual securities 90% of which were state income loans. 90 -- stated income loans. they all went bad.

at some point, somebody says i just found out we have been long on securities and they have all these stated income loans. we have to get out. that it is worthy -- that is where the concern is. can i ask you to go are you asking what we knew? we did not know what subsequently occurred in the housing market. we did not know. by the way, we did not behave like we knew it. in other words, there are e- mails going around talking about junior people and managers and a there are other e-mails where they thought the market would rebound. we did not know that the housing market was going to happen like that. >our positions reflect that

because had we known, we would have been massively short the market instead of just getting short. -- >> this we have heard from everybody. at what point, do you remember, it would be an important day, that you decided to pull together the management of goldman sachs and say this housing market is a bad place to be. when was that day? >> i never did. >> right up until the end, you did not have as corporate policy that we should reduce our holdings in mortgage-backed securities and keep selling them? there have to be a time. it was not the last week. >> i do not no -- again, we are

dealing with the same information. if tomorrow, -- tomorrow, i- think their deeds -- i think it would serve public interest for eight security market and housing, again, learning from the mistakes, if you assume was made that we learn from the mistakes, i think securitized ing home mortgages is not inherently if that activity. >> at what point did you decide that coleman sax had to do everything it could to get out of this business? >> we never decided. >> second quarter of 2007, you shut down your cbo warehouses and reduced purchases and reduced counterpart exposure. that sounds to me like you

wanted to get out of that business. there are other people -- i do not know it the decision was made to leave the business as opposed to reduce the risk. >> shut down warehouses? that was not an indication you wanted to get out of the business? >> when you say get out of the business, senator, i do not know to go do you see why people are concerned about what went on in the second quarter of 2007 and what was going on in 2007 when you said you cannot sell this stuff anymore. it is not right to continue to originate these loans. i just find it incredibly hard to believe, there is this illusion in this country about

how smart people on wall street are. the people on wall street's are really, really smart. it is hard for me to believe and for the american people to believe that people this smart never decided that this was going south in a big way. >> i heard your earlier remark as well. i think we are not that smart, and maybe there were people who knew it. by the way, even people with hindsight that knew it, i think they fought it and turned out to be bright. i would tell you from my own self, at 20% sign down in the housing market, i did not know if it would go down 30% or rebound up 10%. even now, >> now is a different story. >> the reason this is a problem is because one of the defense's

view used is that these are all big boys. therefore, caveat emptor to is not apply. the big boys in new. big boys know that they housing market is a bad deal. if you can get into the housing market now but you will ask for a better documentation of what you are getting and ask for higher returns and all kinds of things because you know this is a risky business. the real question is we talked to washington mutual and went through what they went through. they were just pushing stuff out the door as fast as they could get it. we talked to regulators. the regulators said they had no idea that washington mutual, 90% of their equity loans were stated income loans. he had no idea. he had previously said that

there were a small part of the business. they were still saying in 2005 that there was no problem. they were saying there is a problem. we asked why, indeed thousands of rmbs' at the rate it through 2007, 50% of them were aaa and they are now all jump. people were still doing things long after they knew there was a problem for the courts a lot of business judgments, i wish i had known, but just look at all of the big wall street firms that lost tens of billions of baulking dollars -- dollars i did not know, we did not know

about reducing risk when the markets are dangerous. >> let me finish with this thought -- this is the worst thing to happen economically to this country since the great depression. millions of people were put out of work. millions of people lost their homes. millions of people are really hurting. what really bothers people the most, these are the people that i talked to, is not the bailout. that bothers people a locket. the incredible compensation. the bonuses to people through 2006 and 2007 made horrible decisions but still received gigantic bonuses, especially for ceo's who said this would be based on performance which was lousy and there are still paid

billions of dollars. what really gets them the most is here we are, after this terrible travail, and there is only one section of our attire economy that has to worry what it has to do with millions of dollars before bonuses. that is the problem. it may be totally chance or something beyond our control but the idea is that wall street came out of this thing just fine, thank you. it is just something that the grades on people. they think that you did not just come out fine because it was locked. they think that you guys really play this well. not that you caused the whole thing, although i would say you were a big part, but that you came out just fine. that is what disturbs them. that is the point i am making.

thank you, mr. chairman. >> thank you. >> i have to disagree a little bit with senator kaufman. i think 90% of the problems associated with the meltdown sits on the lap of congress. i have been adamant in my view because we could not record the last time we have an oversight to see if things are working. having said that, i have a few questions for you. the activities that you have been called to testify about, is it your understanding that your competitors were engaged in similar activities? >> yes. and to a greater extent than us. >> some of them are not here anymore. >> that is correct. >> did you at any time have concerns, legal, ethical, or reputation all about any of the activities undertaken by goldman

employees? >> i did not. >> you have not heard anything today that has concerned you about actions or statements by goldman were former goldman employees? >> as i heard it, everything sounds correct but when you say concerns, i am in the business and in my role, i will look deeply into everything. what is going on in this hearing is of course fact-finding for you but it is fact finding for everybody. i heard nothing today that makes me think anything went wrong you raised transactions i never heard of before and i will have people look deeply into that. >> thank you. on sunday, september 21, you made the following to go what

date? >> september 21, 2008, our decision to be regulated by the federal reserve is based on recognition that such regulation provides members with full credentials supervision and access to permanent liquidity and funding. we believe that goldman sacks under supervision will be regarded as an even more secure institution with an exceptionally clean balance sheet and a greater diversity of funding sources. prior to december 2008, did you or anybody at goldman sachs -- >> prior to december? yes. we did not result to do it but it was something that we were very much looking at. >> was this something discussed at a board meeting? >> yes, it was.

