WASHINGTON — Goldman Sachs' chief acknowledged Wednesday that the investment bank engaged in "improper" behavior in 2006 and 2007 when it made huge bets on a housing downturn while peddling as safe more than $40 billion in securities backed by risky U.S. home loans.
Lloyd Blankfein, Goldman's chairman and CEO, made the surprising statement at the opening hearing of the Financial Crisis Inquiry Commission, a 10-member panel that Congress created to investigate and lay out for the public the causes of the worst financial crisis in decades.
Blankfein and senior officers of three of the nation's most prominent banks told the panel that serious flaws in their risk models and business practices contributed to Wall Street's meltdown and the massive taxpayer bailouts that followed. The commission also heard testimony that the banks and quasi-government mortgage giant Fannie Mae recklessly took on as much as 95 times more risk than they could cover, and that Wall Street excels "at pulling the wool over the eyes of the American people."
Blankfein faced the toughest questioning.
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Commission Chairman Phil Angelides, a former California state treasurer, warned Blankfein that he'd be "brutally honest" in his questioning. He asked why Goldman thought it was necessary to take out protection against investment-grade mortgage securities it was selling by purchasing insurance-like contracts known as credit-default swaps. Angelides likened it to selling a car with knowledge it had faulty brakes and then taking out an insurance policy on the buyer.
"I do think the behavior is improper, and we regret... the consequence that people have lost money in it," Blankfein told Angelides.
Until Wednesday, Goldman had insisted that it was merely managing its risks when it placed "hedges," in the form of wagers against the housing market, various venues including in secret offshore deals, with insurance giant American International Group and on a private London exchange.
In November, McClatchy Newspapers reported exclusively that Goldman failed to tell investors about its contrary bets while selling $39 billion in risky mortgage securities it had issued, and another $18 billion in similar bonds issued by other firms.