Wall Street Poems and Crimes

word_crimes_wall_streetI recently participated in a poetry reading on the themes of money, “the market”, and values.[1] The reading inspired in me two things. First, a wistful musing on the value of words. Second, a deeply unpopular view of supposed Wall Street crimes that will make you hate me.

Wistful musing

One question occurred to me before and during the reading: What monetary value do words have?

Few poets, I assume, denigrate words by assigning a specific monetary value like we would to coins or currency. How base, to assign a financial measurement, a weight to these infinitely flexible materials of art!

And yet, what poet has not at some point lamented the lack of financial reward for her craft? Ever the contrarian, I decided to look for the most valuable word combinations on the planet.

At the reading, I recalled this semi-infamous piece of poetry from the year 2000.

“LFMN at $4. I can’t believe what a POS[2] that thing is. Shame on me/us for giving them any benefit of the doubt.

ATHM is such a piece of crap

No helpful news to relate [regarding ICGE], I’m afraid. This has been a disaster – There really is no floor to the stock”

Those lines were worth $104 million in 2002.

The author, Henry Blodget, personally paid $4 million and pled guilty to securities fraud and agreed to a lifetime ban from the industry. The other $100 million came from his former employer Merrill Lynch.

That proved to be a valuable word combination indeed.[3]

Here’s another centaur work, half-poetry, half-prose from 2007, written by Fabrice “Fabulous Fab” Tourre, a Goldman VP who structured mortgage CDOs:

“More and more leverage in the system, the whole building is about to collapse anytime now…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 monstrosities!!!”

And another from the same author:

“When I think that I had some input into the creation of this product (which by the way is a product of pure intellectual masturbation, the type of thing which you invent telling yourself: “Well, what if we created a “thing,” which has no purpose, which is absolutely conceptual and highly theoretical and which nobody knows how to price?”) it sickens the heart to see it shot down in mid-flight…it’s a little like Frankenstein turning against his own inventor ;)”] [4]

Those words, coupled with a few others memorialized in emails and congressional exhibits, cost Goldman Sachs $550 million to settle a civil lawsuit in 2010.

Those are some of the most valuable word combinations ever, no?

word_crimesTourre himself paid $850,000 and later enrolled in an Economics PhD program at the University of Chicago.[5]

Prosecution by words

One of the tropes of our post-Great Recession era is how disappointingly few – ok, the number is zero – executives of major Wall Street were prosecuted or went to jail. Markets crashed, trillions in dollar value disappeared, hundred of billions of taxpayer money bailed out Too Big To Fail Banks, millions lost their jobs, and then: nobody went to jail.

You might have your explanation for that result. I might have mine.

You might see the lack of criminal prosecutions of financial executives as a sign that “the system is rigged” in favor of the rich and powerful.

I don’t disagree that the world favors the rich and powerful. This rigging includes aspects of our own modern criminal justice system. But I disagree that this explains the lack of Wall Street prosecutions.

Ok, now you’re going to hate me. The real reason no one went to jail is because Wall Street executives didn’t actually commit any crimes. The cases against Blodget and Tourre – the finance poets quoted above – were absurd. These were mid-level folks doing their job, which often meant selling products they weren’t fully enamored with. Every finance person I’ve ever known, myself included, has done this. I assume most salespeople, in any industry, have done this. I mean, have you tried to buy a car, ever? The mistake Blodget and Tourre made was two-fold: First, having independent thoughts about their products, and second, writing them down.

henry_blodgetWe have developed a regulatory tradition in the United States of punishing Wall Street through embarrassing email disclosure.

The pattern goes like this:

  1. The market crashes in a particular sector. Like tech in 2000. Or mortgage CDOs in 2008
  2. The public seeks a scapegoat for their losses
  3. Prosecutors and regulators subpoena all emails of Wall Street professionals in that investment sector
  4. Some 29-year-old Vice President at a major Wall Street firm is found to have written an unwise disparaging comment about an investment in that sector two years ago.
  5. Wall Street firms’ lawyers humbly approach prosecutors and ask “how much?”
  6. Wall Street firm pays hundreds of millions, maybe even a few billion, says sorry, VP is fired.
  7. The public is mollified, Wall Street firm is relieved, the shares rally.