>> are there records of that board meeting? >> they're must be. i have not review them. >> would you have your staff provide those to was? >> it was decided to not do it. >> looking back, would you rather be an investment bank? >> you mean -- >> would you rather not be under the federal reserve today? >> i am not sure, it would have to wait and see how the legislation unfolds. i am really not sure how realistic that will be. the reason we are looking at the time was we originally started with a whole regime for investment banks and van post- bear stearns and post-lehman, it

was clear there was not going to be a whole regime for the class " investment bank at that point because there were not that many. >> in your some timber 21st statement, you talk about access to permanent liquidity. were you referring to goldman sex being able to obtain this at the federal reserve? >> i am not sure. possibly. i am not sure. >> that would make sense to you? >> that would make sense but i am not sure. there were a lot of facilities that were in place already and i am not sure. >> let me ask a follow-up question. prior to then, is it accurate to say that goldman sachs had temporary access to the discount window?

>> there are people here that would know that answer better than me. we had access to certain funding facilities. i am not sure it was a discount window but i am not sure. >> that would be something i would be interested in having. whether you did or did not. have you since becoming a bank holding company accessed the discount window? woods to the best of my believe, other than to tested shortly after we became to see if it would work, i would say no. i am looking for confirmation. i feel much better having gotten it. >> let me ask you if you questions about the bill that is being proposed. york executive vice president and cfo says you are generally supportive of the dodd bill.

you have been very high profile in your support for it. do you still maintain your support for this bill? do you think it's all said problems that caused the problems we got into? >> first of all, some aspects of the bill have morphed over the past few days. i am not sure. >> i do not think so. >> i am generally supportive. to be sure, there are details that i am less sure of but on the whole, financial reform is essential and i will say that last week in new york, i listened to a speech by barack obama on wall street and one of the points he made resonated with me because i said it myself. he said the biggest beneficiaries of reform will be

wall street itself because proper reform will make the markets safer and i will add my own peace, the biggest risk that financial institutions have are with each other. to the extent that is made safer, america will be a big beneficiary but specifically, we will, as well. >> what will happen to loan origination from the community banks if they are required to maintain 5% of every mortgage as a right? -- every mortgage is a rigthey ? >> i should give a qualification. there is a part of that bill that will affect us and that we have expertise in and that was what i was addressing.

there are big part of that bill that are remote from our experience. how it would affect community banks, mortgage originators, and how it affects consumer banks, consumer legislation being a big part of it is remote from our experience because we do not engage in those activities. >> do you have any thoughts on the fact that this bill does not address the underlying core problems like fannie mae and freddie mac? you would agree there was an incentive to make loans to the implicit guarantee from the federal government to people that were less qualified than what we had seen prior to the onset of freddie mae and freddie mac? >> i cannot speak to the qualifications or standards of fannie mae or freddie mac. i can say that they were an

instrument of policy to attract more money into home ownership. i am not suggesting -- that is what they accomplish. >> you would agree there was implicit federal guarantee on a mortgage that would make it more available to more people. the cost of capital would go down because there is an implicit federal guarantee behind it. >> there may be a lot more. i think there are policy fax that tend to draw more and more money -- fax that to draw more and more money into government- sponsored entities. the government was implicitly, those entities were able to draw in money and proceed to the cause side--- quasi-government

entities. those two things would favor more money to flow into those sectors. >> have you personally spoken with anybody at treasury about the regulatory reform effort? >> since the beginning? i might have. >> let me rephrase the question. >> have you come up in the last six to nine months had conversations with people at the treasury about the regulatory reform? >> um, i might have but they would have been at a very general level. not specific. along the lines in which i am talking. the same way i am talking about

it with you. >> do you know who you talked to? >> in my role, i try to see senior people in treasury and at the white house and in the legislator and introduce myself an offer to discuss things on their mind and offer them things if they are interested in in hearing on my mind. i was not involved in any type of roll up your sleeve effort on points. >> but to be changed course for a moment. i want to pick your brain. systemic risk and the fact that it was there created a necessary program for us to eliminate that systemic risk. the option in the dodd bill is to tax you so that we can have a fund, and i have problems with how that fund is managed, but the idea is that the government does not loaded again, the

taxpayer. the taxpayer will because if you are taxed, it will talk -- it will cost more to the people you are doing business with. what are the other ways of handling systemic risk, in your opinion, that are different been created a tax payer-funded fund that would limit to this country's exposure to significant systemic risk knowing that as we listen that risk, we also lessen some of our competitive capabilities worldwide? >> for sure, we need the apparatus, it could be the apparatus proposed for systemic risk regulation and observing and people that can look across all the different institutions and potential sources of risk.

