Poor Fab, but it could be worse. Michael Lewis has a heartbreaking, enraging story in Vanity Fair about poor Sergey Aleynikov, the former Goldman programmer and current Dostoyevskyan holy fool who was sentenced to federal prison for eight years for stealing computer code from Goldman, won a complete victory on appeal, was released, has lost his life savings, and is now being prosecuted under state law just because Goldman, or someone, but probably Goldman, really hates him. It is troubling stuff not least for Lewis’s clear implication that a jury trial may not be the best way to arrive at the truth regarding complex financial-technological questions. E.g.: Read more »
Poor Fab! I, for one, was utterly persuaded that he didn’t commit securities fraud by sending an email that he admitted was “not accurate” but not “false,” but the significance of that distinction seems to have eluded the jury:
A federal jury found former Goldman Sachs Group Inc. trader Fabrice Tourre liable for misleading investors in a mortgage-linked deal that collapsed during the financial crisis, delivering a historic win for a U.S. regulator eager to prove its mettle inside the courtroom.
The panel of nine jurors reached their verdict during the second day of deliberations, finding Mr. Tourre liable on six of seven claims that he violated federal securities law. … Mr. Tourre, who left Wall Street to pursue a doctorate in economics, may face a fine and a ban from the securities industry.
I think it’d be a shame to deprive the securities industry of Fab’s financial-structuring creativity and proclivity for sending embarrassing emails, but as we’ve established I’m in the minority here. Read more »
Goldman Sachs President Gary Cohn said his firm continues to do business with SAC Capital Advisors LP, the hedge fund that was indicted on charges of insider trading last week. “They’re an important client to us, they have been an important client to us,” Cohn, 52, said today in an interview on CNBC. “We continue to trade with them, and they’re a great counterparty.” [Bloomberg]
If you wanted to short the housing market in 2007 you could just buy protection on mortgage-backed securities via a synthetic CDO, and that’s what John Paulson did in the Abacus deal, for which Goldman Sachs and Fab Tourre got in trouble. But the problem with that is that buying protection costs money; just for instance the super-senior protection in Abacus would run you about 50bps, or around $4.5 million a year on the $909mm notional that ACA Capital wrapped.1 And who wants to throw away millions of dollars a year waiting for the housing market to crash?
So another way to short the market is to buy a lot of protection on senior tranches of CDOs (cheap because: what are the odds that the housing market will crash?) while also selling a little protection on junior tranches (expensive because the odds that there’ll be some defaults are higher). If you do this, you can have a positive carry (you get paid as more each year on the protection you sold than you pay on the protection you bought), but you can make just about as much money if the housing market craters and there are massive defaults. (The tradeoff is that if performance is mediocre, with some defaults, then you lose money on the junior protection you sold and don’t make it back on the senior protection you bought.)
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: Read more »
The decision to call former Goldman saleswoman Gail Kreitman out of order comes a day after a combative back and forth between the SEC and one of its top witnesses: Paolo Pellegrini, a former lieutenant to billionaire hedge-fund manager John Paulson. Her testimony is important because she may be the first witness to link Mr. Tourre to statements made to ACA Financial Guaranty Corp., which acted as the portfolio-selection agent on the transaction. The SEC has alleged that Mr. Tourre hid from ACA that Mr. Paulson’s hedge fund, Paulson & Co., planned to bet against the deal. As part of her testimony, the SEC is expected to play a tape recorded by ACA’s phone system in which Ms. Kreitman reportedly says that Paulson was taking a “hundred percent of the equity” in the deal, implying it was betting the instrument’s value would rise, not fall…Matthew Martens, a SEC lawyer, said Thursday that the regulator decided to change the order of its witnesses in an effort to speed the presentation of its case. The SEC is considering limiting the testimony of or not calling at all David Gerst, one of Mr. Tourre’s closest colleagues at Goldman, Mr. Martens said. Mr. Gerst had been expected to testify as early as Thursday. The late notice didn’t make the defense happy: they said the parties had reached a handshake agreement to give the other side 48 hours notice before a witness was called. [WSJ]