There must be blood! Goldman Sachs executives are appearing before the U.S. Senate today. This is going to be an all-day affair, so I’ll be breaking this down into several parts. The executives faced the Senate Government Affairs Sub-Committee on Investigations. At issue is whether or not Goldman Sachs was informing their clients that A) the residential mortgage-backed securities (RMBS) being sold were designed to increase in value? and B) if Goldman Sachs (GS) told their clients buying the RMBS products that GS was also betting against the products, buying short positions such that GS would profit from the failure of the RMBS.

First panel consisted of Daniel Sparks, the former manager of GS’s Mortgage Department, Michael Swenson, former Managing Director of Structured Products Group (SPG) Asset-Backed Securities (ABS) desk, Joshua Birnbaum, another director of SPG Asset-Backed Index (ABX) desk and the infamous “Mr. Fab”, Fabrice Tourre, Executive Director of SPG. After a long opening remark by Senator Carl Levin (D-MI), chairman of the committee, and the other senators, the fireworks began.

Each of the GS executives there made opening statements. Each except for Tourre sounded like theirs were written by the same person. The three repeated the same theme, and phrases. They claimed that Goldman Sachs was long on the RMBS market till December, 2006, when GS Co-Chairman, David Vernier, told them to “reduce risk” and to “get closer to home”. Thus, GS began buying more short positions on mortgage-backed securities and selling their long positions on the RMBS from then through 2007. Tourre’s opening statement focused on the SEC charges against Goldman Sachs and him, personally. He claims that he is innocent and that his clients for the security product known as Abacus AC-1 were savvy, sophisticated investors and were aware that John Paulson’s hedge fund had taken short positions on Abacus. Tourre said that Abacus failed not because of Paulson influencing what tranches to build Abacus on, but simply due to the collapse of the mortgage industry.

Daniel Sparks was the first to be put on the hot seat. Levin grilled him over several emails, some internal and some from GS clients. First were emails from clients concerning a GS product called Anderson Mezzanine, which contained sub-prime mortgage tranches from New Century Financial Corporation, which was the nation’s second largest holder of sub-prime mortgages. Clients asked Goldman Sachs in one email how GS could be so “comfortable” with holding and selling New Century assets? Sparks danced around that question, as well as others pointing to GS making clients think that they were ‘long’ on New Century and didn’t know that GS was going ‘short’. The Anderson CDO went from AAA rating to junk status in seven months! New Century’s stock went from having an equity value of $1.7 billion on January 1st, 2007, to $55 Million by March 14th, 2007. Talk about a slide! In total, New Century held some $76 Billion in sub-prime loans.

Levin then pressed Sparks on another RMBS made up of paper from Fremont Investment & Loan, #7 on the list of top sub-prime loan holders with around $62 Billion in such securities. A series of internal emails from Goldman Sachs sales people complained about what a “crap” security it was. Fremont had the highest default rate in the nation. The Fremont RMBS which Goldman Sachs sold went from AAA to junk status in 10 months. Again, Sparks did not recall anything. Levin wrapped up with Sparks on a third fund called Timberwolf, a hybrid CDO based partly on Abacus and also mortgages from Washington Mutual (WAMU). That product also failed and, again, Sparks had no recollection if Goldman Sachs made any profit from being ‘short’ on the product.

The other senators took turns with the panels, but, as with Levin, the executives were vague, or ignorant of an answer. Things got testy between Senator Susan Collin (R-ME) with Daniel Sparks, as well. Sparks, who left Goldman Sachs in the summer of 2008, seems to be the target of much of the hostility from the Senate committee. Later today, CEO Lloyd Blankfein will appear before the committee. Round Two will probably be just as fiery as this one.