Senate Panel Sought Action Against Goldman Before SEC Suit

April 23, 2010

A Senate investigations panel looking into Goldman Sachs’ role in the financial crisis subpoenaed the investment bank as early as June 30, 2009, long before securities regulators sued it for fraud, according to a congressional aide.

The aide also said that the panel notified Goldman on April 5, eleven days before the action by the Securities and Exchange Commission, about who would be called as witnesses, including trader Fabrice Tourre, the only Goldman executive named as a defendant in the SEC lawsuit.

The SEC has accused Goldman and Tourre of not giving investors “vital information” about a debt security created with input from Paulson & Co, a major hedge fund, which then shorted the security.

Tourre, a 31-year-old Frenchman, was a bond trader for Goldman. He is now on paid leave in London.

There was some speculation that Tourre was called as a witness to the Senate Permanent Subcommittee on Investigations after the SEC filed its suit. The fact that he was called before then suggests the Senate panel had some of the same information that led the SEC to file its action.

Tourre’s name appears on some of the emails obtained by the subcommittee during its investigation of the role played by credit raters in the financial crisis, the subject of a subcommittee hearing Friday.

The SEC’s April 16 complaint included emails in which Tourre appeared to exult in the products he was creating.

“The whole building is about to collapse anytime now,” he wrote to a friend. “Only potential survivor, the fabulous Fab standing in the middle of all these complex, highly leveraged, exotic trades he created without understanding all of the implications of those monstrousities!!”

The SEC advised Goldman at least seven months ago that it was considering bringing charges against the bank. Goldman has said the SEC suit is unfounded in law and fact.

The Senate subcommittee is examining the role of Goldman and other investment banks in the securitization of mortgage products and the development, marketing and trading of products such as collateralized debt obligations (CDOs).

The panel on April 27 will take testimony from Tourre, as well as from Goldman Chief Executive Lloyd Blankfein, Chief Financial Officer David Viniar and Chief Risk Officer Craig Broderick.

Also scheduled to testify are the two Goldman traders credited with netting the company large profits during the subprime mortgage crisis — Michael Swenson and Joshua Birnbaum. Birnbaum is no longer with the company.

Their bets against mortgage-related products in 2007 helped the investment bank weather the financial meltdown better than some of their peers such as Bear Stearns and Lehman Brothers, which did not survive the crisis.

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