Forget 'Fabulous Fab': Here's Why Wall Street's Biggest Fish Always Slip Away

Behold the power of plausible deniability.

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This week, a jury found Fabrice Tourre, the Goldman Sachs vice president who put together ABACUS 2007-AC1, a synthetic CDO, liable for securities fraud. This was one of the most famous cases stemming from the financial crisis. In April 2010, the SEC sued Goldman over the deal, and the bank soon agreed to a carefully worded $550 million settlement: it admitted a "mistake" in the marketing materials for the deal while refusing to admit the SEC's allegations.

The SEC pursued its case against Tourre--the only individual charged--and yesterday it got its man. In short, the jury found that Tourre misled investors in ABACUS by leading them to believe that John Paulson's hedge fund would be buying the equity in the deal, which is usually (but not always) an indication that he believed the underlying securities would hold their value. (The equity investor is paid only after all the bond investors, and so is the first to lose money if the securities from which the deal is constructed go into default.) In fact, no one bought the equity: in the actual deal structure, certain tranches were issued "as if" the other tranches existed.

Hooray for the SEC and the jury. If the evidence that has surfaced is accurate, Tourre does appear to have defrauded other participants in the deal. He sent an email saying that a sale of the equity was "precommitted"; he called Paulson the "transaction sponsor," which implies an equity investment; and he knew that ACA (the party that was chosen to sort-of select the CDO portfolio, and also sort-of insured the portfolio*) believed Paulson was the equity investor, and did nothing to correct them.

But anyone who has followed the financial crisis for the past six years must have the nagging feeling that the SEC got the wrong guy. Sure, Tourre screwed up, and he was unlucky enough to have left a few damning emails behind. But ultimately, he was just a cog in the machine, a highly-paid cubicle jockey who was just trying to do what he thought his bosses wanted him to do (which was probably the same as what they actually wanted him to do).

Matt Levine, reading the testimony, thinks that Tourre just wanted to get the deal done, one way or another. This is how dealmakers usually are, especially when they are playing with other people's money. In this case, Tourre seems to have tried to get Goldman--his own bank--to take the long position on the deal, opposite Paulson, because he was afraid the whole transaction might evaporate, leaving him with nothing. People desperate to get deals done are often willing to cut corners. Tourre was undoubtedly similar to hundreds of other people on Wall Street doing the same thing.

Tourre is occasionally made out to be a Goldman "executive," which makes him sound more important (and makes the SEC's victory seem more meaningful). But at the time he was a "vice president" in an industry where title inflation is rampant. Vice president is the level below director (or senior vice president), which is the level below managing director, which is the level below partner--and Goldman named 70 new partners last November.

Working at Goldman, in an intense, performance-driven, numbers-focused culture, Tourre knew that his job was to get deals done. When you tell smart, ambitious people that their job is to produce, they will produce, no matter what it takes. And I don't mean this is in an evil, Tony Soprano, "fix the problem" sort of way. Even if you shade the truth a bit, you're not committing murder. There's a lot to take comfort in: You're dealing with supposedly sophisticated professionals, it's all other people's money (the nice fund investor you're talking to isn't betting his house), and it's quite possible the deal will turn out fine (for the person you're defrauding) anyway.

For the real executives, the optimal strategy is simple: hire people whose ambition outweighs their scrupulousness, measure them by results, and let incentives take care of the rest. Oh, and give them the best securities regulation training money can buy, from the most reputable law firm around, so that you can't be sued for negligent supervision down the line. If things blow up and you're ever summoned to Congress, just say you put your clients' interests first and you had no idea that people were breaking the law.

Because you really didn't know--not for sure, at least. All you did was put them in a position where, you knew, it was likely that some were breaking the law. And you can take that plausible deniability to the bank.

* Sort of, because Paulson suggested most of the bonds to include in the portfolio, and the real insurer was ABN Amro, which stood behind ACA, and was itself acquired by RBS before the deal blew up.