that is very important. secondly, and possibly the most important thing being discussed is to recognize that despite every good intention, despite trying to see around every corner, you will just miss stuff. to make sure the system is better able to absorb the consequences of missing something and so making a financial institutions, including institutions like ourselves, have appropriate levels of capital and liquidity which means more of both -- >> we would limit your leverage ratio? >> you might limit the leverage ratio. you might have certain contingent securities which cause people to give money at times. in general, the system would be made safer if financial institutions had more capital. the extent that you have more

capital and lower leverage, loans will be more expensive. there will be less credit but that is a trade-off after the experience of the last year that policymakers may well be interested in making and it is a -- >> is a $10 chilean cost that we have observed already. that may be -- 8 $10 trillion cost that we have absorbed it already. >> you have to have a resolution of 40 so that it's the first to do not work, you have an institution that was poorly run or undercapitalized does not bring down the system and no institution should be too big to fail or have to burden the public at the cost of its failure. >> which brings to mind, do you think the ftse has the capable

staff that would be able to come in and ron goldman sacks if you got -- to run goldman sachs if you got into trouble? nobody will believe they have the capability of doing that. that is what we are setting up in this bill. we are giving them broad power, they will pick winners and losers, they have none of the expertise to do that but that is who we will put this with. >> i cannot answer your question. my experience with the fdic, while limited, we have only been a bank for a short period of time makes me respect to them to a great degree but it has been in connection with their existing functions there if existing function is the takeover and immediately sell assets and do not run things. correct caused by this bill is going to have them run things.

there is no question that they do a good job. and there are experienced people in the banking business that are making decisions, not the fdic. they have nobody near the capability to take over goldman and run it. do you think that is a wise position? >> i am not sure about that interaction. >> the interaction is we are going to give a federal barack receive the ability, who has never had an experience to run: sex, one of the most sophisticated financial institutions the world has ever known, they have no knowledge how to do that, and we will write lot and they will write regulations that they will do that if you become too big to fail or a systemic risk for the rest of the financial institution. do you embrace that? that is totally different than your business philosophy and what we have studied. >> i do not know the rules.

i do not know how they will be applied in the details of the regulation. the devil is always in the details. >> yet you embrace the bill? >> we support the direction of the bill. with respect to this, it is very important for goldman sacks, and it is very important to taxpayers, it is important for goldman sachs that we take away the notion of a very big burden on us if people think we are too big to fail. we do not think we are too big to fail. we do not want to be too big to fail. a lot of the negativity associated is because people think we are getting the benefit of too big to fail and that is not good for the country or for us to be in that place. >> you would agree that $700

billion was allocated of taxpayer money to salt systemic risk problems of which you were the beneficiaries both directly and indirectly of a portion of that. >> yes. course somebody thought you were too big to fail. >> certainly, at that time, the answer is yes. at that time, even a small institution might have been too big to fail because of fragility. there was so much tinder, to go that is a legitimate point in the courts what about taking the six -- >> what about taking the six largest banks and -- >> i thought of that. i am speaking from a position of not being one of those big

banks. our balance sheet is over $800 billion. that is 40% of the big banks. even though we are a big investment bank, to go there is a commercial side. >> we do not have the balance sheet. >> if somebody is going to get to that position of failing, the fact that they are big makes it worse. the fact that banks are bigger and more diverse and more activities and more places in the world, probably makes them safer. secondly, when you think of the big financing purposes in the world in what the u.s. needs to maintain competitiveness, having financial institutions too sm alall to conduct business competitively with the rest of the world i fink would be a

competitive disadvantage to the u.s. >> i have one final question. you are the leader of goldman sachs. there is no question about that. >> yes, sir. >> you set the tone. >> yes, sir. >> i have asked a lot of questions about ethics. i have a question for you. why did goldman sachs decide to release the personal e-mails of mr. tourre and not everybody else in this hearing? it had no investigative purpose. we did not expose any of that. we were not exposing it. was that the right decision? is it fair to your employee? is that a political ploy or a defense ploy? why would you do that to one of your own employees? >> you know, i was not closed to the decision -- close to the

decision. i was not specific about that. we wanted to get, and i was not thinking about that -- we also provided information from e- mails it respect to the business and there were elements here that spoke badly of the firm and we just wanted to come of breast -- abreast. there was nothing to my understanding about mr. tourre's e-mails that were evidence of the mills that were already out. i did not think we were adding anything. . .

>> you all made a very distinct discriminatory decision that one of your voice was going to be made to look bad because we did not release those e-mails. >> sir, i do not know whether it was e-mails that were extent -- again, this is to the best of my knowledge. could i understand that. >> with respect -- >> i understand that. >> with respect to some of the issues, the decision was just to get it out so that we could deal

with it. at this point, i think you were aware that the press was just -- i do not know where they came from, but i do not think we added, to the best of my knowledge. i do not know, but i do not think we added to the state of knowledge about those e-mails which our employee addressed and i think needed to address. brecker i have gone over, mr. chairman. i apologize. >> thank you for being here today. i want to start by saying that in many ways, the focus on just your firm is tremendously unfair. the activities that are being talked about, and i am sure that we could compile the same kind of documents, the same kind of e-mails from all of your competitors on wall street. the conduct that we are looking at was not exclusive to goldman

sachs. i think it is important to a knowledge that on the record. in fairness, there ought to be another four or five co's up there with you. >> i would welcome the company. the >> i am sure you would. i know it seems like we are harping, but it is because so many of the cultural realities of what you all do is jarring to most americans. this notion of selling a product that you are betting against is hard for people to understand that just have basic sense of right and wrong and common sense. we spent a lot of time going over that today. i want to talk about several details as it relates to that. one is that it is clear to me that you all had -- there was kind of an orphan document in

