The Impact of the Tourre Panel on the SEC Goldman Case

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Fabrice Tourre Goldman SachsThe Securities and Exchange Commission got some gifts from today's grilling Fabrice Tourre. Most important for the SEC is that everything he said was under oath. Now he's locked into his positions, and he made some pretty sweeping statements. If the SEC can find documents or witnesses that contradict today's testimony, the SEC gains a powerful lever in its case against Goldman Sachs (GS).

The Risk of Testifying Under Oath

Tourre is at the center of the SEC's case, particularly the allegation that Goldman deceived ACA into believing Paulson was long in the Abacus deal instead of short. Since the issue is so crucial to the SEC's case, and the SEC's complaint makes clear it thinks Tourre did the deceiving, I can only imagine the SEC is confident in its evidence on the point. Given that, Tourre's money quote was: "I never told ACA... that Paulson & Company... would take any long position in the deal.... I recall informing ACA that Paulson's fund was expected to buy credit protection on some of the senior tranches.... This necessarily meant that Paulson was expected to take some short exposure in the deal." In response to Senator Coburn's direct questions, Tourre doubled down and insisted he never suggested that Paulson was an equity investor and reiterated that he had communicated that Paulson was buying protection, and thus going short.

If the SEC really can prove Tourre deceived ACA, his testimony today gave the SEC a powerful weapon to compel cooperation: threaten a perjury prosecution. And if Tourre does flip, Goldman's in trouble.

On the Issue of Who Chose the Abacus Securities

In Goldman's public statements, Goldman has claimed that IKB, one of the buyers of the Abacus CDO, also had input into the underlying securities. Tourre reiterated that point in his written testimony, which he read into the record under oath: "Paulson's fund made suggestions to ACA, as did IKB and Goldman Sachs." Under questioning by Senator McCaskill, however, Tourre said that IKB "wasn't in the room" when Paulson and ACA were selecting the securities for the CDO.

Exhibit 119 is perhaps a little helpful to Goldman on this issue, in that it shows that IKB made at least one request regarding the content of the securities portfolio -- to remove securities serviced by two particularly notorious subprime lenders -- but the email suggests Tourre was more concerned with Paulson's view than IKB's: "...Paulson will likely not agree to this unless we tell them nobody will buy these bonds if we don't make that change." A Goldman person asked Tourre what he should tell IKB in response to its request, and Tourre replied that IKB should be told that Goldman "was taking its feedback into account and once we have gotten more feedback from accounts across the cap structure we will decide what the best cours[e] of action is".

In a preview of how Tourre will respond to questions about some of the documents cited by the SEC in its complaint, Senator Levin asked Tourre about documents in which Tourre referred to the securities as having been chosen by "ACA/Paulson." Tourre said the documents "could have been more accurate;" in the interests of speed he'd written down only ACA/Paulson, but he should have written ACA/Paulson/Goldman Sachs/IKB. I'm not sure a jury will find that self-serving explanation as persuasive as a document written contemporaneously.

Goldman's Common Sense Defense Further Undermined

One of Goldman's main talking points -- that it lost a lot of money on the Abacus deal and so couldn't have been structuring it to fail was shot down by Tourre when he conceded that Goldman had always intended to sell the part it ended up holding on to; that is, at the time its structured and did the deal, Goldman had no intention of holding a long position. I wonder if, after that under oath statement, Goldman will continue pushing this talking point. Or rather, I wonder if journalists will let Goldman keep pushing that talking point.

"Ratings-Based Buyers"Undermined "Big Boys" Defense

Goldman's "big boys" defense -- the idea that IKB and ACA were sophisticated investors who knew what they were buying with Abacus -- was at least implicitly undermined by Tourre's comments about a proposed list of customers to focus on in the next year to pick up additional revenue. Tourre wrote: "this list might be a little skewed towards sophisticated hedge funds with which we should not expect to make too much money since (a) most of the time they will be on the same side of the trade as we will, and (b) they know exactly how things work and will not let us work for too much $$$, vs. buy-and-hold rating-based buyers who we should be focused on a lot more to make incremental $$$ next year ..."

According to Tourre's email, then, some "big boy" buyers relied heavily on the ratings assigned to securities and didn't know exactly how things worked, and Goldman could and should exploit their weakness for profit. Asked about the email at the hearing, Tourre predictably denied that's what the email meant, but again, I'm not sure a jury would find his explanation as persuasive as his plain English email.
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