In particular, the report said of Fuld that, “There is sufficient credible evidence to support a determination that Fuld’s failure to make a deliberate decision about Lehman’s disclosure obligations was grossly negligent or demonstrated a conscious disregard of his duties.”
For his part, Fuld (who has since returned to work by setting up a small advisory firm several blocks from Lehman’s old headquarters) insisted he was unaware of Repo 105. “I have absolutely no recollection whatsoever of hearing anything about or seeing documents related to Repo 105 transactions while I was the CEO of Lehman.”
Outside of his home in Sun Valley, the week before the first anniversary of Lehman’s collapse, he said, “You know what, people are saying all sorts of crap, and it’s a shame that they don’t know the truth, but they’re not going to get it from me.” He added, “You know Freud in his lifetime was challenged, but you know what he always said: ‘You know what, my mother loves me.’ And you know what, my family loves me, and I’ve got a few close friends who understand what happened, and that’s all I need.”
As of this writing, several government investigations into Lehman remain ongoing, though it is unclear how they will be resolved.
Despite serving for so long as the public face of the crisis, Fuld and Lehman were relegated to the background as the spotlight seemed to turn again onto Goldman Sachs, the firm that had managed to weather the crisis more successfully than its peers. While its success had long made it the target of the public’s ire, it only exacerbated the situation with a number of ill-considered gaffes, the most notable of which was an off-handed joke Lloyd Blankfein made to a reporter that he was just a banker “doing God’s work.”
That comment led to an enormous amount of scorn being heaped on the firm as it demonstrated the emerging disconnect between Wall Street and Main Street, quickly becoming a running punch line on late-night television. Warren Buffett, a longtime Goldman fan, observed of the public outrage, “I mean, they’re going to rewrite Genesis and have Goldman Sachs offering the apple.”
In April 2010 the Securities and Exchange Commission brought its only major case against Wall Street since the crisis, filing securities fraud charges against Goldman Sachs and one of its employees, Fabrice Tourre, a vice president, accusing them of selling securities that were intended to fail. The suit alleged that Goldman had created a synthetic CDO purposely filled with low-quality mortgages on behalf of one of its clients, Paulson & Co., a hedge fund that had made $3.7 billion by shorting the mortgage market. Paulson (unrelated to Henry M. Paulson Jr.) had likewise planned to short the CDO in question, called Abacus. The SEC asserted that Goldman had purposely not disclosed to buyers of Abacus that Paulson had helped create it with the goal of having it fail. The investors who bet it would rise in value wound up losing $1 billion.
Despite the headline-grabbing claims, legal experts described the case as “thin,” and raised questions about whether it was politically motivated to help gain support for the president’s financial regulatory reform bill. The SEC’s five commissioners had voted along party lines, 3-2, to pursue the case.
For its part, Goldman, which claimed it was blindsided by the suit, said it planned to defend itself and that it, too, lost money on the Abacus deal. The firm stated that it had disclosed all of the material information that an investor would have needed to properly evaluate the deal, including which mortgages were being referenced in the CDO.
Wall Street is expecting that Goldman will ultimately settle the civil case, with some analysts predicting that it could pay a fine as high as $1 billion and others speculating that Blankfein could be forced to step down. The Justice Department has also opened its own criminal inquiry into the firm’s practices.
Irrespective of the merits of the suit, it did offer the American public a window into the world of how investment banks really work and the various conflicts of interest that seem to be embedded into their business model.
Senator Carl Levin quizzed Goldman’s CFO, David Viniar, at one of many hearings about the financial crisis. During a heated exchange, Levin asked Viniar why Goldman had sold a CDO called Timberwolf to its clients, even though it was betting against the security itself. Levin had found an e-mail in which one Goldman colleague had observed to another, “Boy that timeberwof [sic] was one shitty deal.”
When asked about that assessment, Viniar only made the situation worse by responding, “I think that’s very unfortunate to have on e-mail.” (After lots of laughter in the gallery, he tried to correct himself. “Please don’t take that the wrong way, ” he added. “I think it’s very unfortunate for anyone to have said that in any form.”)
Another sequence of e-mails uncovered since the height of the crisis revealed that Washington Mutual’s CEO, Kerry Killinger, had been nervous about doing business with Goldman precisely because of such conflicts.
“I don’t trust Goldy on this,” Killinger wrote to a colleague. “They are smart, but this is swimming with the sharks. They were shorting mortgages big time while they were giving CfC [Countrywide Financial Corporation] advice.”
The Goldman suit also brought into stark relief larger questions about the dangers of derivatives and whether they had much social utility. What the public learned was that many derivatives like synthetic CDOs were simply bets without anything underlying them. Nobody was able to get a mortgage as a result of the sale of synthetic CDOs. An investor in a synthetic CDO is simply gambling on what is going to happen to a series of mortgages that he doesn’t even own.
“Synthetics became the chips in a giant casino, one that created no economic growth even when it thrived, and then helped throttle the economy when the casino collapsed,” Senator Levin said.
Despite the attacks against it, however, many of Goldman’s clients rushed to its defense, denouncing the outrage in Washington and elsewhere as politically motivated.
“People need to tone down the rhetoric around financial services and stop the populism and be adults,” Jeffrey Immelt, CEO of General Electric, stated. Warren Buffett was even more vociferous in his defense of Goldman and, specifically, of the Abacus deal.
“I don’t have a problem with the Abacus transaction at all, and I think I understand it better than most,” said Buffett, whose Berkshire still held a $5 billion stake in Goldman. “For the life of me, I don’t see whether it makes any difference whether it was John Paulson on the other side of the deal, or whether it was Goldman Sachs on the other side of the deal,” he observed, adding, “It’s very strange to say, at the end of the transaction, that if the other guy is smarter than you, that you have been defrauded. It seems to me that that’s what they are saying.”
For all the anger directed at Wall Street, there was still a portion left over for the government and its own handling of the crisis. A U.S. Congressional Oversight Panel report was critical of the roles of Henry M. Paulson, Ben Bernanke, and Timothy Geithner. In particular, it took issue with their decision to bail out AIG which, the report contended, “demonstrated that Treasury and the Federal Reserve would commit taxpayers to pay any price and bear any burden to prevent the collapse of America’s largest financial institutions and to assure repayment to the creditors doing business with them.”
The Federal Reserve also came under scrutiny for being too close to Wall Street, as members of Congress questioned whether the agency had acted appropriately in making some of its secret middle-of-the-night decisions and whether more disclosure was necessary. Several congressmen, led by Ron Paul, sought to audit the Fed, which Ben Bernanke resisted, adamant that the Fed remain independent of political interference. As of this writing, it appears that proponents of regular audits have backed down in their demands.