Fabulous Fab / Getty
/ By Alan Gallindoss /
Former Goldman Sachs trader Fabrice Tourre, nicknamed by his colleagues the “Fabulous Fab”, goes on trial this week in a case of civil fraud. He is accused by the Securities and Exchange Commission (SEC) of misleading investors when he was a Vice-President at the bank in 2007, when the financial system was on the verge of falling apart. If he should be convicted he could face heavy fines, and might even be banned from working in the securities industry again. In any case his trial is likely also to rekindle discussion one more time of Wall Street’s responsibility for the systemic failures that took place then, when the financial system came close to collapse and banks were bailed out by government intervention.
While at Goldman Sachs Tourre wrote some pretty exotic emails talking about his job, something not so easy one might think in a relatively boring technical business, except perhaps for a supreme narcissist. One such email actually reads… “The whole building is about to collapse anytime now … Only potential survivor, the Fabulous Fab … standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities [sic]!!!”
The judge in the case, Judge Katherine Forrest in the federal district court in Manhattan has stated jurors will likely be able to see such emails as part of the evidence in the case. In another email he actually gets to the heart of the matter in an important way, when he wrote that collateralized debt obligations (CDOs) were like a….. ” little Frankenstein turning against his own inventor “.
CDOs are securitized loan obligations where sometimes thousands of, in this case, individual mortgages were packaged together into a major asset package and then sold on to both individual and institutional investors. They were also designed to enhance yield, and in order to do so tricks were played in the way they were created to pretend they were not as risky as their underlying components. Their eventual implosion on a massive scale then triggered the banking crisis. In the mining industry it is called salting the mine, when prospectors show potential investors parts of an exploration site that seem to have lots of gold in them…. whereas the rest, that they don’t see, has nothing. With CDO’s lots of junk mortgages were packaged together with a small number of good ones and the mixture of the two was somehow deemed by the banks selling them, and by institutional investors buying them, and even by the rating agencies who assessed them, to be in total less risky than they really were.
The argument was that only if the whole system crashed would such risks be elevated in a serious way and this could “never” happen.. unfortunately though it did. Investment firms such as Goldman Sachs made fortunes selling them and, later, it seems they and some of their friends perhaps made even more money by betting against them once they realized what might really happen.
The specifics of the SEC case place Tourre at the heart of an alleged conspiracy to defraud investors by Goldman Sachs, while lining the pockets of the hedge fund billionaire John Paulson. The SEC claims emails and other evidence demonstrate Goldman and Tourre deliberately misled investors about the role that Paulson & Co, the hedge fund led by billionaire John Paulson, and a frequent client of Goldman, played in choosing securitized mortgage assets that were chosen and placed in a CDO investment package called Abacus. The CDO known as “Abacus 2007-AC1”, alone eventually lost more than US$1 billion. The SEC argues that investors who ultimately purchased pieces of Abacus were misled because when promoting it Tourre did not disclose the role of Paulson, which Goldman allegedly already knew planned to bet against the Abacus assets. As an arms length third party Paulson itself has not been accused of any wrongdoing.
In 2010 Goldman Sachs agreed to pay a then-record US$550 million fine to settle the SEC’s charges against it, without admitting or denying guilt. Tourre himself, just a Vice President of Goldman, is it seems the only Goldman executive to have been charged personally over the case, and he has instead chosen to fight the case.
One can assume that Tourre will argue he was just a cog in the machine, and also that those who lost money were actually also sophisticated investors who made their own, bad, decisions, and presumably did so out of greed for yield in financial instruments in the continuing absence of inflation which had become a problem for many people at that time. It seems he may also challenge the idea that his clients did not know Paulson was betting against them. Efficient markets always depend on two competing investment views that differ in order to function at all, and it is indeed commonplace for buyers to know a seller’s view or vice-versa, both based on similar sets of information.
It should be a fascinating case; whether he is the bad-guy or the fall-guy, or perhaps the good-guy – it remains to be seen.