April 27 (Bloomberg) -- Fabrice Tourre, the Goldman Sachs Group Inc. executive director sued by the Securities and Exchange Commission for fraud, told a Senate subcommittee that he will defend himself in court against the suit.
“I deny categorically the SEC’s allegations,” Tourre, 31, said today at a standing-room-only hearing of the Permanent Subcommittee on Investigations in Washington. “I will defend myself in court against this false claim,” he said, adding that a deal at the center of the suit “was not designed to fail.”
Tourre spoke after protesters dressed in prison garb held up signs reading “shame” and one shouted, “Too big to fail but not too big for jail.” Six other current and former Goldman Sachs employees including Chief Executive Officer Lloyd Blankfein are testifying today about the firm’s mortgage-securities business in the years leading up to the biggest financial crisis since the Great Depression. Goldman Sachs, the most profitable securities firm in Wall Street history, contests the SEC’s suit, saying it provided investors with all of the information they needed.
In early 2007, as the U.S. housing market teetered, Goldman Sachs created and sold a CDO linked to subprime mortgages without disclosing to investors ACA Management LLC and IKB Deutsche Industriebank AG that hedge fund Paulson & Co. helped pick the underlying securities and bet against the vehicle, known as Abacus 2007-AC1, the SEC said.
In its complaint, the SEC alleged that Tourre misled ACA into thinking that Paulson planned to invest in the equity, or riskiest piece, of the deal instead of betting against it by buying credit protection.
‘Most Important Clients’
“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,” Tourre told the panel, as media including television crews from Japan and Russia looked on. “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.”
Tourre also told the panel that ACA and IKB were “institutions with significant resources and experience in the CDO market” and that they “were two of the most important clients of my desk.”
“Goldman Sachs also had no economic motive to design the AC-1 transaction to fail,” said.
“I have been the target of unfounded attacks on my character and motives,” Tourre said. “I appreciate the opportunity to appear before the subcommittee to answer these false charges.”
The line to get into today’s hearing stretched down the corridor on the first floor of the Dirksen Senate office building, the equivalent of half a city block. At the head of the line were four protestors dressed in jail stripes holding “wanted” posters for Tourre and Blankfein.
“Blankfein’s not doing God’s work, he’s doing the work of the devil,” one of the protestors said, referring to a comment Blankfein made in November while defending the banking industry.
Tourre was placed on paid leave by Goldman Sachs after the Securities and Exchange Commission filed its suit on April 16. Joining him on the first panel of witnesses were Michael Swenson, a managing director in the structured products group, Joshua Birnbaum, a former managing director in the same group, and Daniel Sparks, a former partner who ran the mortgage department.
Later today, the panel will hear from David Viniar, the firm’s chief financial officer, and Craig Broderick, the chief risk officer. Blankfein, 55, will be the final witness at the end of the day.
Goldman Sachs made an estimated $3.7 billion in 2007 by placing “heavy bets” against mortgage-linked securities, including some it created, Carl Levin, a Michigan Democrat who leads the investigations panel, said.
“Goldman Sachs didn’t just make money, it profited by taking advantage of its clients’ reasonable expectation that it would not sell products that it did not want to succeed and that there was no conflict of economic interest between the firm and its customers,” Levin said today in his opening remarks. “Its conduct brings into question the whole conduct of Wall Street.”
Blankfein, in his prepared remarks, said the firm “didn’t have a massive short against the housing market and we certainly did not bet against our clients.”
Tourre “believes that he indicated” to investors that Paulson was interested in taking a “short” position on the deal, meaning he was betting against it, Greg Palm, Goldman Sachs’s co-general counsel, said last week.
Sen. Susan Collins, a Republican Senator from Maine, said in her opening Statement that “even legal practices can raise ethical concerns.”
“There is something unseemly about Goldman betting against the housing market at the same time as it is selling to its clients mortgage backed securities containing toxic loans,” Collins said.
“The whole building is about to collapse anytime now,” Tourre wrote to a friend in a January 2007 e-mail, according to the SEC complaint. “Only potential survivor, the fabulous Fab... standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!”
‘Not Too Brilliant’
In a March 7, 2007, e-mail released by the firm, Tourre described the U.S. subprime mortgage market as “not too brilliant” and said 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!!!”
John McCain, the Republican Senator from Arizona, said he didn’t know if anything Goldman Sachs did was illegal.
“But from the reading of these e-mails and the information that this committee has uncovered there’s no doubt that their behavior was unethical,” McCain said. “The American people will render a judgment as well as the courts.”
To contact the reporters on this story: Christine Harper in New York at firstname.lastname@example.org; Lorraine Woellert in Washington at email@example.com; Ryan J. Donmoyer in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Alec McCabe at email@example.com