I haven’t been following Fabrice Tourre’s trial all that closely but I gather that the main evidence against him is that a Goldman saleswoman, Gail Kreitman, told her client ACA Capital Management that Paulson & Co. was going to be a long investor in a CDO called Abacus. That turned out to be false, and arguably in a material and fraudy way. So: why isn’t the SEC suing Gail Kreitman? Well, because someone told her that that it was true, and there’s at least, like, a 60/40 chance that that someone was Fab. Because he was pretty competent:

An ex-colleague of Fabrice Tourre heaped praise on the former Goldman Sachs Group Inc. vice president, saying she was “very impressed” with his detailed knowledge of the complicated mortgage-backed investments he created and sold. … Kreitman, called by the SEC to the witness stand, was a Goldman Sachs saleswoman on ACA’s account. She testified that, while frequently depending on Tourre for details of the deal, she couldn’t remember who gave her a key piece of information aimed at getting ACA involved. By evoking Tourre’s competent reputation as part of their examination of Kreitman, SEC lawyers sought to convince jurors it was he.

Oh man. The theory seems to be that since he was always on top of what was going on, he’d be the most likely person to tell Kreitman what was not going on? Or is it like: no one else on the desk even knew what a CDO was, so any actual information, true or false, had to come from Fab? I don’t know. I do know that banks really should have taken their sales & trading interns to see Kreitman’s testimony. It … let’s say it provides one possibly valuable perspective on the interaction between salespeople and traders. Here is a gem from the Journal:1

The jury heard the recordings of phone calls that Ms. Kreitman had held with two separate ACA executives. On one, which was also played Friday, Ms. Kreitman was heard saying that Paulson was involved in Abacus.

Ms. Kreitman sounded confident on both calls, recounting specifics about Abacus in the argot of a Wall Street veteran.

Yet in her testimony on Monday, Ms. Kreitman said repeatedly that she knew very few details about how synthetic collateralized debt obligations like Abacus worked and relied heavily on traders such as Mr. Tourre for their expertise.

Wait she sounded confident recounting specifics in the argot of a Wall Street veteran, but didn’t actually know what was going on and relied heavily on the traders? And she worked in sales? How odd!2

Anyway she got her information from “traders such as Mr. Tourre,” not Fab himself; others on the desk were involved in the deal, and some have testified for the SEC. The SEC’s thesis seems to be that Fab masterminded a plot to deceive not only ACA (by getting Goldman’s salesperson to lie to them), and not only investors in Abacus (by getting Goldman’s lawyers to write an offering circular that misstated ACA’s role in the deal), but also his colleagues at Goldman. Everyone was doing the best they could to be honest, but Fab sat in the middle feeding lies to everyone so that … something. So that he could feel important and send his girlfriend self-aggrandizing emails. I dunno.

The reality is of course that a bunch of people, inside and outside Goldman, needed to have a hand in the series of miscommunications that got Abacus sold to investors. Goldman’s salespeople brought ACA in, perhaps by correctly and/or incorrectly passing on information about the deal that they’d received from Fab and his fellow traders. Goldman’s (outside) lawyers wrote the controversial offering circular, which Fab stands accused of having looked at. Various Goldman committees signed off on the deal.

But not just them! ACA itself cheerfully signed off on an offering circular saying that it had picked the securities that went into Abacus, but now claims that that was all Paulson’s doing. Paulson representatives met with ACA, had every opportunity to tell ACA what side of the trade they were on, and probably did. The main victim here seems to have been mostly a co-conspirator.

And, y’know. Someone invented the synthetic CDO, and it wasn’t Fab.3 A synthetic CDO requires, by its nature, that someone be short and someone be long, and it’s natural that both sides would want some input into whatever it is they’re longing and shorting. Which is why pretty much every bank did a bunch of synthetic CDOs with a similar fact pattern. Many of those banks paid fines, but other than Fab, none of the people responsible for them is on trial. One of them recently left his job as SEC enforcement director for a $5-million-a-year job at a law firm! Weird, huh?4

Really, it would be hard for Fab’s lawyers to do a better job of portraying him as an innocent cog in a larger machine than the SEC is doing. I suppose that’s the point of building such a machine: if you compartmentalize knowledge and understanding, disperse responsibility among a bunch of people, get semi-informed signoffs from all of them, and slather the whole thing with a generous topping of lawyers, it’s hard to hold any one person responsible. But if you were going to pick one person to hold responsible for the whole thing, why Fab?

