A Goldman Sachs vice president, Fabrice Tourre, who is named in the Securities and Exchange Commission’s civil suit filed on April 16 against the Wall Street firm, told the Senate Government Affairs Subcommittee on Investigations on Tuesday, April 27, that he denies “categorically” the SEC’s allegations that he “failed to disclose to investors certain material information” regarding a synthetic collateralized debt obligation (CDO) transaction that he helped to structure. “I will defend myself in court against this false claim,” Tourre said.
Speaking about the CDO transaction he helped to create–named ABACUS 07 AC-1, which was connected to the performance of residential subprime mortgage backed securities (RMBS)–Tourre said that “the only two investors in this transaction, ACA and IKB, were institutions with significant resources and extensive experience in the CDO market.” ACA, he said, “was a specialty financial services company that, at year-end 2006, managed 22 CDOs with approximately $16 billion in assets. IKB, a large German bank, had a separate mortgage group and was an active participant in the CDO market.” Tourre noted that according to IKB, as of January 2007, the company “had launched and managed more than $16.8 billion of CLOs and CDOs and viewed securitizations and CDO investments as an integral part of their business model.”
The SEC complaint alleges it was not disclosed to investors that “a large hedge fund, Paulson & Co. Inc. [the fund led by John Paulson] with economic interests directly adverse to investors in the ABACUS 2007-AC1 CDO, played a significant role in the portfolio selection process.” The SEC further alleges that Paulson’s firm “effectively shorted the portfolio,” by creating credit default swaps (CDS) with Goldman Sachs, and that Paulson, because of this “short interest,” had and “economic incentive” to pick RBMS that it expected would drop in value for the portfolio.
In his testimony, Tourre said: “I never told ACA, the portfolio selection agent, that Paulson & Co. would be an equity investor in the AC-1 transaction or would take any long position in the deal.” He continued: “Although I don’t recall the exact words that I used, I recall informing ACA that Paulson’s fund was expected to buy credit protection on some of the senior tranches of the AC-1 transaction. This necessarily meant that Paulson was expected to take some short exposure in the deal. Moreover, from the early stages of the transaction in January 2007 to its completion several months later, none of the offering documents, including the term sheets, flip book, and offering circular, provided to ACA indicated that Paulson’s fund would be an equity investor.”
When asked by one of the committee members whether Goldman “did something wrong with synthetic CDOs,” Dan Sparks, who served as head of the mortgage department at Goldman Sachs from late 2006 until mid-2008, and who testified along with Tourre, conceded that Goldman did “deals” that didn’t perform well and that the Wall Street firm did make mistakes, but Sparks said he did not believe that Goldman did anything “inappropriate,” which is what he said the word “wrong” implies.