The fact that Fabulous Fab knew his CDOs were ridiculous derivatives doesn’t distinguish him from many other salespeople in many industries selling products they don’t have 100 percent confidence in. The fact that Henry Blodget knew the internet dogs his company touted were flawed makes him insightful rather than criminal, in my book.

fabrice_tourre
Fabrice Tourre

The tradition of settlement-by-embarrassing-email leaves me dissatisfied. I’m embarrassed for the poor 29-year-old Vice President who didn’t heed the very clear order from training class to never write down anything that you don’t want to read in the headlines of a daily newspaper. I’m annoyed with the lawyers at the enforcement agency, who rely on a “gotcha” email to win a big financial settlement with Wall Street – in a way that often misses the bigger picture.

Gotcha emails distract from this bigger picture: It should not be a crime to express doubts about your product. Any intelligent person who spends time among risky investments constantly questions their investments, their own products included And yes, I understand this is a deeply unpopular view.

More importantly, gotcha emails lull us into thinking that regulators are doing their jobs. They keep us from asking important questions like how to shrink Too Big To Fail banks. Those who wrote the costly poems above no longer work on Wall Street, for example, but the sudden demise of those banks might still crash our system.

And finally, one more question: why aren’t ordinary poets paid more for their words?

I just also needed an excuse to post this video.

[1] If you’re curious, the main reading was from The Market Wonders by Susan Briante, which I reviewed on my site.

[2] “Piece of Slime?” Who knows?

[3] As a footnote to the story and in the interest of full disclosure, Blodget later became editor-in-chief of the successful finance tabloid Business Insider, which used to pick up my writing online.

[4] Another word crime: Fabulous Fab misuses the reference. C’mon man, Frankenstein is the name of the inventor, not the monster.

[5] In the interest of full disclosure, I worked at the same firm and tried my best to sell Mortgage CDOs a few years before that, but I never overlapped with Fabulous Fab.

A versions of this ran in the San Antonio Express News and Houston Chronicle

Please see related post:

Book Review of The Market Wonders by Susan Briante

Four Factors Favoring Fabulous Fab

 

 

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Four Factors Favoring Fabulous Fab

The Fairy Tale SEC suit against Fabulous Fab
The Fairy Tale SEC suit against Fabulous Fab

Below are my reactions to the US Securities and Exchange Commission fraud suit that began yesterday against “Fabulous Fab” Fabrice Tourre, a Vice President at Goldman Sachs for structured products.

From what I gather in the press, the Feds are suing Fabulous Fab for the following reasons:

  1. He sent embarrassing emails to his girlfriend revealing anxiety about the performance of his markets.
  2. He did not fully disclose his and Goldman’s simultaneous role as broker between one client – John Paulson & Co – who wanted to short mortgage derivatives, and another client ACA Financial Guaranty Corp – who wanted to go long mortgage derivatives.
  3. He’s French.[1]

Listening to the news last night I realized that people might actually think Fab is to blame here.  That is a travesty.  The SEC’s suit is a joke, albeit a really unfunny one if you’re Fab.

Fab is no more to blame for investors’ losses in a CDO known as the Abacus 2007-AC1 than any broker who sold you shares in any publicly traded stock in the year 2007 which subsequently halved in value by the end of 2008.

The SEC prosecution appears to rest primarily on the idea that Goldman brought together clients with opposite views of the mortgage derivative market, and then didn’t tell all sides of the trade who everyone was.

Factor #1

What?!!  You mean to tell me Goldman brought together clients with opposite views on the market?

One of the disappointing aspects of William Cohan’s Money and Power: How Goldman Sachs Came to Rule the World is Cohan’s seeming misunderstanding of how a broker-dealer works.  Cohan seems shocked, as the SEC attorneys in the Fab trial want the jury to be shocked, that Goldman could match up clients with diametrically opposed views on the mortgage derivative market.

Hey guys?  Let me give you pro tip:  That’s how a broker-dealer works.

It’s the job of a broker to find willing buyers and willing sellers, all day long, to take diametrically opposed views on the future direction of securities and markets.  It’s also the broker’s job to generally protect and make anonymous the counterparties to a trade.

[NB: Cohan clearly does know how a broker-dealer works and he has an excellent review of the Fab case here on Bloomberg.  My jab at him is about his book in which he doesn’t clarify just how ridiculous Sen. Carl Levin, and by extension the SEC’s theory is, on potential conflicts of interest within a broker-dealer]

So the fact that Paulson and ACA had different views on mortgages means that Goldman did its job.  The fact that Goldman didn’t overly advertise the central role of Paulson in the CDO structuring is not evidence of a crime.

The level of expected disclosure in CDO structuring will be a combination of

1. law, and

2. informally agreed-to market standards.

