The Goldman Scandal - It's The Arrogance & Lack Of Morality That Gets Me

Here's the latest from our Highly Placed Professional

So, like many market professionals, I spent the weekend delving into the press and trying to find out just what those Goldman fraud charges were all about. And I read their vehement refutation of said charges with a sense of regret that maybe the SEC had messed up and that there really was nothing to hang a legal argument on. Like many of my colleagues, I felt that it would be almost impossible to get something to stick to the mighty Goldman anyway. But then came an 'Hallelujah moment' - Frenchman Fabrice Tourre's shockingly arrogant comments in an email sent to colleague in January 2007.

Let's back up a bit before I go on. First off, you have to understand the French were the most mathematically brilliant when it came to structuring sophisticated CDO or mortgage-backed securities deals. Droves of graduates from the Ecoles Normales Superieurs were to be found in London and New York, and it's no surprise that apart from the big US firms, it was the French investment banks that led the charge in this part of the market.

Fabrice Tourre, though, must have been very good indeed to have got near the top of the CDO tree at Goldman. And like many 30-something financial market professionals before him, he was almost incredulous at the extent of his success: 'Only potential survivor, the fabulous Fab, standing in the middle of these complex...trades', he e-mailed a friend in early 2007. But he knew that his expertise was soon to be redundant, as the RMBS market crumbled for good and for all. 'The CDO biz is dead, we don't have a lot of time left', he e-mailed one of his bosses. 

There must have been hundreds of people like him, who had got used to earning millions at a young age, only to see the edifice they had helped to create start to slip inexorably over the cliff. Many of these guys now eke out a less glamorous living at the edge of the market, in broking or small boutique shops. Not the career path for a Young Goldman Turk.

The other thing that strikes you from Tourre's emails was the fact that he was looking for one more roll of the dice, one last deal, one last pat on the back from his management. And, of course, one last big pay-out - followed hopefully by some other job at the firm. But what I find especially chilling is his admission, almost a boast, that he didn't even necessarily understand the trades he was pushing: '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) !!!" Note the three exclamation marks. Note the boastfulness. Note the sense of pride that he, Tourre, doesn't need to understand the trades fully, but could still be successful at bringing them to market.

Now let's get back to Goldman. At the very least, they appear guilty of failing to properly manage Tourre. How can they maintain that they didn't know that the RMBS market was in full collapse mode by the time of the deal they arranged with Paulson ? How is it possible they can maintain they acted in good faith with the ultimate investors in the deal, when a huge hedge fund player who was known to be actively betting against a market segment, selected the parts of a deal he didn't want to be in the pool of assets because they were less likely to fail ?

It beggars belief that a firm as sophisticated as Goldman didn't know there were considerable risks in this product, so I have little sympathy with the firm's assertion that it, too, lost money on the deal. In any case, they were probably just caught with unsold bonds on their book, like many other market participants were when the bottom fell out of the RMBS market. It will be interesting to see the full the sequence of sales from the deal book, and how exactly it all panned out. Hopefully the SEC can and will subpoena those records.

Let's end with Tourre, though, because his e-mail comments seem to me to sum up perfectly the mood of the time. Investors were patsies who could be ripped off with the opacity and complexity of these deals. A lot of money could be made quite painlessly. Careers had never twinkled so brightly. But where was the morality ? Where was the due diligence and the 'prudential man' concept we are all taught about when we take our Registered Representative exams ? Well, those concepts have been thrown so far out the window that people like Tourre were seemingly incapable of even thinking that way.

And that's the key to what got us all in this mess. People were blinded by bonuses, the next big deal, and their own gratification at somehow beating the system. Who knows, Goldman and Tourre may yet get off scott free, but the world has now had the curtains opened onto the devious practises and arrogant attitudes of the time. I hope you all share my desire to see these charges resulting in permanent change.

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