the documents that we got and one of the orphan documents we got was from a woman named inisha manik to lauren morris and it was a summary of mortgages that you all were going to slice and dice and do all the girondist. it is a fairly detailed -- this is a very -- this is exhibit number 77, and it is fairly detailed. the date on this is march 15, 2007. on this document. this document says that 7% of the mortgages that the goldman employee looked at how the material occupancy rate -- misrepresentations where our worst of anywhere from 4 to 14 loans at a time and a default on them all. your risk and loan performance and difficulty for closing on

the second liens would be potentially insecure. another 20% had material compliance issues. they are merely missing final hud's. fixing the errors through refinanced finder disclosure. good can you give me the number again? >> the exhibit number 77. -- >> can you give me the number again? >> exhibit number 77. she goes on to say potential insecure second lien. another 5% of the pool was originally fraudulently based on the dd results. falsification of information origination documents. and then she says there is a reputation have line risk as well. i am not sure if these -- you did issue a bunch of new century of mortgages at or

around that time in one of these instruments. i cannot say that these are the ones that you wish you'd, but what it tells me is you had internal analysis on these mortgages. >> center, -- senator, i am reading the words. i do not know who these people are. just looking at it, it sounds like somebody is complaining and asking -- recommending that we not do some of these seethings m what i can see on this page. the >> i think it is plain on its face that this is a goldman sachs employee that has analyzed a group of mortgages you all were considering packaging up for someone to bet on orbit -- bet against. >> but i do not know who these people are and i do not know

whether any of this was done. are you saying we did these? >> this came from you as a goldman sachs document. i do not know whether you did these or not. the point i'm trying to make is that it shows an analysis was going on of your instruments internally. >> there better have been. we are supposed to analyze and to do due diligence with respect to the securities and instruments created. >> if that is the case, when you issued all of the documents that you did when you did the -- what is the name of the company? that had all of the problems -- long beach mortgage. when you get of the long beach mortgage, did you do the same analysis with all the long beach mortgages? >> i do not know specifically about long beach. i know we have in all our businesses and due diligence process as -- process theses the

appropriate for the business. i would say as a matter of process, i would say that due diligence was done on it based on our standards and protocols. >> in may 2006 you may move to securitized about 532 second lien fixed-rate mortgages originated by long beach. keep in mind this is the same long beach that had to buy back hundreds and millions of dollars in mortgages because of problems. at one point, they had been shut down a few years earlier because of problems. and i guess i would like to request on behalf of the committee that we see the analysis -- first, that we figure out what mortgages these were that were analyzed, where you found fraud and where you found 5% fraud, seven percent on material occupancy and

misrepresentation, 20% compliance issues. i think it would be important for us to see those documents on the issues you created for folks to take a side on. >> ok, i'm not sure whether an instrument was created, but i get the point. >> yeah, i think the point is that it is hard for us to believe that if you all were doing the due diligence i you have stated a couple of times in your testimony, now we know that these things were full of this kind of stuff. we know that. and you obviously knew it on one instance because we have a document from somebody in your employee that 38% of the loans are out of tolerance. i recommend putting back 26% of the pool, if possible. it does not make me comfortable that you all, after doing the due diligence, actually disclosed as much as you maybe should have disclosed about some

of the problematic paper that you were packaging for investors. i would like to follow the trail and get the same kind of documents on the instruments that you did put out in the market both in 2006 and 2007. >> sure. >> let me ask you this -- and by the way, in may of 2006 write about when you did that, offices of supervision just did a scoop at long beach and found all kinds of problems with their mortgages, almost at the exact time you were putting the instrument out. that is why i question what kind of due diligence is actually going on and how much is due diligence you were actually using intel in the buying public what was in these various transactions -- been telling the buying public what was in these various transactions. you express regret that coleman missed the signs were credit was

too easy. -- that goldman missed the signs where credit was too easy. looking back, using that you all did -- and do you think that you all did enough to look at these instruments and how strong they were on their face? you you think you expose the kinds of problems the vast majority of these loans represented? >> given that things did not work out well, in hindsight, i wish we had done more. i think we thought at the time, and again, i do not have contemporary -- content during his knowledge on it and i am not an expert in that area, but i believe we were doing appropriate due diligence and appropriate disclosure. things went much further and got

much worse than people realized. i do not know what to do diligence would have picked that up, but i wish we had done more. >> would more disclosure, in fact, harming your business model? if you truly are just the house, if you truly are just trying to manage transactions on both sides of a proposition. >> i do not think so. >> it is interesting to me that the investment bank's have created -- the investment banks have created all of these exotics and there is not more of a push for disclosure. it appears we are dragging along keating and screening. is that a fair characterization? >> i do not know. i am not sure.

>> there is no question that sometime in early 2007 you realized you had a lot of residual positions, equity residual positions on these cdo's and you one of those books cleaned up as quickly as possible. -- you wanted to those books cleaned up as quickly as possible. >> i'm not sure they were equity residual. i am not sure. i do not know that i have formed a view of equity residual positions exactly. >> in exhibit 130 there is a an e-mail from you to tom on dog and the mail is as follows, " tom, you referred to loss of position in residual deal. could we have cleaned up these books before and are we doing enough right now to sell off cats and dogs in other books throughout the division? -- throughout the division?"

and that was in february of 2007. >> i got to the page. >> that would be indicating early 2007, before you all had, in fact, marketed more of these ofcdo's -- synthetic cdo's that you all were cleaning up the books to push these trees -- to push these to traders. >> i do not know exactly about this, but i know how i used these words and what i mean. when i use the expression "cats and dogs" i mean miscellaneous stuff. i hope everyone understands that. and this is just my normal rant about aged inventory.

