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Goldman refutes Senate charges, says CDO market not a casino

Goldman refutes Senate charges, says CDO market not a casino
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First Published: Wed, Apr 28 2010. 10 09 PM IST

Question time: Goldman Sachs chairman and CEO Lloyd Blankfein being sworn in on Tuesday by the Senate subcommittee on investigations during the hearing on Wall Street investment banks and the financia
Question time: Goldman Sachs chairman and CEO Lloyd Blankfein being sworn in on Tuesday by the Senate subcommittee on investigations during the hearing on Wall Street investment banks and the financia
Updated: Wed, Apr 28 2010. 10 09 PM IST
Washington, DC: US lawmakers have accused global investment banking firm Goldman Sachs Group Inc. of treating its clients as object of profits. “Goldman’s actions demonstrate that it often saw its clients not as valuable customers but as objects for profits,” said senator Carl Levin, chairman of the permanent subcommittee on investigations. “Its conduct brings into question the whole function of Wall Street,” Senator Claire McCaskill accused Goldman officials of gambling with little oversight.
Lloyd Blankfein, chief executive of Goldman Sachs, explained Goldman’s stand in an interview. Edited excerpts:
The analogy of casinos is being repeatedly used when referring to the synthetic CDO (collateralized debt obligation) market. I would like you to comment on another one that came up a great deal with Senator Claire McCaskill, who referred to the Abacus transaction and Goldman’s role in it as nothing more than a bookie. Do you buy that?
I do not think that’s right. Synthetic CDOs allowed buyers and sellers to be able to take the kinds of positions they want in the housing market; it wasn’t a casino.
Also, these were very highly sophisticated parties. In fact, among the most sophisticated in the world, in a professional market.
But someone asked the question why we even need a synthetic CDO market. We are talking about a derivative. We have a $12 trillion (Rs535.2 trillion) physical mortgage markets that already exists during this period in time. Why synthetic CDOs?
Question time: Goldman Sachs chairman and CEO Lloyd Blankfein being sworn in on Tuesday by the Senate subcommittee on investigations during the hearing on Wall Street investment banks and the financial crisis. Susan Walsh/AP
I think that what synthetic CDOs allowed people to do was to efficiently and quickly get the kind of diversification and risk they wanted on the buy side or on the sell side, and they were hedgers and market participants that did this.
I think issues were raised and I think in connection with regulatory reform people will be looking at derivatives market since they see that, notwithstanding the value they contribute to the market, some securities are too complex and hard to manage.
What do you think now when you look back on the synthetic CDO market? Do you think perhaps it’s something which we should never have touched, which we should not have done?
I understand fully the reason that drove the transactions.
What was the reason that drove the transaction?
People wanted positive or negative risk to the housing market.
And people were searching for yield. But couldn’t they have found it in some other area?
These were professional investors who sought the risk and obtained the risk that they wanted in the market.
Another question that has come up a lot is if you have an adverse interest to your client, do you have a responsibility to tell?
When you are a market maker, you have a responsibility to make sure that your client is suitable, knowledgeable and that what you are providing serves the purpose and provides the rest of the client’s wants.
You believe that Goldman Sachs did that?
I believe we did.
There is also the larger question about ethics, about this market at this period of time and as to how it reflects on Goldman and all of Wall Street? Why did it need to exist? Why did it need to happen?
I think the housing market was and is and will be an important market and it will want to attract capital. In order to attract capital, people will want to have investment opportunities and people will also need instruments that will allow them to hedge investments, or else, capital will not flow in.
cnbctv18@livemint.com
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First Published: Wed, Apr 28 2010. 10 09 PM IST