After seven hours of testimony from the ‘small fish’, the Senate Government Affairs Subcommittee on Investigations finally got their chance at grilling the CEO of Goldman Sachs, Lloyd Blankfein. It had all the atmosphere of a freaky circus, including clowns from Code Pink dressed up in prison stripes! At described previously, the main issue being looked into today was Goldman Sach’s methods of creating products, asset-based securities, in this case based on chiefly on subprime mortgages, and selling them to clients while also buying short positions against the same products.

The Senate lightly grilled two other Goldman Sachs (GS) execs just before they got to Blankfein. They were CFO David Viniar and Chief of Risk, Craig Broderick. The exchanges were generally friendly, especially after Viniar conceded that he regrets some of the language and attitude in GS emails. But Sen. Carl Levin (D-MI) scolded Viniar when Viniar did not understood what Levin meant by “succeeds”? Levin was referring to the GS practice of taking short positions on their own products against them succeeding. Viniar fell back on the GS party-line that clients bought the products for reasons of their own, which they deem successful. Coburn discussed the Dodd financial reform bill and asked Viniar for his opinion. Viniar said it may help fix some systemic problems but had no opinion on reforming Fannie Mae and Freddie Mac. Viniar glossed over GS getting 100% of the money owed to them by AIG saying that everybody did as well.

Blankfein began his statement saying that the “system is fragile but largely stable”. He was grateful to the government and American people for the TARP loan they received and pointed out that they paid it back with 23% in interest. Blankfein listed reasons why GS is wonderful for the economy. He recognized that there is much public angst towards Wall Street, but blames the financial crisis on too much leveraging and too much cheap credit. Blankfein said that the charges made by the SEC against Goldman Sachs were a shock to him and disagrees with their premise. He claimed that GS was not massively short in relation to their long positions on mortgage-back securities (about 53% short to 47% long in 2007).

Senator Levin attacked first listing emails from GS sales staff on how crappy their products were and gave specific examples of those crappy products. Levin asked Blankfein about client trust, adding, “I wouldn’t trust you.” Blankfein responded that their clients know that GS is a “market-maker” and that GS is always on the opposite side of any transaction be it a buy or a sell. This last bit was probably the most honest thing said all day!

Issues of disclosure to clients did not go very far. Blankfein explained several times during his testimony that the value of any security is based purely on market price and that investors knew what they were buying. For example, in regards to the CDO known as Abacus 2007 AC-1, Blankfein says that ACA management and IKB must have known their was a short position taken on Abacus because that’s what Abacus was based on. Sen. Jon Testor asked Blankfein if Abacus was designed to fail, to which the Goldman Sachs CEO answered “No” and explained that it was structured to reflect current market conditions. He continued to echo the message that the buyers of such products were fully aware of the risks.

Testor also asked Blankfein possibly the best question of the day, is Goldman Sachs too big to fail? Blankfein answered that in a normal economic environment, no, but in the current situation, any failures would be bad for the economy. Blankfein remarked several times during the hearing that the crisis will force all companies, including GS, to review their practices and methods. Sen. Coburn also asked him about the Dodd financial reform bill. Blankfein, who has supported the legislation from the beginning, says that he continues to support much of it, despite some recent changes. When Sen. Ted Kaufman (D-DE) tried to him to tell what he knew and when, Blankfein wiggled away saying he was far removed from many decisions.

As I write this, the Senate subcommittee is still grilling him. Now well past 10 hours of testimony in total from Goldman Sachs executives, no major revelations have resulted. Lloyd Blankfein stands behind the firm he runs. He claims that nobody could have known before hand what would happen or how far down the housing-mortgage market declined. Blankfein defended the practice of short positions as being more than just speculation or akin to gambling. On Fannie Mae and Freddie Mac, he says agreed with Sen. Tom Coburn (R-OK) that these Government Secured Enterprises were the instrument of political policy. Any products sold by Goldman Sachs were bought by clients who wanted and accepted the risks involved. Blankfein denied any undue influence on ratings firms to give those products better ratings than they deserved.