July 15, 2013 6:31 pm
Pride has certainly come before a fall for Fabrice Tourre. The former Goldman Sachs derivatives salesman, who once quipped that he sold toxic mortgage-backed securities to “widows and orphans”, this week finds himself in a Manhattan courtroom accused of fraud by the Securities and Exchange Commission. The regulator claims that he resorted to sharp practice to shift the collateralised debt obligations he was employed to sell.
There can be no doubt that the self-styled “Fabulous Fab” has questions to answer about the way he marketed Abacus 2007-AC1, a CDO created on the eve of the financial crisis that was designed to allow investors to bet on pools of subprime mortgages. The investors who purchased it were purportedly unaware that John Paulson, a hedge fund manager who wanted to short the CDO, had allegedly been allowed to influence its contents, some of which he picked on the basis of their propensity to default. In this case, their ignorance may have cost them dear: they lost a cool $1bn.
What is more puzzling is that Mr Tourre is the only individual Goldman executive to face an SEC lawsuit. His department was among the most profitable and fast-growing at Goldman during the period under examination. In emails surveyed by the SEC, he pitched ideas to his bosses about using CDOs to allow financial institutions to short the housing market in just the way Mr Paulson did. While it is possible that he broke rules, Mr Tourre seems an unlikely lone wolf.
Mr Tourre was anyway a small cog in a vast machine. Goldman has already settled SEC charges relating to Abacus, without admitting liability, by paying $550m. But the CDO business went beyond one Wall Street firm. Between 2005 and 2007 investment banks issued $1,100bn of CDOs. Securities law that was extended to derivatives in 2000 permitted them to treat buyers as counterparties, to whom they owed no duty of care. It is perhaps no coincidence that in 2008 losses from CDOs almost broke the financial system.
Mr Tourre’s pre-crisis bragging may represent much of what was wrong about Wall Street. But his case also highlights how much remains unfixed. Goldman has been let off the Abacus case with the financial equivalent of a heavy slap on the wrist – an eloquent demonstration of the fact that large financial institutions remain “too big to jail”. Many other banks have gone uncollared. However Mr Tourre’s case ends, justice cannot be said to have been done.
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