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Home > Blog > The Fabrice Tourre, Goldman Sachs CDO Debacle

The Fabrice Tourre, Goldman Sachs CDO Debacle

French trader Fabrice Tourre and his employer, Goldman Sachs, are being sued by the Securities and Exchange Commission (SEC) for allegedly devising a package of highly risky credit default swaps (CDS) and then betting against the investments – and their clients – to fail. The deals produced massive losses for investors but big profits for Tourre and, ultimately, for Goldman Sachs.

The SEC filed its civil lawsuit on April 16, and the move seems to confirm what many people have long believed: The world of Wall Street is indeed rigged, and investors are the ones who wind up on the losing end.

“The SEC suit against Goldman, if proven true, will confirm to people their suspicions about the total selfishness of these financial institutions,” said Steve Fraser, a Wall Street historian, in an April 18 article in the New York Times. “There’s nothing more damaging than that. This is way beyond recklessness. This is way beyond incompetence. This is cynical, selfish exploiting.”

Tourre is the only Goldman Sachs employee named in the SEC’s complaint. As for the deals Tourre created, they consisted of collateralized debt obligations (CDOs), which were contingent on the performance of risky mortgage-related securities. Those details, however, were never disclosed to investors, according to the SEC.

In the SEC’s complaint, Tourre is accused of structuring the CDO, called ABACUS 2007-AC1, with input from the hedge fund Paulson & Co. The CDO itself held some of the riskiest assets around, a key fact that allegedly was never stated in any marketing materials related to ABACUS or by Tourre when he sold the investments to investors. Regulators say Paulson then bet against the CDO. Again, investors in the CDO were never told about Paulson’s role or intentions.

When the housing market began to spiral out of control in 2007 and 2008, ABACUS felt the pain. In an e-mail that Tourre sent to a friend on Jan. 23, 2007, he states the following:

“More and more leverage in the system, The whole building is about to collapse anytime now…Only potential survivor, the fabulous Fab[rice Tourre]…standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!”

Another e-mail from Tourre – this one dated Feb. 11, 2007 – reads as follows:

“The CDO biz is dead we don’t have a lot of time left.”

And neither did investors as it turns out. When the housing market collapsed, investors in ABACUS 2007 AC1 suffered losses of more than $1 billion, according to the SEC. Paulson, meanwhile, made a profit of about $1 billion. And Goldman Sachs? It was paid about $15 million for structuring the bonds and selling them to investors.

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