While the Securities and Exchange Commission hangs fraud charges on a Goldman Sachs vice president, several sources suggested the lower level executive might be taking the fall for his bosses.
Though Fabrice Tourre, a London-based trader for Goldman, was viewed within the firm as a smart “up-and-comer,” sources noted that many of the alleged misdeeds he’s accused of committing involved decisions that normally would be above his pay grade.
Tourre and Goldman are accused of failing to let investors know that a pool of loans used in a collateralized debt obligation, or CDO, had been cherry-picked by billionaire hedge fund king John Paulson, who planned to bet against the pool’s performance. The investors lost $1 billion, while Paulson earned the same amount.
“Tourre devised the transaction, prepared marketing materials and communicated directly with investors,” the SEC charged in its complaint. “Tourre knew of Paulson’s undisclosed short interest and its role in the collateral selection process.”
Several sources told The Post they found it unlikely that Tourre, 31, was able to accomplish any of these acts on his own. Indeed, these sources noted, Wall Street culture, particularly at Goldman, dictates that someone at Tourre’s level never would have a wide enough berth to operate unchecked.
“I think that Tourre is just being used as the fall guy,” said one Wall Street observer.
That has led some people to question the role of Tourre’s superior, Jonathan Egol, a Goldman star mortgage trader who is widely seen as the brains behind the area in which Tourre worked.
As a senior member of Goldman’s CDO structuring team, Egol helped create tens of billions of similar, made-to-order CDOs from 2004 to 2008. A Princeton graduate with an aerospace engineering degree, Egol is said to have produced upward of $11 billion worth of CDOs similar to the one at the center of the SEC probe.
Egol, who has not been named in the SEC suit, could not be reached for comment.
According to the SEC, Goldman failed to disclose to investors that Paulson was allowed to pick some of the most toxic mortgages available to serve as collateral for a CDO transaction known as ABACUS 2007-ACI CDO in order for him to place bets against the deal.
Further, the SEC charged that Goldman, to help Paulson pick out loans, hired mortgage research firm ACA Management to “leverage ACA’s credibility and franchise” as “portfolio selection agent,” but never told ACA about Paulson’s plans to short the CDO.
“Are ‘we’ ok to say yes on this portfolio?” the SEC claims Tourre asked in a Feb. 5, 2007, e-mail to an unidentified person.
According to the SEC, “The response was, ‘Looks good to me. Did [Paulson] give a reason why they kicked out all the Wells [Fargo] deals?’ Wells Fargo was generally perceived as one of the higher quality subprime loan originators.”
Three days earlier, Tourre sent an e-mail to an unidentified Goldman employee that read, “I am at this ACA meeting. . . This is surreal,” which the SEC claimed illustrated how Tourre marveled at the fact that Goldman is “fully aware of Paulson’s economic interests with respect to the quality” of the mortgage portfolio while ACA was in the dark.
Sources noted that Goldman and Paulson weren’t the only ones involved in putting together such transactions.
Deutsche Bank’s mortgage trading desk also worked directly with Paulson to create similar CDOs that he could then make short bets against in the market.
A Deutsche Bank spokesman declined to comment on its deals. One Deutsche Bank trader said that the difference between its deals and Goldman’s is that investors were fully aware of how these deals were structured and also didn’t use third parties.
Smoking gun
Part of the Securities and Exchange Commission’s securities fraud case against Goldman Sachs and Fabrice Tourre is based on e-mails.
Jan. 23, 2008
Tourre to a friend: “More and more leverage in the system. The whole building is about to collapse anytime now. . .Only potential survivor, the fabulous Fab[rice Tourre] . . . standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!”
Feb. 11, 2007
Goldman trading exec to Tourre: “the cdo biz is dead we don’t have a lot of time left.”