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News from Wall Street this week reminded me of the penguins that inhabit the icy, turbulent waters of the Southern Ocean.
These penguins are preyed upon mercilessly by tremendous, ravenous orcas – a terrible beast to feel gnawing on your leg if you derive your daily bread from the frozen, watery wastes.
But the penguins have devised a clever, if brutal, warning system.
A flock of penguins will gather apprehensively at waters’ edge… and one luckless penguin will be pushed into the sea. If the penguin is ripped to shreds by killer whales, the rest will hang back a while.
Otherwise, the rest of the flock piles into the briny deep.
Goldman Sachs Group (NYSE: GS) bond trader Fabrice Tourre is one of those luckless, doomed penguins.
The predator in this case is unlikely: a normally toothless flounder otherwise known as the Securities & Exchange Commission.
Fabrice Tourre, a bond trader of the middling ranks, was earlier this week found liable for six of seven fraud charges relating to Goldman Sachs’ trading of toxic mortgage assets.
The civil trial – a rare prosecution – provided a rare victory to the SEC, who, after a loss and a draw, are desperate for a win. At issue was whether or not a full $1 billion worth of collateralized debt obligations (CDOs) were fraudulently marketed.
Fabrice Tourre, like so many others, willfully and knowingly spread the contagion through the system, administering the toxic securities that would help bring the whole thing crashing down in 2008. As a vice president, Tourre was definitely not entitled to entrée into the halls of power, but he was in a position to know what he was doing, and to know better. He simply had to know what he was doing was wrong. Only a fool would think otherwise, and Goldman Sachs isn’t in the business of hiring fools.
But where did Tourre go wrong? What set him apart from all the other crooks? Here’s what happened…
Rule No. 1: Keep Quiet
There’s little to distinguish Tourre from any of the other crooks on Wall Street, except perhaps that he boasted to his girlfriend of selling rubbish securities to “widows and orphans that [Tourre] met at the airport.” He referred to the products he traded as “pure intellectual [expletive deleted],” and went on to say that “the whole building is about to collapse now… [The] only potential survivor, the Fabulous Fab… standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all the implications of those monstrosities!”
Fabulous Fab indeed. While he may have been a wizard at trading exotic instruments, Tourre wasn’t too careful about covering his tracks.
Perhaps it was this indiscrete boasting that landed Tourre in the role of doomed penguin. One rather gets the sense that all of the other twentysomething wunderkind traders involved at least had the good sense to keep their mouths shut – or not break up with whomever they bragged to.
Fabulous Fab: A Third-Rate Villain
Yes, like some 1970s James Bond villain bragging to Roger Moore, providing a play-by-play about his carefully planned misdeeds and giving away the keys to the kingdom, Fabrice Tourre ran it right up the flagpole, and his bosses gave him up for it.
Goldman Sachs was decent enough to foot the bill for Tourre’s (expensive) defense.
Because it was after all Tourre’s bosses who set up the complicated Abacus 2007-AC1 security, and put him in charge of it. Securities are synthesized all the time, but Abacus was special because it was designed to fail. The vehicle was established as a way for hedge fund kingpin John Paulson to bet against the CDOs underlying Abacus. Paulson selected the horrible securities himself, stacking the deck. Tourre was just the wheelman.
If this is all reminiscent of the infamous London Whale, Bruno Iksil, there’s a good reason.
The Whale was betting against the other side of the house… but he never got caught lying about it and he didn’t defraud any widows or orphans. But like Fabrice Tourre, the Whale was a good soldier, just following orders.
Abacus Was Just the Tip of the Iceberg
Another thing the Southern Ocean has in abundance, besides orcas and penguins, is icebergs – thousands of icebergs.
Abacus was just the tip. The Great Collapse of 2008 was shot through with straw-man securities, hand-selected for their poor quality, losing bets tailor-made for the big boys to bet against. As things started to go bad, their short positions began to pay off big time, fattening their positions as the whole thing began to crumble. And as the entire financial system began to collapse from the poisoning, these people made out handsomely as short after short paid out in the zero sum (end) game.
It’s unlikely that even a re-invigorated SEC, bloated on chum, will have the wherewithal to go after the Great Shorters — the really big fish. They’re just too powerful, too well dug-in. But when the SEC goes after small fry, it does enough to silence the howls of the masses, even if it’s just a sideshow.
You don’t have to be a slick bond trader to pull one over on the other guy. Make sure no one has you in their sights with this list.
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