Goldman's Tourre E-Mail Describes `Frankenstein' Derivatives

Fabrice Tourre, a Goldman Sachs Group Inc. executive director facing a fraud lawsuit in the sale of a mortgage-linked investment, said an index that facilitated derivatives trading in the market was “like Frankenstein.”

The so-called ABX index is “the type of thing which you invent 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?’” Tourre said in a Jan. 29, 2007, e-mail released yesterday by Goldman Sachs. Watching the index fall is “a little like Frankenstein turning against his own inventor.”

Goldman Sachs, the most profitable securities firm in Wall Street history, released more than 70 pages of e-mail and other documents yesterday ahead of a U.S. Senate subcommittee hearing on the firm’s actions throughout the mortgage meltdown. The firm disputes the U.S. Securities and Exchange Commission’s claim that Goldman Sachs and Tourre, now 31, misled investors in a 2007 collateralized debt obligation about the role played by hedge fund Paulson & Co., which bet the CDO would collapse.

The ABX index enabled investors to trade derivatives known as credit default swaps on different portions of the subprime mortgage market without actually owning loans or securities.

Widows and Orphans

In a March 7, 2007, e-mail Tourre describes the U.S. subprime mortgage market as “not too brilliant” and says that “according to Sparks,” an apparent reference to Daniel Sparks who ran Goldman Sachs’s mortgage business at the time, “that business is totally dead, and the poor little subprime borrowers will not last too long!!!”

The timing of the e-mails overlaps with his work on the Abacus 2007-AC1 bond that is at the center of the SEC’s lawsuit. The Abacus deal was sold to IKB Deutsche Industriebank AG and ACA Management LLC between January and April 2007.

A few months later, a June 13, 2007, e-mail shows Tourre claiming, “I’ve managed to sell a few Abacus bonds to widows and orphans that I ran into at the airport, apparently these Belgians adore synthetic ABS CDO2,” using short-hand for asset- backed collateralized debt obligations squared, or CDOs made up of tranches of CDOs containing asset-backed securities.

Pamela Chepiga, an attorney at Allen & Overy LLP in New York who represents Tourre, didn’t reply to a voicemail seeking comment.

‘Trigger the Crisis’

Tourre and Sparks are among seven current and former Goldman Sachs executives who are scheduled to face questioning by the Senate’s Permanent Subcommittee on Investigations, led by Michigan Democrat Carl Levin, on April 27. Levin, 75, issued a statement yesterday saying his panel’s investigation shows that Goldman Sachs and other investment banks “were self-interested promoters of risky and complicated financial schemes that helped trigger the crisis.”

One of Goldman Sachs’s legal advisers is K. Lee Blalack II, a partner at the law firm of O’Melveny & Myers LLP in Washington and a former chief counsel and staff director of the Permanent Subcommittee on Investigations, according to his biography on the firm’s Web site. Blalack fired off a letter to Levin on April 23 after Levin made similar comments about Goldman at a hearing.

“The statement suggests that you and the subcommittee have already drawn conclusions about the conduct of Goldman Sachs,” the letter said. “We strongly disagree with your statement at today’s hearing and believe that, if we were provided an opportunity to respond to your specific findings, Goldman Sachs could produce to you information that establishes that your findings are incorrect.”

Uncertain About Market

Goldman Sachs also released e-mails yesterday that supported its argument that senior executives at the company didn’t have a uniform view of the mortgage market’s direction in 2007. The e-mails show that the firm adopted a cautious position on the subprime mortgage market in early 2007 and had more trades that would benefit from a decline in the market than from an increase in prices.

“Of course we didn’t dodge the mortgage mess,” Goldman Sachs Chairman and Chief Executive Lloyd Blankfein wrote in an e-mail dated Nov. 18, 2007, that was also among eight pages of documents made public by the Senate’s Permanent Subcommittee on Investigations. “We lost money, then made more than we lost because of shorts. Also, it’s not over, so who knows how it will turn out ultimately.”

Some e-mails indicate that selling securities to customers was part of the firm’s effort to get rid of its mortgage risk and take a negative stance on the market.

“My basic message is let’s be aggressive distributing things because there will be very good opportunities as the markets goes (sic) into what is likely to be even greater distress and we want to be in a position to take advantage of them,” Chief Financial Officer David Viniar wrote in a Dec. 15, 2006, e-mail to a colleague.

To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net

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The offices of Goldman Sachs Group Inc. in London

Frantzesco Kangaris/Bloomberg

Pedestrians pass the offices of Goldman Sachs Group Inc. at 120 Fleet Street in London, on April 16, 2010.

Pedestrians pass the offices of Goldman Sachs Group Inc. at 120 Fleet Street in London, on April 16, 2010. Photographer: Frantzesco Kangaris/Bloomberg

April 21 (Bloomberg) -- Gregory Zuckerman, a reporter for the Wall Street Journal and author of ``The Greatest Trade Ever,'' talks with Bloomberg's Julie Hyman about Goldman Sachs Group Inc. banker Fabrice Tourre's agreement to testify before the U.S. Senate Permanent Subcommittee on Investigations on April 27. The Securities and Exchange Commission has accused Tourre of misleading investors in a collateralized debt obligation. Tourre will testify along with Goldman Sachs Chief Executive Officer Lloyd Blankfein, according to two people briefed on the plan. (Source: Bloomberg)

April 23 (Bloomberg) -- Bloomberg Businessweek editor Josh Tyrangiel talks with Deirdre Bolton about the latest issue of the magazine, which features a cover story on Goldman Sachs Chief Executive Officer Lloyd Blankfein's testimony before the Senate Permanent Subcommittee on Investigations next week. (Source: Bloomberg)