Finance Matters

Archive for April 24th, 2010

Now hold on. The first “Fabulous Fab” email we read was entirely different from the one the Senate just released.

The SEC released this section of The Fabulous Fab Email a couple of weeks ago:

The REAL Fabulous Fab email, just released today by the Senate, reads completely differently. It’s from page 80 in the documents published by the New York Times.

 

It’s painfully obvious the SEC was desperate. They completely changed the meaning of Tourre’s email. Let’s compare.

“More and more leverage in the system…” (This is Tourre’s interpretation of an FT article, which is about there being more leverage in the system. Tourre was referring to Gillian Tett’s article, “The unease bubbling in today’s brave new financial world,” which he attached in the email and recommended that his girlfriend read it. Here’s the article on Roubini’s blog.)

“The only potential survivor, the Fabulous Fab…” (after which, Tourre writes, “as Mitch would kindly call me, even though there is nothing fabulous about me, just kindness, altruism and” – we’ll cut the mushy stuff.)

Seriously, SEC? Tourre’s email is wildly different from how the SEC first portrayed it. This makes their case look even weaker. Embarrassing.

Read more of Tourre’s emails.

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A number of the private emails Goldman’s Fabrice Tourre wrote about CDOs and MBS have just been released by the Senate and published on the New York Times.

One of the emails Tourre writes (pg 100) is to a woman named Fatiha Bouktouche. It’s his ex-girlfriend.

(We aren’t sure if this is her, but she’s the only one listed on Facebook. We’ve contacted her to find out.)

Because what Tourre writes to Bouktouche (at least, the translation of what he writes to her. His original emails are in French.) is informative, we imagine she might be required to testify at some point.

Tourre writes:

“I’m trading a product which a month ago was worth $100 and which today is only worth $93 and which on average is losing 25 cents a day…it adds up to a lot of money….

“When I think that I had some input into the creation of this product (which by the way is a product of pure intellectual masturbation, the type of thing which you invest telling yourself: “Well, what if we created a “thing,” which has no purpose, which is absolutely conceptual and highly theoretical and which nobody knows how to price?”) it sickens the heart to see it shot down in mid-flight…It’s a little like Frankenstein turning against his own inventor ”

This part of the email might actually help Tourre’s case:

I had some input into the creation of this product,” he writes. “It sickens the heart to see it shot down in mid-flight…It’s a little like Frankenstein turning against his own inventor.”

It could be interpreted to mean that he wasn’t sure the product would fail when he created it. We’re not sure which product he’s talking about, but he seems stressed and sad when it starts to fail, so it might be interpreted, importantly, to mean that he didn’t design it to fail.

Of course it could also mean he knew he created a monster. (See more of his emails.)

That’s why Fatiha Bouktouche’s testimony (and her informed interpretation of what he meant) might be important.

By the way, Tourre also wrote an important email to his girlfriend after Fahita, Marine Serres. The infamous Fabulous Fab email.

Brush up on the SEC’s case against Goldman and Fabrice Tourre –>

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See Also:

• Fabrice Tourre’s Landlord Says Tourre Was A Square Who Went Jogging, Once Broke His Sink And Was NOT A Fabulous Fab
• The Complete Story Of What Really Happened Between Goldman, Paulson, ACA, IKB, And ABN
• 20 Winners And Losers From The Goldman Sachs Fraud Accusations

Goldman’s response to the Senate’s claim that the bank was a self-interested promoter of risky and complicated financial schemes that helped trigger the crisis is now online.

Their first sentence is, “The financial crisis has been a humbling experience for every participant in the financial system.”

From what little we’ve read so far, their response looks like more of the same. The main arguments being, we’re market-makers, we work for our clients and “We did not take one directional “bet.”

Their defense for making more money than they lost trading against mortgage backed securities is that they were motivated by fear of the unknown.

