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UK politicians join Goldman bandwagon

UK POLITICIANS presented a rare united front yesterday as they called for the City regulator to begin its own investigation into securities fraud allegations against Goldman Sachs.

Fabrice Tourre, the individual named in the case brought by the Securities and Exchange Commission (SEC) in the US, is now based at Goldman’s Fleet Street headquarters after relocating from New York in 2008, after the alleged fraud was committed.

Prime Minister Gordon Brown yesterday insisted that the Financial Services Authority begin a special investigation into the affair immediately, signalling that Labour will do everything it can to assist the SEC in the US.

“I want a special investigation done into the entanglement of Goldman Sachs with other banks,” he told City A.M.. “Hundreds of millions of pounds have been traded here and it looks as if people were misled about what happened.”

Tory sources seized upon the case as proof that the tripartite method of regulation in the UK was ineffective and needed to be overhauled.

Shadow financial secretary Mark Hoban said the allegations should be “thoroughly investigated”, adding: “We have consistently called for a tougher approach to all financial crime. For far too long people didn’t take allegations like these nearly seriously enough. Those who commit financial crimes should face criminal prosecution and the prospect of a custodial sentence.”

Liberal Democrat Treasury spokesman Vince Cable also added his voice to calls for an investigation. “The FSA has been very good at bringing in small fry, but now it’s time to deal with the big fish like Goldman Sachs,” he said.

EVIDENCE | TOURRE’S EMAIL
“More and more leverage in the system, the whole building is about to collapse anytime now…

Only potential survivor, the fabulous Fab [Fabrice Tourre]…standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!”

FABRICE TOURRE | GOLDMAN SACHS
FABRICE Tourre, 31, worked as a vice president on the structured product correlation trading desk at Goldman Sachs in New York, where he held primary responsibility for structuring and marketing the Abacus portfolio.

He is now based at the bank’s London headquarters on Fleet Street, where he is an executive director, but grew up in France, where he attended the Lycée Henri IV and the Ecole Centrale de Paris before studying for a masters at Stanford in the US. He is said to be renowned for his love of socialising and his keen sense of humour.

JOHN PAULSON | PAULSON & CO
US BILLIONAIRE John Paulson made himself the richest man in the hedge fund industry through betting against sub-prime mortgages for an ultimate personal profit of around $3.7bn.

Paulson worked in the M&A team at Bear Stearns before founding Paulson & Co in 1994. His sub-prime bet was recently the subject of a book by Gregory Zuckerman named “The Greatest Trade Ever: The behind-the-scenes story of how John Paulson defied Wall Street and made financial history”.

Paulson is not accused of any wrongdoing.

NUTS AND BOLTS OF THE SEC CASE Q&A
Q. AROUND WHAT TYPE OF FINANCIAL INSTRUMENT DOES THE SEC’S CASE CENTRE?

A. The case centres around synthetic collateralised debt obligations (CDOs), a form of credit derivative used to gain exposure to a portfolio of assets by investing in credit default swaps. Investors can rake in extremely high returns from synthetic CDOs, but can equally be left in the lurch if the portfolio is hit with responsibility for ballooning obligations and losses.

Q. WHAT CHARGES HAS THE SEC LEVELLED AGAINST GOLDMAN?

A. The SEC has brought two counts of securities fraud against Goldman and its employee Fabrice Tourre, alleging that it misrepresented Paulson’s involvement in selecting the portfolio to investors and thereby defrauded them.

Q. HOW IS GOLDMAN DEFENDING ITSELF?

A. The bank is adamant that the SEC’s charges are “completely unfounded in law and fact”, and says it will “vigorously contest them and defend the firm and its reputation”. Goldman points out that the bank itself lost over $90m on the transaction in question; that its investors were aware of the risks of mortgage investing and understood that a synthetic CDO deal necessarily includes a long and a short side; that ACA selected the portfolio independently (after discussions with Paulson); and that it never told ACA that Paulson was going to be a long investor.

TIME LINE | THE HISTORY OF A BILLION DOLLAR FRAUD INVESTIGATION
● 2006
Paulson discusses with Goldman ways of creating a collateralised debt obligation (CDO) to allow the firm to select a portfolio of reference obligations and then effectively short that portfolio by entering into credit default swaps (CDS) with Goldman on specific layers of the CDO’s capital structure.

● January 2007
Goldman approaches ACA to act as a “portfolio selection agent” for the Paulson-sponsored CDO transaction. ACA’s name on the portfolio, as an independent third-party collateral manager, would have helped the bank market the liabilities even when the sub-prime mortgage bubble was starting to show signs of distress.

● 26 April, 2007
The deal closes, with Paulson having paid Goldman around $15m for structuring and marketing ABACUS 2007-AC1

● 24 October, 2007
83 per cent of the sub-prime residential mortgage-backed securities (RMBS) in the portfolio had been downgraded.

● Late 2007
ACA, under severe financial strain, enters into a global settlement agreement with counterparties to unwind around $69bn of CDSs. SEC begins to investigate banks’ dealings in the rapidly deteriorating sub-prime market.

● 29 January, 2008
99 per cent of the portfolio had been downgraded, causing losses of over $1bn to investors in the CDO. Paulson’s CDS positions, in contrast, netted the firm a profit of equal magnitude.

● 2008
Fabrice Tourre, the Goldman employee with primary responsibility for structuring and marketing the Abacus portfolio, moves from New York to London

● August 2008
Royal Bank of Scotland, which had acquired ABN Amro at the end of 2007, unwinds ABN’s super senior position in Abacus by paying Goldman $840.9m.

● 16 April 2010
SEC fraud complaint submitted to the US District Court in New York.