when someone tells me they're losing money on old stuff, my reaction is -- you know, part of the discipline of the business is to manage risk and sell inventory. here i am not even thinking about the particular asset he is talking about. i am saying, should we have clean up these books -- in other words, i am yelling at him in -- before we sell off other cats and dogs throughout the division. i am basically saying, you are head of the division. you are supposed managing something called aged inventory, which is just as a matter of discipline let's not accumulate residual parts of other deals. sometimes you have little pieces left over, but if they are not big enough to pay attention to and then in the aggregate can hurt you, i am saying -- >> i will not take the time to read through the whole e-mail chain, but it is clear if you

read through the whole chain, it was about risk in a loan trading business. it is clear that what was going on here was that there was a lot of internal noise about the fact that you had long positions, equity positions, and a lot of this stuff as you guys were moving into -- i think we have beaten the source until it is almost dead -- some major short positions throughout 2007. -- have almost beaten this horse until it is almost dead -- some major short positions throughout 2007. you all keep talking about your net throughout 2007 and no one has been able to delineate the position you suffered in 2007. is this really old stuff? is there any notion that you guys were really perfect -- participating in long purchases throughout 2007? >> if we had one risk on our books, it would not matter if we

had it there for a short time or a long time. the risk is risk, and i would ask people to manage their risk down. by the way, on the front page -- i'm sure i did not look at this all. the fellow who wrote to me said most of the risk is from positions in deals done over the last few years. that is what i was responding to. it is on disciplined -- un disciplined to old stuff for years because it was too small to -- to hold stuff for years because it was too small to pay attention to. >> i'm not sure if it would be considered small by most people's standards. >> i'm talking about the risk as a residual position. >> i guess what i am trying to get at, the point we have been trying to make -- and this is where i think this notion that

you guys are market makers and you also are taking, sometimes taking positions outside of just your market-making, that is what is hard for many of us to get our arms around. i have been talking sports analogies today because i think there is a lot about this that relates to gambling on a sporting event because the synthetic cbdo's represented jut that. it was not real stuff in there. it was taking a back like you bet on a football game. is there anything that you would not create a market for? i understand that some people are trying to create a derivative market and is that something people are going to

do? >> i have not heard about that and i'm not involved in it. i am sure there is, but if there is someone whose business depends on -- would be able to do their business better if they were able to hedge or eliminate the financial risk and they came to us and ask us to eliminate that risk and it was legitimate and proper and honest and susceptible to being understood, i think they would come to us and ask us to do it. >> didn't mr. paulson just want to make money because he thought the market was going to take? he was just looking for a place to score on a bet, wasn't he? >> i cannot say for mr. paulson, but he was just a speculator. there are people who speculate in corn and all sorts of things that allow the professional

users of those markets to complete their hedges. that is a socially acceptable -- >> there is a big difference between fine in the opposite side of and -- above a certain day and the commodity edge for a former the need certainty or the airline that needs to find out what fuel is going to cost and to side of a deal where there is just betting. there is not any certainty other than somebody takes one side of the deal and someone else takes the other side of the deal. that is what a cdo is. >> you could characterize it as a bet, but not the underlying commodity. some of these things do not take physical form, but they provide the opportunity and the liquidity for people who want to hedge themselves. >> and we cannot take this too far? you do not think there is a

point where we make up things to bet on and you guys are securitized in it and to launching it -- to traunching it, and you have one side of the room that are picking the bet, which i think it's bizarre. the person who came to you that wanted to bet against the deal, you put them in their room with the people who will pick the stuff in the deal. in other words, you did not put both sides in there. you put one side of the bed in there with the people picking the product that was going to be gambled on. that seems weird. it reminds me of this notion -- i think most americans would think it would be really wrong for one of the football players to be able to be in the room for the bookies -- with the book he tried to influence what the line was going to be and then they

are out there playing in the game. that is what this feels like. it feels like you are betting on the game you are playing in and maybe it is not a level playing field. >> on these transactions, i know there is an inherent distaste for the short side of things as opposed to the long side of things, but for every transaction there is a buyer and a seller and there is nothing immoral about somebody structuring a position. some people taking the short position may just want to restructure their portfolios as well. >> i understand that. but you understand that it feels like you guys were pushing a product you were betting against and at the same time you were letting somebody who wanted one side of the deal in the room with the people picking

the product. none of that seems like an honest bogeokie. >> in that transaction, the agent was the buyer itself of something like 80% to 90% of the transaction. the biggest buyer, the biggest long in that whole transaction was acl fdoitself. i think it took over $900 of the transaction itself. >> that also seems weird. i mean, it seems like to meet that if you -- and it is hard for me to believe that the selection agent was excited about the deal if they really knew the person who was helping him to pick all the deals was willing to bet against it.

