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Commentary: A Message to Wall Street's Fabulous Fabs


Goldman will survive, but the expectations have changed

If you happen to be sitting on the Goldman Sachs (GS) bond-trading floor, life must feel horribly unfair. You did nothing worse than live by the ethical assumptions of your market—any money-making event short of obviously illegal is admirable—and now your own grandfather thinks you're some kind of monster. Your world feels upside down. What was right is now wrong, what was good is now bad, what once felt like winning now feels like losing. You're probably wondering: What next? What will the angry rabble—all those ordinary people who can never really understand your business—now demand that you explain to them, so they can disapprove of you all over again?

Here, for a start, is what the world beyond Wall Street is entitled to:

Full knowledge of the inner workings of your proprietary trading desk. In particular, the moment-to-moment dealings of your correlations traders from late 2004, when they first exploited AIG's (AIG) idiotic willingness to sell cheap insurance on pools of subprime mortgage loans, until the end of 2007, when they would have taken most of their profits from the total collapse of the subprime bond markets.

Your bosses claim to have lost $100 million or more on the Abacus trade for which your firm is being sued. This seems, to put it mildly, disingenuous. In March 2007, the time of this particular Abacus trade, your prop traders were already short the subprime market. Would they really have taken a naked long position in a deal you helped to construct precisely so that it would fail, without offsetting in some other way on their books?

Sadly, it will not suffice to offer up Fabrice Tourre as a ritual sacrifice. No one is going to accept a then-27-year-old Frenchman, whose job was apparently to keep sweet the patsies on the other end of your trades, as the world's authority on your trading positions. His name isn't even on the top of the list of Goldman traders on the $2 billion Abacus deal for which you are being sued. The name on top of that document is "Jonathan Egol." Egol appears to have been the bond trader at the center of your Abacus program. The same Jonathan Egol who told fellow traders in 2006—a year before this transaction—that the subprime market was doomed. The public eventually will ask: Who is Jonathan Egol, and what exactly was his game?

Then there's the matter of your relations with the inaptly named "CDO manager." In this case, the manager was ACA but it wasn't the only one. Others were equally pliable. The Securities & Exchange Commission lawsuit charges you with using ACA as a shill: The investors in these deals assumed that it was ACA's job to figure out whether the bonds inside the collateralized debt obligations were intelligent investments. But ACA quite clearly had no idea what it was doing—and you quite clearly understood that.

The telling details here are the e-mails between your French salesman and ACA in which ACA feels it needs to understand exactly what John Paulson's interests are in this new CDO. Paulson, who had done a great deal of analysis on the underlying bonds, was of course picking the ones he wanted to see inside the CDO. (Hard to understand why it didn't disturb you that he was even in the conversation, by the way, but that's another story.) The SEC accuses you of lying to ACA by suggesting that Paulson was a long investor in the deal when he was in fact selling the deal short.

What's interesting here is what you appear to take for granted: that ACA has no talent for evaluating the bonds picked by Paulson. After all, if ACA was doing its job it wouldn't have cared one way or the other what Paulson (then a third-tier hedge fund manager) was up to. ACA would have known which bonds were good and which were bad, and picked the good ones. In their anxiety about Paulson's motives we can all glimpse their incompetence. They want to know that Paulson has an interest in picking the good ones because they themselves have no clue which ones they are.

But if a CDO manager had no independent ability to select the bonds inside a CDO, then what, please explain to us, was its financial function? Why did you select ACA to manage your deal?

Finally, what is the reason for being so unconcerned for so long with the consequences of your actions? The masses deserve to know, for instance, how you became blinded to the very simple difference between right and wrong. The more moralistic among them will ask the question mainly to fuel their own outrage, the more tactical will ask the question because they sense that the financial system doesn't function unless you have the incentive to think in these terms—and you clearly do not. What begins as an effort to change your business may well end up as an attempt to change your soul.

Just as there was a time when people could smoke on airplanes, or drive drunk without guilt, there was a time when a Wall Street bond trader could work with a short seller to create a bond to fail, trick and bribe the ratings agencies into blessing the bond, then sell the bond to a slow-witted German without having to worry if anyone would ever know, or care, what he'd just done. That just changed.


We Almost Lost the Nasdaq
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