An executive at embattled Goldman Sachs (GS)
denied before a Senate panel today that he misled investors in a synthetic collateralized debt obligation (CDO) tied to the performance of subprime residential mortgage-backed securities (RMBS).
The Securities and Exchange Commission
(SEC) is charging investment bank Goldman and the executive director of its structured products group trading, Fabrice Tourre, for allegedly making misleading statements about the CDO transaction, ABACUS 2007-AC1.
Tourre, testifying at the Senate Permanent Subcommittee on Investigations hearing on the role of investment banks in the financial crisis, denied the SEC's claims.
"I deny -- categorically -- the SEC’s allegation. And I will defend myself in court against this false claim," Tourre said in a prepared statement
As HousingWire previously reported
, the Subcommittee uncovered a trail of internal e-mails that allegedly indicate Goldman knowingly profited amid the collapse of the housing market and the related financial products.
“The 2009 Goldman Sachs annual report stated that the firm ‘did not generate enormous net revenues by betting against residential related products,’” said Subcommittee chairman Sen. Carl Levin (D-MI). “These e-mails show that, in fact, Goldman made a lot of money by betting against the mortgage market.”
Another Subcommittee member, Sen. Claire McCaskill (D-MO), said Goldman had less oversight of its risk-taking practices in the synthetic market -- or the "lala land of ledger entries" -- than a pit boss in a Las Vegas casino.
Tourre told the Subcommittee that seasoned investors were aware of the risk inherent in CDOs and other synthetic products. He said there were only two investors on the ABACUS transaction -- specialty financial services firm ACA
and German bank IKB
-- which he called "institutions with significant resources and extensive experience in the CDO market."
Tourre also said he informed ACA that hedge fund Paulson & Co.
was expected to buy credit protection on some of the senior tranches, therefore taking some short exposure in the deal. He denied ever telling ACA that Paulson's fund would be an equity investor.
"If ACA was confused about Paulson's role in the transaction, it had every opportunity to clarify the issue," he told the Subcommittee. He also denied the ABACUS transaction was "designed to fail."
"ACA and IKB were two of the most important clients of my desk," Torre said. "Moreover, the securities referenced in the transaction did not underperform the other securities of that ratings class and vintage. All of the securities of that ratings class and vintage performed poorly because of the subprime mortgage market suffered a broad collapse."
He noted Goldman had "no economic motive" to structure the deal for failure. In fact, Goldman had a long exposure in the transaction, just like ACA and IKB. Tourre said Goldman's losses in connection with the transaction ultimately exceeded $100m, including $83m with respect to the retained long position.
Also noted ACA, not Paulson & Co., selected the portfolio of securities referenced in the deal. As the SEC complaint says, ACA rejected most of the suggestions provided by Paulson. So Goldman was correct in its representation to investors that ACA selected the securities, according to Tourre's testimony.
"[T]he last week has been challenging for me and my family, as I have been the target of unfounded attacks on my character and motives," he said. "I wish to repeat -- I did not mislead IKB or ACA, two of the most sophisticated institutional investors in these products anywhere in the world."
Write to Diana Golobay
Disclosure: the author holds no relevant investments.