Ex-Goldman CEO recalls facing the Congressional firing squad after the Global Financial Crisis

No one sent out a memo announcing the end of the financial crisis - and markets remained extraordinarily volatile into the new year. But as 2009 began and Barack Obama was inaugurated, no other shoes dropped.... In the first quarter of 2009, the firm returned to profitability - it would be another record year. Slowly, our business seemed to be reestablishing some kind of normality.

What did critics think we'd done wrong? One line of criticism focused on repayments we'd received from the government as part of its bailout of AIG. There was a baseless suspicion that having so many highly placed alumni had somehow resulted in AIG being bailed out for the benefit of Goldman or gotten us some other kind of special treatment. Everyone was looking for a smoking gun indicating that Hank Paulson had saved AIG at our behest. Of course he hadn't.

The reason to rescue AIG was the impact a default would have had on nearly every company in America. Goldman might even have been unique in not being materially at risk from an AIG default. Thanks to our aggressive collateral calls and CDS insurance, we were largely protected. In any case, we didn't lobby anyone....


...Another charge was that we'd designed mortgage products to fail. The accusation focused on a mortgage derivative product with the catchy name ABACUS 2007-AC1. We'd put it together at the behest of John Paulson, a hedge fund investor who wanted to bet against the housing market. Paulson shorted ABACUS by entering into credit default swaps that would pay off if certain subprime securities failed.

We found counterparties who wanted to go long on those riskier mortgages. These were institutional buyers of that type of risk. When securities included in ABACUS did fail as a result of the subprime meltdown, Paulson made billions on his CDS and the counterparties that wrote insurance - the bond insurer ACA and two European investment firms - lost money.

In January 2010, I was called to testify at the first public hearing of the Financial Crisis Inquiry Commission, a panel appointed by Congress to investigate the causes of the financial crisis. I appeared along with Jamie Dimon, John Mack and Brian Moynihan, the CEO of Bank of America. Phil Angelides, the former state treasurer of California, chaired the hearing and went after me straightaway. 'It sounds to me like you're selling someone a car with faulty brakes and then buying an insurance policy on that car that pays you when it crashes,' he said, referring to the ABACUS transaction.

I'm not sure Angelides quite understood how finance works. If you're a market maker, you often hold an interest in opposition to the performance of the securities you sell. But our goal wasn't to make a bet on the security ourselves. We were intermediating between sophisticated market professionals, one side that wanted to be long mortgage risk and another that wanted to be short. The security was not marketed to the public.

Unless we did something to cause those mortgages to fail, which of course we didn't, we were simply a seller of a legitimate financial product that some investors wanted to bet on and others wanted to bet against. Goldman itself lost a significant sum on the deal because we were left with some of the ABACUS long.

In the punitive post-crisis atmosphere, however, that kind of inter-mediation looked more sinister. In mid-April 2010, SEC voted 3-2 to bring a civil charge against us for misleading statements related to the ABACUS placement. The case focused on the actions of Fabrice Tourre, a 28-yr-old French trader based in London who was accused of misleading ACA into thinking that John Paulson was long rather than short on the securities underlying ABACUS.

'Fabulous Fab', as the media called him, had written a lot of braggy emails to his girlfriend, touting his supposed exploits. He facetiously boasted that he had sold complex mortgage derivatives to 'widows and orphans that I ran into at the airport'. Those emails fuelled a full-blown media circus. Fabulous Fab was at the centre of a media feeding frenzy....

...I went to Washington that month to testify the way the ruler of Gaul went to Rome after Caesar's conquest - in chains in a cage. Seven of us from Goldman, including Fabulous Fab, were subpoenaed. The Senate Permanent Subcommittee on Investigations (PSI) is best known as the vehicle Senator Joe McCarthy used to slander and browbeat alleged communists in the 1950s.

With its broad mandate to 'investigate inefficiency, mismanagement, and corruption in Government', PSI still specialises in show trials. When it devoted a day to interrogating Goldman Sachs, the world was watching....

...I finally came on at 7.00 pm and read my prepared statement. Code Pink protesters were seated behind me, wearing striped prison jumpsuits and waving signs saying 'Shame'. I'd always liked European history and couldn't help identifying with the French aristocrats being led to the guillotine....

...I kept explaining that our goal was to limit our exposure in either direction. We had traders who were long and wanted to be longer, and traders who were short and wanted to be shorter. We kept the firm as a whole 'close to home'. You couldn't look at our short bets against the mortgage market without looking at our offsetting long bets on the mortgage market. In issuing ABACUS and other mortgage derivatives, we were acting as an intermediary, not an adviser with a fiduciary obligation to clients.

Levin, of course, knew all of this. He was as smart as senators come. But facts weren't going to divert him from his political agenda. That agenda was to prepare the way for stringent new legislation restricting the financial sector....

...After the hearing finally finished around 9.00 pm, I went to the Capitol rotunda and did something like a dozen 15-min interviews with different TV networks and financial broadcasters. When that was done, it was time to drive back to New York City - it was too late for the shuttle or a train. I hadn't eaten all day and was feeling pretty miserable.

When we stopped for gas on the Baltimore-Washington Parkway, I bought a hot dog that must have been rotating in the display case for weeks.

'If you eat that, you're going to die,' my driver said.

'Good,' I said. 'I really don't care at this point.'





This is an edited extract from Streetwise: Getting To and Through Goldman Sachs