That supports the defense Goldman has laid out against the SEC's charges. The company contends that investors in its so-called Abacus, or AC-1, instrument were fully aware of the risks. Echoing that line, Tourre told a Senate panel that he never indicated to ACA Capital, the firm that managed Abacus, that a hedge fund run by John Paulson was taking a "long" position in the deal in the expectation that it would gain value.
"â€¨I never told ACA, the portfolio selection agent, that Paulson & â€¨Co. would be an equity investor in the AC-1 transaction or would take any â€¨long position in the deal," Tourre said in prepared testimony.
Tourre also said he told ACA that Paulson was buying credit protection against certain slices of Abacus, which effectively meant that he, Paulson, intended to short the CDO.
"If ACA was confused about Paulson's role in the transaction, it had every opportunity to clarify the issue," Tourre continued. "Representatives of Paulson's fund participated directly in all of my meetings with ACA regarding the transaction. I do not ever recall ACA asking me or Paulson's representatives if Paulson's fund would be an equity investor.... Quite frankly, I am surprised that ACA could have believed that the Paulson fund was an equity or long investor in the deal."
Asked why he didn't tell ACA directly that Paulson planned to bet against Abacus, Tourre said it wasn't clear at the time what "tranches" of the CDO the investor intended to short.
Tourre did admit to one error. He acknowledged failing to write that Paulson and another investor, German bank IKB, had helped ACA select the securities in Abacus. That's potentially important because the SEC's case rests on the agency's claim that Goldman failed to tell investors in the CDO that Paulson picked some of its underlying bonds.
Still, lawmakers went easier on Tourre than might be expected, choosing to focus on the other, more senior Goldman execs who testified. That's in line with what is apparent in the SEC suit: Fabrice may be fabulous, but he is considered small-fry. The goal -- legally and politically -- is almost certainly to follow the evidential train up to the top of Goldman (CEO Lloyd Blankfein is scheduled to appear this afternoon.)
Sen. Mark Pryor, D-Ark., pressed the former Goldman officials on whether the company's actions contributed to the housing crisis. Absolutely not, they asserted, while mouthing the usual platitudes about accepting "full responsibility" for their actions. Said Daniel Sparks, who headed Goldman's mortgage department from 2006 to 2008:
It's clear that credit standards overall got loose. Risk wasn't respected across the industry, and we were part of the industry. I don't have any regrets about doing things that I think were improper. But we were participants in an industry that got loose.By contrast, some lawmakers at the hearing seemed confused about what, exactly, they were doing there. Several harped on Goldman making a bundle by betting against the housing market in 2007 and 2008 through its CDOs and other mortgage-backed securities.
Let's get this straight -- there's nothing wrong with that. Home prices were absurdly high in those days. Goldman and other investors who pricked the bubble by shorting the market helped end the charade.
The real question here is if Goldman sold people a bill of goods by pushing products they secretly designed to fail. We also need to get to the bottom of how often Wall Street firms play clients off each other for fun and profit, and, while we're at it, whether CDOs serve any constructive economic purpose.
Image from C-Span