ANALYSIS-Goldman foe gets some revenge in reform bill

By Reuters Staff
June 29, 2010

By Matthew Goldstein

NEW YORK, June 28 (Reuters) – One of the sleeper provisions in the 2,000-page financial regulatory reform bill may be one that is no more than six paragraphs long.

The brief section of the massive bill is aimed at stamping out some of the conflicts of interest that arise from Wall Street’s packaging and marketing of asset-backed securities — investment products backed by a pool of mortgages, loans or bonds.

The measure could give U.S. securities regulators the authority to ban a narrow class of so-called securitized products that enable Wall Street banks to take the opposite side of trade from a client, lawyers and other structured finance experts said.

“It may eliminate a certain class of deals,” said Jerry Marlatt, an attorney in New York with Morrison & Foerster.

Some on Capitol Hill have dubbed the provision the Goldman Sachs amendment because its legislative proponents introduced the measure after the U.S. Securities and Exchange Commission sued Goldman Sachs Group Inc <GS.N> over its sale of subprime mortgage-linked security called Abacus 2007.

The provision’s language was drafted by Sen. Carl Levin, who raked Goldman top executives over the coals for the bank’s role in putting together the Abacus deal and other similar collateralized debt obligations.

Levin used an April hearing by the Senate Permanent Subcommittee on Investigations to pillory Goldman for packaging and selling so-called synthetic CDOs that were designed as a bet against the housing market and the underlying basket of mortgage-backed securities included in the deal.

On Friday, after the measure survived the legislative sausage-making process, Levin said in a statement it would “prevent the obscene conflicts of interest revealed in the Permanent Subcommittee on Investigations hearing with Goldman Sachs.”

A Goldman spokesman was not immediately available. But during the Congressional hearing, Goldman executives defended their activities by saying it was consistent with acting as market maker and taking prudent steps to reduce its risk.

The measure introduced by Levin includes a provision that permits banks to engage in “bona fide market-making in the asset backed security.”

President Barack Obama has said he would like to sign a final bill by the July 4 holiday. But the timing of a congressional vote may be delayed by the death of Sen. Robert Byrd of West Virginia.

TIMBERWOLF

Of course, it will ultimately be up to the SEC to determine just how big an impact the conflicts of interest measure will have on Wall Street’s securitization machine. As with much of the financial regulatory reform bill, it will be up to regulators to design the rule to carry out the broad mandates drafted by U.S. lawmakers.

But look for Levin and his legislative team to keep pressing the issue in the coming months.

Sometime after Labor Day, Levin’s panel is expected to release a lengthy report that will detail all its findings about Goldman’s CDO business. People familiar with the committee’s work said the report will go beyond the testimony at the hearings and the hundreds of pages of Goldman emails previously released to the public.

Committee investigators are continuing to gather information about several controversial Goldman CDOs including deals called Timberwolf and Hudson Mezzanine, said these sources. The committee also has asked a number of former and current Goldman executives who appeared at the April hearing to clarify their testimony.

People close to the committee and Levin said they could opt for another hearing to focus specifically on the Timberwolf, Hudson and other deals.

A second hearing and the committee’s report could provide guidance for the SEC in how to institute rules to prevent conflicts in the marketing of asset-backed securities.

A legislative report is not binding on regulators, said Donald Langevoort, a securities law expert and professor at Georgetown University Law School. But he said it would be naive to conclude regulators do not take into account reports prepared by influential members of Congress.

And the prospect of an investigative report likely means another round of negative headlines for Goldman and any other bank that took part in similar kinds of CDO deals. (Reported by Matthew Goldstein, editing by Matthew Lewis) ((matthew.goldstein@thomsonreuters.com; + 1 646-223-5773))

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