Michael K. Shaub, April 28th, 2010
This week’s theater of the absurd features Goldman Sachs appearing before the Senate Permanent Subcommittee on Investigations. When it comes to watching these two groups face each other, the moral high ground is an anthill.
The reason CEO Lloyd Blankfein and other Goldman employees, including the silver-tongued vice-president Fabrice Tourre, will be at the witness table is because the SEC has filed civil fraud charges over the Abacus 2007-AC1 deal. Goldman marketed the Abacus synthetic collateralized debt obligations to a bond-insurance company and a German bank, and allegedly told the bank that the bond-insurance company had selected the bonds that would be tracked. Instead, Goldman allegedly allowed John Paulson’s hedge fund to have significant input regarding what bonds were included. And Paulson’s bonds were allegedly designed to be lemons that Paulson could strategically bet against, on the other side of the transaction from the bond-insurance company and the German bank. Paulson’s hedge fund made over a billion dollars on the deal; guess who lost the billion? Oops.
I used the word “allegedly” three times in the last paragraph. This is never a good sign. It means that people who seem to have trouble telling the truth are on the loose again. One person who apparently cannot get enough of telling the truth is the above mentioned Tourre, who made a series of unfortunate comments in girlfriend e-mails, including referring to himself as “Fabulous Fab” who was “… standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!” In another note he indicated that he had “…managed to sell a few Abacus bonds to widows and orphans that I ran into at the airport, apparently these Belgians love synthetic ABS CDO2!!!” He also indicated that he was “[n]ot feeling too guilty about this, the real purpose of my job is to make capital markets more efficient and ultimately provide the US consumer with more efficient ways to leverage and finance himself, so there is a humble, noble and ethical reason for my job. … amazing how good I am in convincing myself!!!” I think this is why the word “ironic” made it into the dictionary.
But Goldman has managed to hit the headlines twice, thanks to allegations that a member of their board of directors, Rajat Gupta, provided inside information about Warren Buffett’s intention to invest in Goldman in September 2008. Unfortunately, the alleged beneficiary of the information was Raj Rajaratnam, Gupta’s close friend and former business partner, and head of the very successful Galleon Group hedge fund. Or at least it was successful until Rajaratnam and others were charged in the biggest insider trading probe in decades and the fund collapsed. Mr. Gupta, the former head of consultants McKinsey & Co., has not been indicted, but he will not stand for re-election as a Goldman director. Federal prosecutors in the Galleon case apparently have phone recordings of everything but Mr. Rajaratnam brushing his teeth, including conversations with Mr. Gupta.
So CEO Blankfein gets to appear before Congress and try to explain his e-mail statement that , “Of course we didn’t dodge the mortgage mess. We lost money, then made more than we lost because of shorts.” Uh huh. There are many internal e-mails discussing being on both sides of these deals. These cases are never as cut and dried as Congress wants to make it appear, and bankers are easy to demonize. And it will be helpful for Blankfein and Goldman to have Tourre to point to as a rogue employee, though this may work to Goldman’s disadvantage in the courtroom one day soon.
Apparently, Goldman Sachs is willing to provide full information. The question is whether they are providing it to people who are actually the ones who ought to get it.