>> he was one of the biggest portfolio managers in that asset class. when you talk about investors and deals, it sounds like this is a broad distribution. there were only three professional investors engaged in the whole transaction. this was, in effect -- there was no transaction. this was not a transaction that had to be done. it only works if the lungs and the shorts agreed on what the portfolio was. i realize that is not intuitive, but those professional investors wanted those exposures. >> and i'm not sure, frankly, it is a thing of value that most americans would be comfortable, that we would be backing up and providing taxpayer bailouts to companies engaging in data, especially if you were not actually dealing with the commodity or dealing with the product at the base of the

transaction, that you were making up positions for people to take the transaction on only for that reason. it seems like hamsters in a cage as opposed to societal value that investment takes in this country have represented for many years. -- investment banks in this country are represented for many years. i think the work this committee has done and staff has done has been amazing. we have a conflict of interest issues, disclosure issues, and transparency issues and we have to get all of these fixed so we have no repeat of this debacle. thank you, mr. chairman. >> thank you, senator. senator pryor. >> thank you, mr. chairman. i would like to start with the topic of asking you about credit rating agencies. in retrospect, how accurate were

the credit rating agencies in rating the various raw edges of the ceos -- the various traunches of cdo's. >> in retrospect, not very accurate. but >> these were down -- >> these were downgraded. and what you think they -- why do you think they rated so badly? >> i read articles, too, and that is where i get some of this from, but it just seems that they never worked into their models the kind of move that occurred in the market. and i think that is why they did not work. >> from your standpoint, what

ability, if any, to investment banks have in influencing a rating by a credit rating agency? can you, as lawyers say, form shop and try to find a better rating with a different agency? >> i do not know. the first panel that you have today has included people that execute deals and in connection with obtaining ratings. in my entire time at goldman sachs, i never dealt with another rating agency other than with the rating of goldman sachs. and i am not sure that i have been able to influence them. >> fair enough. let me ask a question i'm not sure anyone else has passed on a topic that no one has touched on yet, and that is, the use of off-balance sheet limited and special investment partnerships. i have a concern about those.

>> siv's. >> yeah, ok. why would your company ever want to use an off-balance sheet investment vehicle? why would you ever do that? what is the motivation to move it off balance sheet? >> i am not sure that we do. >> but goldman does that, right? >> i am not sure. some deal trust maybe -- i am just not sure. i can tell you as a matter of our policy, we mark to market all the risks of the firm whether they are on balance sheet or off-balance sheet so that there will be no p mendell consequence to us. >> the -- p and o consequences

to us. >> so they are disclosed? >> i do not know. in >> i would like to ask you about the security is and administration -- the securities and exchanges case. i do have some questions based on the press release that sec sent out on april 16. if you will answer, i would like to get a feel for, you know, what you really think happened. i guess i would like to give you a chance to explain some of this. it says, "goldman sachs failed to disclose to investors vital information about the cdo, in particular the role of the battle hedge funds rate -- played in the role of the process against them cdo."

is that true that you failed to disclose that? >> again, you obviously know. i was not there. >> right. >> but i think the person who testified in the first panel maintained that they did know and -- a look, some of these things it is not a question. you know i was not there and i do not know purified and doing the best i can. -- and i do not know. i am doing the best i can during its their reputations of transactions and some things that suggest they should have known and must have known and there are opinions flowing out in which people say they did know. it is not a question of not wanting to tell you. i cannot tell you more.

i know that one of the contested fax in the case is whether the selection agent -- contested facts in the case is -- the selection agent knew.-- >> should that information be disclosed to investors? co>> again, i'm not sure. in other words, the complaint is whether -- at least part of the complaint is whether the influence had an undue affect. i do not think it -- i'm not sure that any body has a duty on us to disclose position of the

short position. there had to have been a short position. if it were not them, it would be us. so that everybody in the transaction new, in a sense, that there was a long. so, there had to be a short. it was not a question of disclosing it. there just had to be a short. the question is, did the short have undue influence on the selection agents. and then you get to the situation where our person believes that they knew. i think a person may have been quoted as having an opinion on that. and then the issue was, how could you not know, that kind of element to it. it is obviously a legal case so that there are people on one side and people on the other and i do not want to diminish that, but that is the best i can do. that is the factual issue over

which the case is. >> it says, "goldman wrongly prohibited a client that was getting ahead -- against the hedge market exert influence while telling other investors that the securities were selected by an independent, objective third party. the first question is, is that allegation true? >> again, i will do the best i can, not knowing any of these facts firsthand. but one of the facts, and i think it is on the sec's complainet that the portfolio that was initially proposed in which the head fund at least participated -- and i'm not sure, maybe they propose all the names. more than half of those securities were thrown out by the selection agent call.

now, and throwing out more than half, they are obviously looking and making a judgment about all of them. they just turned back more than half of them, but that does not necessarily mean they looked at all of them. they looked at half of them and they've decided they be eliminated. paulison i guess proposed others and some of those were limited and some were turned back. so, there was a healthy back and forth over -- it looks like they were -- every decision that was made, you know, there is no deal unless the long and short agree to it. no doubt there was conversations between the two, but whether the selective agents had the responsibility and the duty to pick up portfolio, they did. that is our point of view.

the sec, i think, has its point of view. i hope i'm doing a good job of representing both sides of this and i'm trying to be cooperative, but that is the best understanding i have. >> this presentation says the market won't -- marketing materials that this thing has come all of the portfolio underlying the cdo represented a third parties expertise in representing the credit risk in rmbs. the sec disclosed that and this goes materials underlying the company had to fund, which was poised to benefit if the rmbs defaulted, played a significant role in selecting which rmbs would get selected for the

portfolio. is that true? -- is that true that the ombs portfolio was selected by cdo management? >> that is consistent with what i just said and that is consistent with what they did in selecting the portfolio. we have an independent auditor. it does not mean we do not interact with them. it does not mean we do not give them our views if they have an opinion of how they should be treated at goldman sachs. at the end of the day, they make the decision on who ought to be audited. >> to you have your documentation about him what was disclosed to whom and when -- about what was disclosed to whom and when? >> there were disclosure materials. >> on these type transactions there are documented disclosure

