Goldman Sachs’ Senate Testimony: Did CFO Viniar Screw Their Pooch?

This article was originally posted on Going Concern.com on April 29, 2010.

I watched all 11 hours yesterday of the Goldman Sachs testimony to the Senate Permanent Committee on Investigations. I never expected anyone to mention the auditors and I was not disappointed. You may think, given my criticism of the auditors, that I would be cheering on the side of the inquisitors, ready to burn the smarty-pants, smug, supercilious Goldman “banksters” at the stake.

Well… you would be wrong.

The merits of the SEC’s case against Goldman Sachs for the Abacus deal will be decided in the courts or settled ignominiously.  For a great summary of the merits of the case, you can read Barry Ritholtz summary or accounting professor Larry Ribstein’s for two different views.  I rarely agree with Larry Ribstein but his analysis is worth reading, especially about the ridiculous focus on short selling as if it were satanism. I don’t have the benefit of the millions of documents and investigative powers of the SEC, so I don’t judge.  Therefore, it was painful to watch the Senators attempt to try this case in an open hearing.

Their objective in keeping Goldman executives glued to those chairs for 11 hours was clear immediately.  The Senate held the hearings ostensibly to further develop their proposals for regulatory reform.  Instead, the hearings quickly degenerated into an attempt by the ill-mannered and ill-informed Senators Levin and McCaskill to force Goldman into the role of fiscal, economic and social policy setter.

Goldman Sachs is not in the business of managing systemic risk.  That’s the regulators’ job. Goldman embraces risk. They price it appropriately and hold it or hedge it. They are agnostic about the religion of that risk.

The Senators and the Goldman executives were two trains running in opposite directions on parallel tracks but at very different speeds.  The Goldman executives were a modern, efficient bullet train, traveling at high speed, wind at their backs, with very little rattle or hum.  The Senators were a rickety, raggedy freight train, weighed down by heavy cargo, clickety-clacking in a shrill, annoying way.

The only segment that touched on auditor issues came when Senator Ted Kaufman (D-DE), who I have praised, asked CFO Viniar at the 54:50 point about Lehman’s use of Repo 105 and other “accounting tricks” at Goldman:

Senator Kaufman: Would Goldman ever use Repo 105 type transactions?

CFO Viniar: We did none those transactions.

Senator Kaufman: You can say under oath that GS never engaged in transactions near quarter end to improve their balance sheet?

CFO Viniar: We never engaged in Repo 105 type transactions. Anything we did at quarter end, if we took something off our balance sheet it’s because we sold things.

Senator Kaufman: Did you transactions you do transactions where you sold things then bought back after the quarter end or bought then sold them again after quarter end?

CFO Viniar: Everything was disclosed…

Senator Kaufman: You never moved things on or off the balance sheet to dress up the balance sheet?

CFO Viniar: No.

Lehman is vulnerable, after the Bankruptcy Examiner’s Report, to allegations regarding fraudulent Sarbanes-Oxley Section 302 certifications.  EY was recently added to a current Lehman case that updated their allegations for Repo 105. The SEC is now investigating several banks regarding their use of Repo 105 accounting.

I think Senator Kaufman got CFO Viniar to put a Goldman statement regarding Repo 105 and other balance sheet window-dressing techniques in the record.  If it’s found later that Goldman did use these techniques, his statement could be used against them.  However, the burden of proof for a Section 302 certification allegation under the securities laws is very high.

Law firm Bingham McCutcheon: “Section 302 certifications will not necessarily lead to liability if there are problems with the company’s financial statements or internal controls. However, corporate officers are still tasked with the responsibility of ensuring, to the best of their ability, the accuracy of the company’s financial statements and their Section 302 certifications. If corporate officers know of or recklessly disregard “red flags” relating to the company’s financial statements or internal controls, then they make those Section 302 certifications at their own peril.