Gary Brown could hardly believe his ears. Brown was sitting behind the senators in Room 106 of the Dirksen Senate Office Building in Washington, D.C., on April 27, 2010, when Goldman Sachs Chief Financial Officer David Viniar was testifying before the Senate's Permanent Subcommittee on Investigations (PSI). Brown, who was serving as a special legal advisor to PSI, sat through the entire 11-hour televised hearing, which focused on Goldman Sachs' conduct as it related to the recent financial crisis. Senator Carl Levin (D-Michigan), a hard-nosed former prosecutor and PSI's chair, was grilling Viniar about emails in which Goldman Sachs employees had referred to mortgage-backed securities the firm had sold its customers as a "sh---y deal" and a "piece of c--p." After repeating the unflattering adjectives several times for effect and noting that the firm of Goldman Sachs was "on the short side, betting against" these securities while at the same time selling them to customers, Levin finally asked the visibly uncomfortable Viniar, "when you hear that your employees, looking at these deals, said, 'God, what a sh---y deal'...do you feel anything?" Viniar replied, "I think that's very unfortunate to have on email." The packed hearing room erupted in shocked laughter. Brown recalls shaking his head in astonishment.
Brown is a nationally known expert in securities law, and he spent three months last spring working as a legal consultant supporting PSI's investigation of the causes of the financial crisis. This was his third stint in Washington helping the Senate unravel a complex financial boondoggle and propose reforms designed to prevent a recurrence. In 2006, Brown provided Congressional testimony on offshore tax havens and tax shelters and how they were used to circumvent U.S. securities laws. And in the wake of the 2001 collapse of Enron Corporation, Brown spent most of 2002 working in Washington as Special Counsel (Minority) to the Senate's Committee on Homeland Security and Governmental Affairs and PSI in their investigations, providing advice on what ultimately became the Sarbanes-Oxley Act.
Although Brown has enjoyed his work for the Senate, he notes that "working on Senate investigations is disruptive to one's regular activities." During each of his Senate engagements, Brown has taken a leave of absence from his law practice, most recently at Baker Donelson Bearman Caldwell & Berkowitz, where he is a shareholder. While serving as Special Counsel during the Enron investigation, Brown divested the stocks held in his retirement plan to comply with conflict of interest rules. "That turned out to be a blessing," he said. "I divested all my stock and avoided a lot of the stock market meltdown."
Despite spending his entire career practicing corporate and securities law, Brown recalls being stunned by Viniar's reply to Levin, which he believes illuminates a widening disconnect between the perspectives of Wall Street executives, who seem visibly bewildered that anyone blames them or their firms for creating the financial crisis, and PSI's members, a bipartisan panel of senators representing the perspectives of their equally bewildered constituents on Main Street, who felt blindsided when the economy was suddenly undermined by a complex set of unregulated bets made by Wall Street financial firms.
Brown's specific task last spring was to assist in PSI's investigations of Goldman Sachs, Washington Mutual and credit rating agencies. He also worked with PSI members and staff to prepare a package of amendments to the financial reform bill proposed by Senator Christopher Dodd (D-Connecticut), a bill that ultimately passed as the Dodd-Frank Wall Street Reform and Consumer Protection Act. Among the common-sense reforms that PSI proposed were restrictions on "synthetic" CDOs (collateralized debt obligations), which according to Brown "were nothing more than massive wagers on whether one or more referenced groups of mortgages would pay off or not," and what Brown characterizes as "my own pet project—overruling a 1995 Supreme Court case that in my opinion, and that of most other securities experts, misinterpreted the securities laws so as to inhibit the ability of investors in non-registered deals to sue for false and misleading statements in a 'prospectus' despite the fact that Congress gave purchasers that express right in the Securities Act."
Another example of the numerous issues that PSI members identified and sought to address in reform legislation was the need for greater oversight of investment banks and credit rating agencies. "In Sarbanes-Oxley, investment banks and credit rating agencies got a pass from additional oversight despite the banks having actively assisted Enron in misstating its financial results and the rating agencies having rated Enron securities as 'investment grade' a week before they went bankrupt," Brown said. "You can make a good case that those groups bear a large amount of responsibility for the most recent financial crisis. Investment banks and credit ratings agencies have simply had little, if any, accountability or liability for anything they've done. Without accountability, no matter what rules are written, someone will be smart enough to find a way around them. Until we restore accountability, especially on Wall Street, we're going to continue to have these issues. And when certain groups of people, through legislation or judicial decision, have been insulated from liability for bad acts, lawyers and investment advisors are somewhat free to assist people in committing fraud without any real fear of liability."
Brown remains disappointed that some key reforms that PSI members proposed are not in the reform legislation that ultimately passed. "The main reason I'm disappointed with the outcome is that Congress really didn't fix the problem," he said. "It didn't address Fannie Mae and Freddy Mac. It didn't address the problem of synthetic derivatives, which require investment firms to 'sell both sides of the risk,' an inherent conflict of interest that the final reform package did not address despite a proposed PSI amendment on which I worked that would have addressed that. Among a few things that the legislation did do was give the SEC some authority and direction to determine whether brokers should have a fiduciary duty toward their customers similar to that imposed on investment advisors; at least that's a step forward."
Although Brown and the senators and staff serving on PSI worked diligently together to identify the causes of the meltdown and advance solid proposals for needed financial reforms, Brown was particularly disappointed that some of PSI's recommendations met with stiff resistance, often because of party politics. "PSI is a terrific investigative body with a rich heritage, and Chairman Levin and Ranking Member Tom Coburn [R-Oklahoma] and the other members showed what we can accomplish when everyone works together," he said. "You do work like this because you want to make a difference, and I believe there is a real message for the rest of Congress in the way the members and staff of PSI work together. They set a wonderful example, and if members of the House and Senate took a lesson from the Permanent Subcommittee on Investigations on how you operate, they could accomplish so much more."Top of page