To read about the industry's concerns and response to theGoldman hearings clickhere

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WASHINGTON, DC-As the Senate Governmental Affairs Subcommitteeon Investigations grilled Goldman Sachs Tuesday about the sales ofresidential and commercial mortgage-backed securities, the senatorsagreed they will amend pending legislation to includeconflict-of-interest wording based on the testimony. The company,which earned $500 million in 2007 by balancing long investments onthese securities with short sales against the securities' success,has been charged by the SEC with fraud regarding MBS sales.

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Through 11 hours of testimony from Goldman executives, thesubcommittee accused the company of selling securities to somecompanies without telling the buyers that Goldman planned to sellshort on those securities--basically betting against the product."You have salespeople saying they think these products are crap,yet they still sell them while your company bets against them,"said committee chairman Sen. Carl Levin. "You shouldn't be sellingjunk, and you shouldn't be betting against your own customer thesame time you're selling to him."

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Levin was referring to about half a dozen examples of large badloan packages that the company sold to investors, while Goldman atthe same time went short on the same packages. Emails presented asevidence showed that Goldman employees knew the packages were bad,but did not relay this sentiment as it marketed the packages. Allof these packages ended up in default, and investors lost millionsof dollars.

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Levin said he's going to insert regulatory language into anamendment for a financial services regulatory reform bill, nowpushed by Sen. Christopher Dodd, to try to prevent conflicts ofinterest. "We need a financial cop back on the beat, to protectMain Street from the excesses of Wall Street," Levin said.

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However, Goldman executives said repeatedly that no fraud wascommitted, and that they have followed the law and acted ethicallyin all dealings. Goldman's product salespeople are responsible toshow a buyer its due diligence on a product, but they do not haveto provide their opinion about the securities, the executives said.Also, Goldman's short coverage of the MBS packages, even after itbecame clear the housing market was failing, was just a marketcorrection to stem losses, the executives said.

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"Nothing I've heard today makes me think anything went wrong,"said Lloyd Blankfein, Goldman chairman and CEO, during histestimony. "We didn't know what was going to happen with thehousing market. We just wanted to reduce risk."

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While a few of the senators tried to liken trading in syntheticcollateralized debt obligations to sports betting, Blankfein andthe other Goldman executives said they were just providing aservice to investors who wanted to assume various levels of risk ata good price. "You could probably even find someone right now whowould give you pennies on the dollar for those same bad loans,because that's the risk they want to assume," Blankfein said.

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It was clear at various times during the questioning that thesenators lack understanding of how a market maker such as GoldmanSachs operates, with separate departments that handle trades andsales. Also, while the senators had trouble with the ethics of thetrades, they did not claim that direct fraud was committed.

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The SEC filed charges against Goldman Sachs on April 16. Thecommission alleges that hedge fund Paulson & Co. paid Goldmanto structure a transaction in which Paulson could take shortpositions against mortgage securities chosen by Paulson, based onthe belief that the securities would fail. Goldman did not mentionPaulson's role in choosing the securities, or Paulson's short bet,in their marketing materials for the product, the SEC alleged inits charges. Goldman Vice President Fabrice Tourre, named in theSEC suit as being the principal behind this deal, said duringTuesday's testimony that investors knew of Paulson'sinvolvement.

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