You can read the rest on the Financial Times –>

Now brush up on the SEC’s case against Goldman’s involvement in the ABACUS deal –>

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See Also:

• Goldman Suspected Of Dumping Crappy ‘Greywolf’ Bonds Into ABACUS Too
• Senate Releases Tons Of Goldman Emails, Says Goldman Helped Trigger The Crisis
• Goldman Sachs Launches Desperate Charm Offensive To Save Reputation

(This is a guest post from the author’s blog.)

In response to the chorus of experts calling for the mega-banks to be broken up, defenders of our current banking system argue that because Canada’s banking system is pretty stable, and Canada has some giant banks, size isn’t the issue.

This might be a great argument … except that Canada’s banking system is completely different from America’s banking system.

Instead of listing numerous differences, I’ll just raise two.

First, as Newsweek points out:

Canadian banks are typically leveraged at 18 to 1—compared with U.S. banks at 26 to 1 and European banks at a frightening 61 to 1.

Of course, Congress or regulators cold demand lower leverage ratios.

But the second difference is harder to fix. Specifically, 5 American banks hold virtually all of the world-wide exposure to derivatives, especially credit default swaps. See this, this, this and this.

Unlike the 5 giant derivative dealers in the U.S. who pretend – because they want to keep their derivative sale profits high – that reining in derivatives would be bad for the economy, Canada’s banks don’t see much need for much exposure.

As the Bank of Canada wrote in 2000:

Anecdotal evidence also suggests that Canadian banks have been slower to embrace credit derivatives than their international counterparts. Reasons cited

for the slow emergence of credit derivatives in Canada include the Canadian banks’ access to cost-effective funding through their retail deposit base, as well as

their ability to achieve a broad diversification of credit risk internally through their national branch networks.

Can’t Congress or regulators fix this?

No.

Derivatives will never be reined in until the too big to fails are broken up. The banks are so big and politically powerful that they have bought the politicians and captured the regulators.

So the American banking giants – which have repeatedly gone bankrupt due to wild speculation – are a totally different animal than the Canadian banks, because the former is up to their ears in derivatives while the latter isn’t, and the former is preventing any transparency or regulation of derivatives.

Unless the too big to fails are broken up, they will go bust again – and bring the system down with them.

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New ABACUS details Reuter’s reporter Matthew Goldstein revealed in his latest story suggest that Goldman went into the ABACUS deal keeping in mind self-interests that were beyond just collecting a fee from Paulson.

Reuters dug into the ABACUS prospectus and found documents that show that, at least at first, Goldman planned to include Greywolf CLO 1 in the collateral for ABACUS. Greywolf CLO 1 is a security Goldman had underwritten earlier that year in 2007.

In short, the potential inclusion of Greywolf in ABACUS could raise the possibility of Goldman’s self dealing. Perhaps Goldman wanted to get crap off their balance sheets in addition to just doing a solid for their client, John Paulson, for whom ABACUS was created.

Greywolf was founded by a group of ex-Goldman distressed bond traders and underwritten by Goldman Sachs. In the instance that the institutional buyers were concerned about Goldman’s not disclosing some material detail (like if they thought that Greywolf’s being underwritten by Goldman was material), it could prove problematic – maybe. Big maybe though.

Greywolf was actually quite a better investment than ABACUS was. Morgan Stanley repackaged some of its pieces into a new $130 million CLO in 2009, by which time ABACUS was long dead. So Greywolf’s investors weren’t crushed like ABACUS’s and they are less likely to file something against Goldman.

Another reason we think it could be a non-issue is that the Greywolf offering documents probably (we don’t have a copy, though it was apparently attached to the ABACUS prospectus originally) had the same disclosure as ABACUS, which said that Goldman Sachs might have access to “non-publicly available information” about the collateral and, because of that, “this presentation may not contain all information that would be material to the evaluation of the merits and risks of purchasing the notes.”

They say up front, “we might not be including material information.” That pretty much covers their bases.

Now judge for yourself if Goldman did anything wrong in the full timeline of the ABACUS deal –>

Read the full Reuters scoop on Greywolf –>

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