materials that pass among all the parties? >> there are disclosure materials, yes. the cracks in the past 25 years, america has seen -- >> in the past 25 years, america has seen an increasing severity in financial crises. you had the savings and loan crisis, and ron, the housing bubble -- enron, a housing bubble. what steps will wall street take to prevent another crisis? >> i think the reform is a good step that we are working on now. that we are working on, now, and i'm not sure where it would come out that there was need for reform. i mentioned earlier that there was need for systemic risk regulation. that is general and, obviously, every firm needs to manage its

risks very well and better than they have been doing it in most cases. in our case in particular, you also have to look through every aspect of your business practices to make sure and to not be defensive, which there is a tendency to be. and you make sure that you do a better job. >> that was one of my questions that i was going to follow up with was, what are the lessons learned from this most recent financial crisis, and what is goldman staff doing differently internally now that you have had to go through the bailout and all the other strains and difficulties that we have gone through in the last year and half. >> even as i am explaining what

we did and why i thought it was adequate at the time, there is not a thing that will rise here and elsewhere that will not be the subject of some big soul search and some tightening up of standards. we have a high-level committee in our firm going over every business practices committee. our business practices this committee is chaired by one of our senior officer as. it is not in reference to whether we can win a lawsuit or lose a lawsuit. we are going to -- we are going over everything. it is like painting a bridge. new gaudette -- you get to the end of the bridge and you go back and paint it again because of the way things are evolving.

everyone has to tighten up and ratchet the standards up. you asked me and we were just talking about the standards in that particular transaction that is the subject of a lawsuit. we have the position that we do and we believe everything is adequate, but given the criticism that we are going under and given the position that the sec has taken with our duties, guess what', we will tighten up now. everything that has been the subject of criticism we will tighten up. >> you know, there is a company that is based in little rock named stevens inc. i do not know if you know them. >> i do not know them well, but

i know them, yes. >> he always said that he had the philosophy of, we want to be in business tomorrow. what he meant by that, and the way that apparently stevens still operates is they want their customers to do an excellent job there and also, they want to be prudent and jealously guard the trust of their investors. stevens, as far as i know, has never gotten into these 20 to one, 321, 40 to one type of leveraged deals. -- 30 to 1 40 to 1 type leveraged deals. but they have remained very sound through this process. my question is, is goldman

sachs, or the industry changing those really high leverage race ios -- ratios and going back to something that i think is a bit more appropriate, and you may say conservative, but is based more on reality other than just how much money you can make off of one transaction? >> yes, i think the industry is substantially less leveraged. and i will tell you, we thought we were not leveraged going into the crisis, and we were not as much as other investment banks like ourselves. in hindsight, we were to leveraged, even beyond what we thought at the time was -- we were to leverago leveraged. this crisis is going to reverberate with me for the rest of my life, you know, the fear

and anxiety that we all had. i think all firms will be run much more conservatively. and i tell you that society will not rely on the goodwill and memory of financial firms. i think congress and regulators will impose higher requirements and liquidity requirements, and i think that is appropriate. as we also found out in the crisis, off we all have interrelated obligations -- we all have into related obligations to each other and to have goldman sachs the conservative if everyone is going to put them at risk, which is again, making the world safer and being too big to fail is something that is in a substantial interest of society

at large and also in the interest of goldman sachs. >> mr. chairman, thank you for your diligence on this matter. this did not start with you two weeks ago. this has been going on for the last year-and-a-half and you have just done yeoman's work, thank you. >> thank you, senator. your last answer, i'm going to get into some questions here that i had prepared. is goldman too big to fail? >> i do not believe so. >> ok, so, if goldman went down the financial markets would not go into a tailspin that would not be recovered quickly. >> the answer is, if we went into a tailspin in a normal world, one in which everybody was not doing the same thing,

which is another issue. and by the way, when you cannot rely upon because i have said this before, a lot of institutions would be too big to fail if you were afraid that once park would set off the whole forest. but generally, if people's credit is eroding, the market starts to move funds away, starts credit. the firms start to shrink when they get into trouble. but i do think some additional legislation with respect to too big to fail is warranted. >> i really want to follow up some questions on the first panel and delete drill down some of those specifics of the advocates deal. i think we have pretty well established that goldman and paulson and co. both played a role in selecting the assets in the advocates of deal.

we know that goldman wanted to short the market and 82% were ultimately ground down within six months. we also know that goldman was eager to complete the deal. we know you wanted to get the deal done, goldman wanted to get the deal done and at least in the previous deals, of which there were about 50 in total, you did not use an independent " -- portfolio management agent. why did you decide to use an independent portfolio management agent in the advocates the deal ultimately and why did you use the assets that had already been selected? >> the assets were not selected. the assets, i think, were being proposed, and of what was

proposed, more than half were rejected by that agent. i do not know the circumstances under which use an agent and which you do not. >> ok, i understand. it is a big company. aca was not the first choice of the portfolio management agent. in fact, they described the arrangement as highly unusual. what i was wondering is, is the selection of its portfolio management agent and the advocates 2001 due to the fact that it was the only investment that could be found? they indicated they were only interested in the cdo's effused an independent portfolio agent? >> one thing i know for sure is that the collection agent itself brought together the