I spent enough time around the persnickety legal compliance folks at Goldman to have confidence that Fab’s team complied with the letter of the law over counterparty disclosure, or what is called in the business ‘name give-up.’

Some types of trades require it, some types of trades forbid it, and some types of trades will rely on market standards to determine the correct level of disclosure.

At the moment of structuring the Abacus CDO it’s less clear to me, from a distance, whether Fab’s team reached a less formal level of ‘market standard’ when it came to disclosing Paulson’s role.  But market standard is a kind of nebulous concept for which I can’t believe Fab can be found guilty by the SEC

Factor #2

Why go after Fab and not bigger fish?  Because he’s the only one against whom you could find embarrassing emails to his girlfriend?  (Give him a break.  He’s French.)

Fab was a relative nobody.  Like Greg Smith (of Muppets fame), or like me, Vice Presidents are in charge of very little at a Wall Street firm.  From his ill-advised emails we gather he was an over-worked, under-sexed, anxious, and narcissistic guy, but what 31 year-old on Wall Street isn’t all of those things?  If that’s a crime, then lock ‘em all up.

I’m not a fan of the Eliot Spitzer- trademarked prosecution-and-trial by embarrassing email.[2]  That appears to be why Goldman settled for $550 million with the SEC a year ago, because of Fab’s anxious, flirty emails to his girlfriend.[3]  Goldman, as is typical in these situations, did not admit guilt, they just paid the money in order to move on.

I’m not saying the SEC shouldn’t bother to prosecute bad actors even if they are low on the totem pole, but I am saying two things:

1. Fab was a small cog in a big machine doing exactly what he was paid by his bosses to do, and

2. There’s nothing bad about what he did except try to sell squirrely investments to willing, professional, sophisticated buyers.  And that’s his job!  CDOs are squirrely.  Everybody knows that.  CDOs, we used to say on the desk, are “sold, not bought.”  Meaning, once you’ve placed them in a client’s portfolio, pray they never ask to sell them back to you.  You do not want to buy them back.  They’re too squirrely.

Factor #3

ACA was no innocent victim

ACA was not an ‘innocent victim’ of mean, nasty brokers tricking them into buying destined-to-soon-fail derivatives.  These were highly compensated, professional, CDO investors.  ACA charged their customers millions of dollars in fees, and collectively paid themselves millions of dollars in compensation, to provide their “unique insight” into buying complex financial products.

As Michael Lewis pointed out before in The Big Short, if any fraud or crime was being perpetuated, it was by ACA on their own customers, for pretending they knew how to separate the profitable from the unprofitable, the gold from the dross, the good from the garbage.  If you can’t do that, you’re just tricking your own customers.  If you lose money buying a terrible product in the way ACA did, you should only blame yourself.

Factor #4

But ACA was on the wrong side of John Paulson without knowing it.  Paulson’s a genius!  It’s so unfair!

John Paulson in 2007 was not John Paulson.  He was just another contrarian hedge fund guy taking a swing at the overly frothy mortgage and housing market.  Everybody who had done this type of trade previously – betting big against mortgage credit and housing in the run-up – from 2001 to 2007 – had lost their shirt, as the market moved against them.

Everybody who took Paulson’s side of the trade before things broke in 2007 was an idiot and a money loser.  What’s obvious now in retrospect was not obvious then.  The ACAs of the world – buying the stupid, illiquid, highly-levered subprime, garbage CDOs – had made much more money in the previous years than the John Paulsons of the world.

That’s why Paulson was so damned successful.  Because there were only a few Paulsons around to take the other side of the mortgage derivative trade in 2007.

Being on the short-side, like Paulson dared to be, appeared to be for suckers.

ACA must have been laughing all the way to the bank.

 

If Fab is guilty, then I’m the big bad wolf.

Bloomberg News wrote that

U.S. District Judge Katherine Forrest, who will oversee the trial in Manhattan, summed up the SEC’s allegations this way in a June 4 opinion: “Tourre handed Little Red Riding Hood an invitation to grandmother’s house while concealing the fact that it was written by the Big Bad Wolf.

The SEC’s version of the case is so absurd it’s hard for me to believe they’re pursuing it.  It’s a fairy tale.



[1] In my opinion, this is the only valid reason of the three.

[2] For more on this, as well as a great primer on why Spitzer should never, ever, be elected dog-catcher, I recommend this blast-from-the-past article.

[3] Broker-dealers always, always, always settle with regulators because the cost of fighting regulators in court is that you’re out of business.

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