The Banker at the Center of the Storm

"He's a kid...making $2 million a year. He's easier to intimidate...."

An indiscreet e-mail written by Fabrice Tourre, the banker at the center of the U.S. government's investigation of Goldman Sachs, helped the Securities & Exchange Commission build its case against the investment bank. Now, Tourre, a young French citizen who called himself the "Fabulous Fab" in that e-mail, finds himself at the center of a major showdown between Washington and Wall Street over the financial crisis.

Tourre has agreed to testify at a Senate hearing on Apr. 27, along with Goldman Chief Executive Officer Lloyd Blankfein. What he has to say may offer interesting clues about the early direction of the government's legal case against Goldman. The SEC sued Tourre and Goldman Sachs last week, contending that they did not tell investors in a 2007 collateralized debt obligation that hedge fund Paulson & Co., which planned to bet against the CDO, played a significant role in selecting the underlying mortgage-backed assets.

The SEC likely named Tourre in the lawsuit to put pressure on him to "roll over," says Elizabeth Nowicki, a former SEC lawyer. "They're hoping that he tells the SEC whatever he knows about this case or other fraudulent transactions he might know of," she says. "He's a kid, with a lot of ego, making $2 million a year. He's easier to intimidate than a senior executive."

Tourre, who joined Goldman Sachs in 2001 straight out of Stanford University, worked in the firm's New York-based mortgage securitization trading operation just as the housing market was unraveling. One former employee remembers him as smart, detail-oriented, and "putting in ungodly hours" as he tried to come up with clever ways to create complex securities.

A strand of this story worth watching, attorneys say, will be any sign of Goldman executives distancing the firm from Tourre's actions. "It's all going to be a factual dispute about what he remembers and what the other folks remember on the other side," Greg Palm, Goldman's co-general counsel, said in an Apr. 20 call with reporters, without naming Tourre. The Wall Street bank has denied wrongdoing and said it will fight the SEC's case because it's "completely unfounded in law and fact." Pamela Chepiga, Tourre's lawyer at Allen & Overy in New York, didn't return two calls seeking comment. Tourre, who also couldn't be reached, likely will seek to defend his conduct before the Senate permanent subcommittee on investigations, say two people briefed on his appearance.

Goldman placed Tourre, now an executive director based in London, on indefinite paid leave and de-registered him with the U.K.'s Financial Services Authority. The bank hasn't publicly suggested that he acted wrongly. In the Apr. 20 call, Palm said that "if we had evidence that someone here was trying to mislead someone, that's not something we'd condone at all, and we'd be the first one to take action." Nowicki sees that statement as keeping the door open to a "rogue trader" defense. Charles Whitehead, a law professor at Cornell University, thinks Goldman's even-handed treatment of Tourre so far would make that tough: "They're clearly saying that they haven't found anything on Tourre themselves. Otherwise, they would have punished him earlier."

Government investigators obtained an e-mail from January 2007 in which he wrote: "The whole building is about to collapse anytime now." Tourre also wrote that the "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!!!"

The SEC will need much more than an e-mail to win its case against Tourre or implicate other, more senior, Goldman executives. Based on its response so far, the investment bank does not seem worried, says Nowicki: "Goldman is as overly confident as one would have thought."

The bottom line: Much is riding on whether the SEC's case against Goldman Sachs ends with Fabrice Tourre or just begins with him.

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