4 tough questions for Goldman Sachs

By David Ellis, staff writer


NEW YORK (CNNMoney.com) -- Goldman Sachs' moment of public flogging is here.

On Tuesday, top representatives from Wall Street's most powerful firm will appear on Capitol Hill, where they are expected to endure a harsh line of questioning from lawmakers about their role in helping bring about the financial crisis.

Much of the focus however will likely center on the complicated mortgage investment Goldman (GS, Fortune 500) sold that is now the subject of a civil fraud suit brought against the firm earlier this month by the Securities and Exchange Commission.

Seven current and former Goldman Sachs executives are slated to appear at Tuesday's hearing. Among them will be the company's current CEO Lloyd Blankfein, its chief financial officer David Viniar, as well as Fabrice Tourre, the 31-year-old Goldman employee who helped broker the now infamous deal that is at the center of the SEC's claim.

Lawmakers will probably show little mercy towards that trio. Here's a glimpse of what types of tough questions they could face.

Is this the work of a single employee?

Goldman has quickly distanced itself from Tourre, placing the London-based employee on indefinite paid leave last week and stripping him of some of his credentials with British regulators.

And while the firm has not explicitly blamed Tourre, representatives from the company have suggested it "would never condone" such an act by an individual employee.

Tuesday will mark the first time that Tourre will speak publicly on the matter, although he may be pretty tight-lipped given that the deal in question is the subject of ongoing litigation.

Senior Goldman executives might also avoid saying too much for that reason. Still, any silence on the matter could also raise questions about what kind of oversight Goldman was exercising over its employees and just how much it is serving the interest of its clients.

How should Goldman and other banks be regulated to ensure these conflicts of interest are not hurting investors?

At its heart, the SEC's suit against Goldman is about the simple issue of disclosure and whether the company was transparent enough with investors in the deal.

But it also raises the subject of conflicting interests, an issue that has long troubled the investment community, said Adam Pritchard, a securities law professor at the University of Michigan.

Did Goldman serve both of its clients effectively by acting as a so-called "market maker" in the deal, partnering buyers and sellers? Should it even have occupied that role in the first place?

Taking that line of business away from Goldman however would likely mean a lot of lost revenue and profit for Goldman and its big banking peers.

"I'm actually interested to know if Blankfein has an idea whether anything else can be done," said Pritchard.

You've spent a big chunk of money on lobbying efforts this year. What are you trying to accomplish?

For Wall Street firms like Goldman, keeping their business model intact has been paramount.

That has meant beating down legislative proposals like the Volcker Rule, which would restrict financial firms from operating hedge funds or undertaking leveraged buyout deals - two businesses that Goldman currently engages in.

Congress has also wanted greater transparency into the world of derivatives, requiring banks to put them onto clearinghouses and exchanges, as well as posting collateral.

There are already fears that such rules could crimp profits at firms like Goldman by driving investors into the arms of overseas competitors that wouldn't be bound by such restrictions.

The slogan on your Web site is 'Our work enables growth.' How does a company that generates much of its business from trading help the economy grow?

As much as Blankfein may try, chances are he'll find it pretty tough to answer this one.

Last week, the company reported a first-quarter profit of $3.5 billion that shattered analysts' expectations, due in large part to a surge in trading activity.

Of course, rivals like JPMorgan Chase (JPM, Fortune 500), Bank of America (BAC, Fortune 500) and even Citigroup (C, Fortune 500) enjoyed a similar bounce in the latest quarter.

But unlike those firms, Goldman does zero lending to American consumers and small businesses. Indeed, it may help companies merge, issue stock or occasionally do "God's work", but Goldman may find it tough to defend its role in the economic recovery.  To top of page

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