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Goldman’s Claim Tourre Acted Alone is Horse$&*t

Posted by Larry Doyle on April 22, 2010 10:14 AM |

Goldman Sachs is playing this SEC charge of fraud by the book. How so? Wall off senior management, pin the blame on one low level junior employee, and sell that individual down the river. This approach by Goldman is not a surprise but, in my opinion, it is total horse$&*t. How so? Let’s navigate the world of structured finance transactions on Wall Street.

Bloomberg reports the Goldman defense in writing, Goldman Sachs Says SEC Case Hinges on Actions of One Employee:

Goldman Sachs Group Inc. said the U.S. fraud case against the firm hinges on the actions of the employee it placed on paid leave this week.

Fabrice Tourre, the 31-year-old Goldman Sachs executive director who was accused of misleading investors about a mortgage-linked investment in 2007, will also be de-registered from the Financial Services Authority, a spokeswoman at the firm in London said yesterday.

“It’s all going to be a factual dispute about what he remembers and what the other folks remember on the other side,” Greg Palm, Goldman Sachs’s co-general counsel, said in a call with reporters yesterday, without naming Tourre. “If we had evidence that someone here was trying to mislead someone, that’s not something we’d condone at all and we’d be the first one to take action.”

By characterizing the case as a dispute involving a single employee, Goldman Sachs may be taking its first steps to publically distance itself from Tourre in the case, some lawyers said. That could reduce bad publicity and ultimately make it easier for the company to settle the case.

Goldman Sachs may also want to separate itself from Tourre if it’s concerned he will cooperate with the SEC or implicate more senior employees, said Onnig Dombalagian, a professor at Tulane University Law School in New Orleans and former attorney fellow at the SEC.

Goldman’s defense is no surprise, but it is pathetic and ridiculous. In pinning all the blame on Tourre, Goldman would like America to believe that a 27-year old junior level employee structuring a synthetic CDO has the ability to sign off on the capital commitment and other legal liabilities associated with this type of transaction. Wow!! Goldman Sachs must truly believe America is incredibly naive.

Within Wall Street firms, these transactions would typically have deal teams in which a structurer played one role. The balance of the team would consist of the deal head (typically, a more senior level employee within the CDO group), and a marketer who would work with salespeople. Above these individuals, other senior level people who would typically need to sign off on the transaction would be the head of the CDO group and the head of the firm’s mortgage business.

I am not sure of Tourre’s reporting lines, but they would have at least been ultimately into the head of the CDO group and very possibly into the head of the mortgage business. These individuals have the responsibility to properly manage each and every individual employee reporting to them. The failure to properly manage is known as ‘failure to supervise.’ That charge is extremely serious and has cost many mangers on Wall Street their careers. All the senior level managers at Goldman may want to be careful because potential perjury charges are also quite serious.

In the midst of all the noise around this specific transaction, America should not be distracted from the fact that there were likely many more transactions of a similar nature at other firms. Does the lack of disclosure provided by Wall Street on these transactions rise to the level of a criminal charge? I would like to see how a jury would rule on that.

In regard to the charge of whether America can trust senior level management on Wall Street, America is screaming guilty loud and clear via its unwillingness to play the markets.


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  • mk

    Similar to how they threw Youngdahl under the bus

  • Matt

    Larry –

    Michael Lewis, author of “Liar’s Poker” and recently “The Big Short”, said the 100% exact same thing that you do in this post in an interview Monday on CBS. He said the contact name at the top of the cover page of the marketing materials for these Abacus CDO’s was the head of Goldman’s bond trading division, so he sure as hell was very involved in this. This is a really good 10-minute interview Larry and I would recommend watching it. Lewis has a lot of interesting things to say about Goldman and Wall Street and the SEC.


  • Matt

    Larry –

    Here’s another commentary/op-ed column by Michael Lewis that he just wrote in today’s Business Week. He makes some great points in this too.


  • Fred

    I personally think GS dropped the ball(was ill advised), on this one.

    The most recent developments over the last few days were favorable for GS; as reported on CNBC, responsibility shifted more to ACA for portfolio selection failure, political motivation within the SEC (3/2 vote along party lines) in bringing the suit and even the timing of the suit itself in terms of the financial reform bill were brought into question. Even the Chicago “political connection” in terms of establishing exchange regulated derivatives trading for CDO securities, rather than in the “back rooms” of wall street, has been brought up.

    Public opinion will not be supportive for GS if they try to blame Tourre entirely. It also looks as though GS has assumed some liability, at least in terms of an employee who represented the firm.

    Maybe GS thinks the “rogue trader” defense will stop client defections. Let’s face it, if fiduciaries were able to justify investment solely on a securties rating they can certainly justify staying with GS because of a “rogue trader”.

  • My Country


    I was equally appalled at Goldman’s statement that Fabrice Tourre acted alone. Fixed income investors all know this is “horse$&*t”. The classic response when firms get into trouble like this is to pick a scapegoat – usually a person who believes they are acting in the best interests of the company and client.

    Expect Goldman to sacrifice Mr. Tourre and anyone else they see fit including (despite the fact that he does “God’s work”) Mr. Blankfein. Let’s face it – most sophisticated investors who have traded with Goldman do so at their own peril and know it. At this point, they’re going to have to justify doing so to their stakeholders and the louder the questions get, the more they are apt to say “it’s just not worth the hassle” and do business elsewhere.

    The Goldman board and current shareholders know this would spell death for their firm. Just what do you think they will stop at to avoid it?

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