Blast from the Goldman Testimony Past: CDOs and Bad Brakes

From questioning during Goldman’s Lloyd Blankfein’s FCIC testimony in January:

The act of selling [CDOs]—I can understand how my point was you had a view of the market as you continued to sell the securities. I guess one of the questions I’d ask you is: How do you go to the rating agencies, with whom I dealt with a lot as treasurer, and how do you persuade them to give many of the tranches the highest ratings—triple A—at the same time that you have credit information that leads you to believe that, in fact, those securities may fail?

Chairman, I’d have to—and another point. The predicate of your question, we are not necessarily…I know—if you had looked into Goldman Sachs, we were not controlling our risk. When you listen to the testimony that’s come by, the biggest problem that institutions had was the accumulation of risk.

We weren’t working—a market maker doesn’t manage its risk profile because it likes housing or doesn’t like housing. Those are separate. We have various pockets of—excuse me. We have various pockets of Goldman Sachs that like a position or don’t like it. What we do is risk management. Because we had this risk, because we were accumulating positions, which, by the way, we acquired from clients who want to sell them to us, we have to go out ourselves and provide and source the other side of the transactions so that we can manage our risk. These are all exercises in risk management.

Well, I’m just going to be blunt with you. It sounds to me a little bit like selling a car with faulty brakes and then buying an insurance policy on the buyer of those cars. It just—it doesn’t seem to me that that’s a practice that inspires confidence in the markets. I’m not talking about your own…