Goldman Sachs On the Run

by John M. Curtis
(310) 204-8700

Copyright April 19, 2010
All Rights Reserved.                                

            Wall Street investment titan Goldman Sachs showed signs of flight in response to the Security and Exchange Commission’s April 16 fraud suit, accepting a “leave of absence” from 31-year-old “derivatives” hotshot Fabrice Tourre.  While Goldman vigorously denies any wrongdoing, its mastermind of collateralized debt obligations suddenly made a “personal decision to take a bit of some time off” from his job at the London office.  Tourre’s embarrassing e-mails boasted about his “exotic” trades involving residential mortgage backed securities, sold by Goldman Sachs to domestic and foreign banks.  “Only potential survivor, the fabulous “Fab” standing in the middle of these complex, highly leveraged exotic trades he created . . .” wrote Tourre, implying that institutional investors, especially financial institutions, would be burned by risky investments.

            Several German banks, including Dusseldorf-based IKB, Deutsche Banks and Swiss-based UBS, sustained nearly a billion in losses from Tourre’s clever investments.  During the peak of the market, Goldman sold over $20 billion of the risky securities, making the firm at least $2 billion in commissions.  With the SEC fraud suit, Britain and Germany are considering lawsuits to reclaim staggering losses that, like the U.S., nearly destroyed the world banking system.  Goldman officials contend that they did nothing wrong selling dicey securities, where buyers knew the risks.  Goldman executives insist their relationship with hedge fund Paulson & Co. was not inappropriate or collusive, despite the fact that Paulson made billions shorting the ethereal securities in 2007.   Tourre specifically selected bands of subprime mortgages on which to base the derivative investments.

            Treasury Secretary Tim Geithner and Democratic members of Congress led by Finance Chairman Sen. Christopher Dodd (D-Conn.) and his House counterpart Rep. Barney Franks (D-Mass.) seek more regulation on derivative investing.  Former President Bill Clinton recently admitted to ABC News that he made mistakes supporting the 1999 Gramm–Leach-Bliley Act, deregulating the financial services industry, removing Depression-era protections under the Glass Steagall Act that prevented banks from risky stock market investing.  Back in the late ‘90s, banks begged to join the bull market, giving quick bucks to anyone jumping in to the bull market.  When the White House and Congress consider new financial reforms, they need to place hedge funds under SEC regulatory authority.  Hedge funds, like Paulson & Co., currently operate without any SEC supervision or regulation.

            Goldman Sachs is right that they don’t police the risk of certain investments, something savvy investors, like banks, must do on their own.  Cherry picking investments for hedge funds, especially short sellers, goes too far, demonstrating that the unregulated hedge funds industry can’t police itself.  “The fact that the vote was close has been the proximate cause for the stock’s rally.  This means it wasn’t as clear decision by the SEC,” said Doug Kass, president of hedge fund Seabrease Partners Management, referring to the slight improvement in Goldman’s inflated share prices, closing today at $163.32.  Goldman insists it did nothing wrong selling Paulson & Co., even where Paulson knew the subprime-based derivatives were designed to fail, giving the hedge fund insider knowledge about shorting selling.  Goldman denies that it had anything to do with picking Paulson’s investments.

            Goldman’s legal defense revolves around its distributor that packages its collateralized debt obligations ACA Management LLC.  “We would never intentionally mislead anyone,” said Goldman’s chief legal counsel Greg Palm, responding to SEC charges that the Wall Street powerhouse withheld vital information to investors about CDOs.  Palm insisted that Goldman Sachs did not collude with investor John Paulson to create CDOs based on subprime mortgages, for the purpose of Paulson & Co. shorting the investments.  Passing the buck to ACA doesn’t absolve Goldman of helping Paulson cherry-pick bands of subprime mortgages destined to fail. Palm now insists that Goldman had nothing to do with ACA’s process of selecting pools of bad mortgages to meet Paulson’s needs.  “The portfolio was not selected by John Paulson,” said Palm.  “The portfolio was selected by ACA.”  

            Smelling a lot like Enron’s hotshot CFO Andrew Fastow, Goldman Vice President Fabrice Tourre suddently took a leave of absence from his position as executive-director of Goldman’s London office.  Fastow, of course, created the phony offshore balance sheets that kept investors from recognizing Enron’s impending insolvency.  Tourre was rewarded handsomely by for generating the lion’s share of Goldman’s profits.  His “voluntary” leave of absence indicates he’s become radioactive to the 141-year-old Wall Street investment bank.  “It’s voluntary.  He decided to take some time off,” said London-based Goldman spokesman Micahel Duvally, signaling, if nothing else, some kind of culpability.  Repudiating the SEC doesn’t mean Goldman is off the hook.  Regardless of the denials, Tourre’s absence speaks volumes about Goldman’s accountability.

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.