Goldman Sachs (GS) Executives Grilled on Capitol Hill

Fabrice Tourre, the trader at the center of the SEC's allegations of fraud against Goldman Sachs Group Inc. (NYSE: GS), stood up at a Senate hearing Tuesday and denied any wrongdoing while other current and former employees with the firm defended their actions during the time leading up to the economic meltdown.

Democratic Senator from Michigan, Carl Levin criticized the firm in his opening statement, stating that Goldman turned a substantial profit in betting against the housing market in 2007.

"Goldman says these bets were just a reasonable hedge," Levin said. "But internal documents show it was more than a reasonable hedge—it was what one top executive described as 'the big short.'"

The executives emphatically rejected the claims that they purposefully bet against the housing market and mislead investors in the process. They simply said that they were trying to navigate the firm’s risk throughout the volatile mortgage market of 2006 and 2007.

"No one from senior management told me to make a directional bet against the subprime market. Rather, during the 2006-2007 period, regardless of whether our books were long or short, the consistent theme from management was to reduce risk in our books," Josh Birnbaum, a former managing director in Goldman's structured-products group, said.

The Securities and Exchange Commission has alleged that Goldman misled investors about its betting that the mortgage market would fail, specifically the moves tied to the hedge fund managed by Paulson & Co. that was linked to the performance of mortgage-backed securities.

Tourre told the Senate subcommittee that he never notified ACA Management LLC, which was the portfolio selection agent for the securities in the hedge fund managed by Paulson, that Goldman and Paulson would take a long position when a short position was taken by the firm.

"Although I don't recall the exact words that I used, I recall informing ACA that Paulson's fund was expected to buy credit protection on some of the senior tranches of the AC-1 transaction. This necessarily meant that Paulson was expected to take some short exposure in the deal," Tourre said.

Tourre denied that the transaction was created to fail, and insisted that ACA was one of his most important clients at the time. Tourre did add that Paulson had input on which securities would be involved, but said that ACA "had sole authority" to decide which securities would be included in the transaction.

Other Goldman officials are expected to speak, including current CEO Lloyd Blankfein.

Shares of Goldman Sachs are up 1 percent to $153.55 today.

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