investment. i am sorry. >> know, go ahead. that brings up my other question. >> the advocates structure, i do not know anything more other than what questions you asked for bareez. >> i guess i need to know them all because ikb was hung out for a lot of money. you said the aca had 80% or 90% baiuyer. are you saying that ikb only had 10% of it? what are really saying here? >> > >ikb -- i think ikb had a total position of something

like 150 and these numbers i think are in the complaint. i think the hca ended up having a total position that was multiples of that. i seem to recall the nine hundreds of millions. ikb i think had 150 and aca had 952. >> and we are talking about these folks on the long side of these things went paulson was on the short side. >> correct. >> and when it was marketed to ikb -- because this is a question that has been brought up. we're talking about transco and -- disclosure and transparency

and conflict of interest and all of that stuff, but was ikb told that paulson was selected as part of the securities? >> all i have his the testimony -- the information that we have from the torah. i do not have independent knowledge of it. -- from the tool our. i do not have intended knowledge of it. in rugs are listed off for five different arrangements that goldman have and i believe i agree with the senator who said that there should be for five other folks up here with you. i have been sitting here trying to really figure out a good analogy of how this happened. i get the impression that from

the fellows that were up here earlier in the day that this kind of works this way all the time, the folks can pick the securities and from their perspective they will fail because they sell them short. and they try to market them to somebody else and they think they're going to be successful. that is just one of the way business is going? >> i am so sorry. the securities were not meant to fail. they succeeded by conveying the risks that people wanted to have. and in a market, that is not a failure. >> it is like we are speaking a different language here. and this is not being critical of you. but it seems to be more than just a bit odd that paul since

-- that paulison picked the securities because he was going to make money on them. he picked the securities that he could sell short so he could make money on them. and somebody else that may be did not have the information that paulson had -- so, maybe that is where the disclosure comes in -- thought maybe they would be ok. that may be oversimplifying. it seems to me it is not like selling a -- it is not like selling an unsound horse. you have a cow and you are calling it corn and it is really something else. >> in these transactions, sometimes the bair comes to you and what somebody to offer the other side. -- sometimes the buyer comes to you and wants somebody to offer the other side. and in the absence of two sites, usually we provide the side.

and >> ok, because what i have read here indicates that this is an independent portfolio advocacy agency was selected because there was an outfit by the name of ikb that wanted to buy it and the only way they would buy it is if you have the portfolio selection agency. are you saying that is not correct? >> no, i am not saying that is not correct. what i am saying is that i cannot go through the ins and outs of it because i just cannot no more than what i have heard. -- i just cannot know more than i have heard. and >> it sounds like there is a disclosure problem between the parties. that is what it sounds like to me.

the synthetic financial vehicles -- and i know you said everybody has the right to hedge the risk, but these go beyond that. i mean, they really do. it is more like a scam. i came in and heard you talk about your clients being critically important. and i think anybody would not think that and it is probably the most important thing you can do. although, the previous folks never appeared the other day would not say whether they worked for the clients or the company. they said they were market -- >> makers. >> for market makers, that is what they said. but what is amazing to me is that they would not say that they worked for the clients.

>> yes. >> why would the clients believe in goldman sachs? >> senator, there are parts of our business that our fiduciary -- that our fiduciary. -- are fiduciary. when you are a principal, i can understand their confusion when answering the question. and i am trying to explain it and i wish i were better to explain it. there are parts of the business where you are a money manager, where you owe a duty to the client. there are parts of the business where you are a principale and you are giving the client what it once and it is understood. and you have to know what is

suitable and you have to know what you do and who delivers and what they expect to have, but the markets could not work if you had to make sure that it was good for them. >> what you are saying is in one case you are working for the client and in the other case you are selling. >> i will tell you, in the business world if we are not the biggest, most important market maker, if we are right up there. in other words, we do well with this and our clients thought he was for it. >> and one does not lead over into the other or vice versa? >> i think the market understands when these people are buying -- i will say it. hadera buying for their own piano. >> what are your responsibilities -- they are buying for their own p &l.

>> what are your responsibilities in this? >> we have a whole range. >> is there a disclosure requirement? orix eikenberry disclosure requirements when you are talking -- >> i think there is a disclosure requirement when you are talking about underwriting. but the disclosure of the risks associated with that is not related to whether you are long or short also or whether housing is going up or down. does the product deliver what the client seeks? >> if disclosure is not given equally to both sides, because you said it had to be given equally to both sides to make it work, if it is not given to both sides, whose responsibility is that? -- is not you. porges it to you?

-- or is it you? >> the disclosures are very well involved. >> ok, is it to you? >> i think the disclosure document would disclose -- would disclose to the world the buyers in that incident. >> so you think i knew that paulson was part of securities? >> again, the lawsuit is whether we satisfied it and that is a factual issue. >> do you on behalf of goldman accept any responsibility for the collapse of 2008? spuck >> yes. >> are you in any way embarrassed that the u.s. taxpayer had to bail out kohlman? >> we got funds for the government -- from the government -- that the u.s. taxpayer had to bail out goldman? >> we got funds from the

government and it is embarrassing now. >> you think it is embarrassing that you needed these funds to stay in business? >> i think they were critically important. i cannot say what would have happened otherwise. they were critically important to the system and, therefore, critically important to us. >> do you feel you owe anything to the taxpayers because of that bailout? >> i think, yes, and for many other reasons. i would like to say, senator, also, and i am answering your without qualification on all of those points. but we were not waiting for government bailout. and i think this was quite famous and observed that weeks before that we did a transaction with warren buffett where we gave him equity warrants on a substantial portion of goldman sachs i