Goldman Sach's trading of mortgage-related securities has emerged as an early focus of the Financial Crisis Inquiry Commission, the US body set up to get to the bottom of the causes of the credit crunch and the financial panic of 2008.
Lloyd Blankfein, the Goldman chief executive, bore the brunt of intense questioning on the first day of the commission's public hearings in Washington yesterday, and admitted to the inquiry that his firm got caught up in "elements of froth" in the market for mortgage investments.
But commission members signalled they would go after more than an admission of mistakes, and demanded more information on potential conflicts of interest and on whether Goldman misled its clients.
Inquiry chairman Phil Angelides, a Democrat who was formerly California state treasurer, accused Goldman of activity that "sounds like selling a car with faulty brakes and then buying an insurance policy on those cars". He pressed Mr Blankfein repeatedly on why Goldman had continued to sell mortgage-related derivatives to investors, even as the company was placing bets that the US housing market and the value of these investments was going to fall.
As the most powerful and widely recognised name on Wall Street, Goldman Sachs has become a lightning rod for public fury over the bailout of the nation's leading banks. For this reason – and because his name put him first on a panel arranged alphabetically – Mr Blankfein was yesterday cast as chief spokesman for the investment banking industry.
Also appearing before the commission were Jamie Dimon, chief executive of JPMorgan Chase, John Mack, chairman of Morgan Stanley, and Brian Moynihan, the new chief executive of Bank of America, which owns Merrill Lynch. "Without trying to shed one bit of our industry's accountability, we would also further our collective interests by recognising other contributing causes to the severity of the crisis," Mr Blankfein said in his testimony. That was dismissed in a one-liner by Mr Angelides. "Maybe this is like Murder on the Orient Express," he said, "and everybody did it."
In the end it was Goldman's activities that most interested the chairman and for long periods the hearing became a feisty debate between the two men. Mr Blankfein repeatedly interrupted to try to explain that Goldman's main activities were as a broker of mortgage securities and that it was not "betting against" the market, just trying to reduce its substantial overall exposure to housing and mortgages. He likened the practice of short-selling the mortgage market to taking out "hurricane insurance", prompting Mr Angelides to cut in: "Acts of God we will exempt, these were acts of men."
The chairman also repeatedly tried to get Mr Blankfein to admit that Goldman could have gone under in the week after Lehman Brothers failed in September 2008, if it were not for the extraordinary interventions in the market by the US government. Neither Mr Blankfein, nor any of his peers on the panel, would agree that their own firms were certainly doomed.
The commission is beginning its work in an atmosphere of public anger over the effects of the financial crisis, which exacerbated an already deep recession, and just days before Wall Street banks are due to reveal a return to the pre-crisis levels of bonuses for staff. Today, President Barack Obama is planning to set out ways in which the costs of the bailout will be recouped via a "fee" on the industry. Mr Angelides has been told to produce a report on lessons from the crisis by December.
Morgan Stanley's Mr Mack yesterday called the financial crisis "a wake-up call" and said: "Many firms were too highly leveraged, took on too much risk and did not have sufficient resources to manage those risks effectively in a rapidly changing environment."