The day that Goldman Sachs was charged with fraud was "one of the worst days in my professional life", the investment bank's chief executive Lloyd Blankfein plans to tell a Senate investigation today.
Mr Blankfein and six more of the company's executives are being hauled before a panel examining Wall Street's role in the financial crisis and, in particular, how Goldman Sachs made profits as the US mortgage market collapsed in 2007.
In his prepared testimony, published last night, the Goldman boss says he understands public anger and promises that future deal-making will take public opinion into account.
The US Securities and Exchange Commission laid civil charges against Goldman on 16 April following an investigation lasting more than a year. It said the bank had duped investors in one of its toxic mortgage derivatives, known as Abacus, by not telling them the product had been created so that a hedge fund could bet on its imminent collapse. Investors lost $1bn.
Goldman has said it will fight the charges, and Mr Blankfein will tell the Senate's permanent sub-committee on investigations that he disagrees with the SEC's interpretation of the controversial mortgage deal at the centre of the case.
"It was one of the worst days in my professional life, as I know it was for every person at our firm," he says of hearing about the charges. "We believe deeply in a culture that prizes teamwork, depends on honesty and rewards saying no as much as saying yes. We have been a client-centred firm for 140 years and if our clients believe that we don't deserve their trust, we cannot survive."
The Senate committee will also hear testimony today from Fabrice Tourre, the 31-year-old trader who created Abacus, and who refers to himself as "Fabulous Fab" in an email which was unearthed by investigators at the SEC.
Three of Mr Tourre's bosses in the mortgage trading business, plus Goldman's chief financial and chief risk officers, will also appear.
Mr Blankfein will say that he understands why revelations about Abacus have angered many members of the public. "To them, it is confirmation of how out of control they believe Wall Street has become, no matter how sophisticated the parties or what disclosures were made," he will add.
"We have to do a better job of striking the balance between what an informed client believes is important to his or her investing goals and what the public believes is overly complex and risky."
Over the weekend, Goldman released dozens of pages of internal emails, shedding light on the activities of its mortgage trading desk over 2007, in which it confirmed that it had made profits that year from the business. It lost that money and more in 2008.
The Abacus deal netted Goldman $15m (£10m) in fees but has cost the company $15bn in lost market value – and the bank is facing lawsuits from investors who say executives should be made to compensate them.
Goldman shares had seemed set fair to reach pre-crisis levels, following a three-month surge and ahead of what turned out to be record-breaking first-quarter results, but the SEC charges sent them tumbling and they have continued to slide. They closed yesterday at $151.90, down more than 15 per cent since the minutes before the charges against the bank were made public. Its market capitalisation has collapsed from $95bn to $80bn.
The SEC has been investigating Abacus for more than a year and issued a Wells notice – a precursor to filing civil charges – in July last year. Goldman did not disclose the notice, saying it was not material to its results, but lawyers acting for shareholders yesterday accused it of acting illegally.
A lawsuit filed in a federal court in Manhattan alleges that Goldman and its executives made false and misleading statements about Abacus and misled shareholders by failing to declare the Wells notice.
It contends that, as a result, Goldman shares traded at artificially inflated prices. The defendants in the lawsuit are Goldman itself, Mr Blankfein and two other executives – the chief operating officer, Gary Cohn, and chief financial officer, David Viniar.Reuse content