Ex-Goldman Saleswoman Called to Bury Tourre With Praise [Bloomberg]
Tourre Lawyers Focus on Reliability of Federal Witness [DealBook]
Tourre Defense Zeroes In on Key Witness [WSJ]

1. Or there’s this from DealBook:

“I would never tell my client anything I did not believe to be true,” she said in court. She later added, “The trading desk really ran point, which is unusual for me.”

Or also from the Journal:

On Monday, however, Ms. Kreitman said she told SEC investigators in June 2009 that she had only recently come to hear of Paulson & Co. She also said at the time that she didn’t know the firm, or any other hedge fund, had a role in Abacus 2007-AC1, the deal at the center of the government’s case against Mr. Tourre.

“Never heard of them,” she said, according to a transcript of that meeting that was read to the court Monday.

Ms. Kreitman explained the discrepancies by saying she was “confused,” and thought that the SEC was referring to billionaire hedge-fund manager John Paulson, whom she had read about in the newspaper. She said she didn’t realize Paulson & Co. was his fund firm.

ONE COULD SEE HOW THAT NAME WOULD BE CONFUSING.

2. Here is a possibly relevant picture.

3. You know who it was, right?

4. Here’s a massive senate report on the financial crisis that includes lots of gory detail on Deutsche Bank’s (and Goldman’s!) naughty CDOs; check out particularly pages 330-375 for Deutsche. A sample:

Deutsche Bank was a major player in the CDO market, both in creating new CDO issues and trading these securities in the secondary market. Deutsche Bank’s top global CDO trader, Greg Lippmann, began to express concerns that the CDO market was unsustainable. By the middle of 2006, Mr. Lippmann repeatedly warned and advised his Deutsche Bank colleagues and some of his clients seeking to buy short positions about the poor quality of the assets underlying many CDOs. He described some of those assets as “crap” and “pigs,” and predicted the assets and the CDO securities would lose value.

At one point, Mr. Lippmann was asked to buy a specific CDO security and responded that it “rarely trades,” but he “would take it and try to dupe someone” into buying it. He also at times referred to the industry’s ongoing CDO marketing efforts as a “CDO machine” or “ponzi scheme.”

That’s the CDO desk that Robert Khuzami supervised before becoming SEC enforcement director. Here is Yves Smith. Incidentally, all that said, I agree with Matt Yglesias that the fact that Khuzami is getting a well-paid post-SEC job isn’t particularly troubling. It’s just verrrrrrrrrrrry suspicious that Deutsche was the only CDO bank that escaped SEC trouble.

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Comments (7)

  1. Posted by Sveny | July 23, 2013 at 12:39 PM

    what page ?

  2. Posted by St. Copious | July 23, 2013 at 1:30 PM

    ACA sounds like a smaller scale version of Fairfield Greenwich, Merkin, et al. Paid extraordinarily well to manage money, but instead blindly funneled it to someone they perceived to be smarter (sans diligence).

    And they should be similarly run out of the securities business forever.

  3. Posted by And their yachts? | July 23, 2013 at 1:45 PM

    But where are the ACA managers houses on Mustique?

  4. Posted by ILoveLamp | July 23, 2013 at 2:00 PM

    I think the SEC should promulgate a new rule. Prior to being consummated, every proposed securities trade must be preceded by the following disclaimer from the dealer to the customer: "The financial instrument you are intending to buy is being sold by someone else. Moreover that person is probably smarter than you, so you may want to reconsider your strategy."

  5. Posted by UBS PR Quant | July 23, 2013 at 2:11 PM

    But what if the seller is UBS? Are they still smarter than you?

  6. Posted by Guest | July 23, 2013 at 3:17 PM

    Thanks for the probably unintended but still good distillation of why active investment management exists as a viable business on the scale that it does: Enough people don't understand that they can't all be above average, or, in your words, "smarter than" everybody else.

  7. Posted by Frank in SF | July 24, 2013 at 2:47 PM

    It's called, "Buyer Beware!" Better known as, "Caveat emptor."