Goldman Sachs(GS), the SEC, Fabrice Tourre - What A Day

Goldman Sachs, the SEC, Fabrice Tourre - What A Day? It could almost be a song. So, let's give the broad recap on this one.

The SEC document lays out a pretty compelling story. Essentially, Goldman created an investment product to help a hedge manager (Paulson) profit if mortgages started to default. It created the product with the help of Paulson, who they knew was taking a short position. It then brought in another company ACA to help promote the product to investors who were taking a long position. It never mentioned that Paulson helped.

My advice is to read the actual SEC filing (SEC filing). It's actually quite interesting.

Here are a few of my favorites excerpts:

Here's how a Paulson employee explained the investment opportunity of these mortgage backed CDO stinkers:

“It is true that the market is not pricing the subprime RMBS wipeout scenario. In my opinion this situation is due to the fact that rating agencies, CDO managers and underwriters have all the incentives to keep the game going, while ‘real money’ investors have neither the analytical tools nor the institutional framework to take action before the losses that one could anticipate based [on] the ‘news’ available everywhere are actually realized.”

In plain English, the rating agencies didn't have any incentive to kill the golden goose and everyone else is stupid.

Here's another gem:

At the same time, GS&Co recognized that market conditions were presenting challenges to the successful marketing of CDO transactions backed by mortgage-related securities. For example, portions of an email in French and English sent by Tourre to a friend on January 23, 2007 stated, in English translation where applicable: “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!!!”

Wonderful! What better light can be shed on the total failure of Wall Street. The greed and avarice that sent them plunging off a cliff, dragging us all with them? These overpaid bankers were essentially rolling the dice at the casino with others people, making money for doing so, and not caring or understanding what the outcome would be.

I wonder just how much profit is generated by these activities. Goldman reportedly made just $15 million for this transaction, which is peanuts for them. Is the whole company rotten or just a mold around the edges?

It's really hard to believe that this is an isolated case. Time will tell and Goldman and Tourre will have their day in court. I suspect we'll be seeing many more SEC filings in the future.