September 26, 2017

DealBook: After Goldman and Before Trial, a Global Education for Fabrice Tourre

Fabrice P. Tourre spent time volunteering on a coffee farm in Rwanda.Fabrice P. Tourre spent time volunteering on a coffee farm in Rwanda.

Fabrice P. Tourre is best known as “Fabulous Fab,” the former Goldman Sachs trader whose e-mails about the mortgage crisis became a symbol of Wall Street hubris and will now highlight the government’s case against him. As the economy was on the brink of collapse, e-mails show Mr. Tourre joked to a girlfriend that he sold toxic real estate bonds to “widows and orphans.”

But an inner circle of friends knows Mr. Tourre from very different dispatches — e-mail updates he sent from Africa during a stint as a volunteer. It was there that “Fabulous Fab,” a nickname he earned from a friend in New York, became known simply as “Breezy.”

“Rwandan coffee yields have significant room for improvements,” he wrote in a March 2011 message to friends, describing his adventure a world away from Wall Street. “Plenty of ideas and projects to focus on, with the ultimate goal to improve coffee farmers’ income and living conditions!”

“Rwandan coffee yields have significant room for improvements,” Mr. Tourre wrote in a March 2011 message to friends.“Rwandan coffee yields have significant room for improvements,” Mr. Tourre wrote in a March 2011 message to friends.

The e-mail, reviewed by The New York Times, provides a rare glimpse into Mr. Tourre’s life after Goldman, and after the Securities and Exchange Commission accused him of misleading investors about a mortgage security that ultimately failed. After his trip to Africa, Mr. Tourre enrolled in an economics doctoral program at the University of Chicago, where professors described him as a “standout” whom they selected as a teaching assistant for more junior students.

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Mr. Tourre’s character will come into focus when his trial opens Monday in a federal courtroom in Lower Manhattan. The human elements of the case, which could be spotlighted when Mr. Tourre takes the witness stand, might sway a jury otherwise bogged down in the minutiae of high finance.

While Mr. Tourre’s time in Rwanda is unlikely to play a role in the trial, he may nonetheless come across as a dynamic professional. Working in his favor, he has already calmly faced a Senate committee. He speaks slowly, the hearing showed, careful to enunciate. Still, jurors may view him as another ambitious Wall Streeter, one with a distinctly foreign accent.

In what is considered the most prominent case stemming from the financial crisis, the S.E.C. is expected to paint Mr. Tourre as a brash up-and-comer at Goldman, willing to sell investors products that were sure to fail. Mr. Tourre’s lawyers, in contrast, could try to portray their client as a bit player in the crisis — a midlevel 28-year-old trader at the time of his actions — who has dedicated his time since Goldman to worthy causes and a life of the mind.

“Fabrice Tourre has done nothing wrong,” his lawyers, Pamela Chepiga and Sean Coffey, said in a statement. “He is confident that when all the evidence is considered, the jury will soundly reject the S.E.C.’s charge.”

Goldman was charged alongside Mr. Tourre, but chose to settle, paying what was at the time a record $550 million penalty, without admitting or denying guilt. That left Mr. Tourre to tackle the S.E.C. alone, though with Goldman’s resources financing his fight. Mr. Tourre no longer works for Goldman.

On the eve of trial, people close to Mr. Tourre say he remains calm. Douglas C. Weaver, a former Goldman executive who once supervised Mr. Tourre and had dinner with his former colleague a few months ago, said Mr. Tourre appeared upbeat.

“He is dealing with it fairly well,” he said. “He doesn’t feel he did anything wrong.” Mr. Weaver added, however, that the charges had upended Mr. Tourre’s life.

Mr. Tourre, now 34, was raised in a suburb of Paris, and went on to earn a degree in mathematics from the École Centrale Paris.

He first came to the United States in 1999, at age 20, taking a summer internship in Hamilton, Ohio, as a production worker on an assembly line producing heater cores and air-conditioning units for the French car-part manufacturer Valeo. He then attended Stanford, where he received a master’s degree in management science and engineering.

After college, he landed a summer intern spot at Goldman, a hypercompetitive program that leads to a full-time job for a select few. Mr. Tourre, among the survivors, began in Goldman’s corporate credit department, where he started out securitizing, or packaging and reselling, auto loans. He later moved into a troubleshooting role for financial institutions with soured loan portfolios.

Fabrice Tourre, formerly of Goldman, faces claims that he was part of a conspiracy to mislead investors on a mortgage security.Doug Mills/The New York TimesFabrice Tourre, formerly of Goldman, faces claims that he was part of a conspiracy to mislead investors on a mortgage security.

Within the firm, Mr. Tourre was known as a statistical wizard. One former co-worker, who spoke on the condition of anonymity because of a Goldman policy against speaking to the media, described Mr. Tourre as an “analytical nerd.”

In 2004, Mr. Tourre landed a job in Goldman’s mortgage department, then a thriving unit of the bank, and a year later was making enough money to afford a $3,250-a-month apartment in Manhattan’s West Village. In the mortgage unit, Mr. Tourre was tasked with creating synthetic collateralized debt obligations, or C.D.O.’s.

It was a big business on Wall Street. From 2005 through 2007, at least $1.03 trillion in C.D.O.’s were issued, according to Dealogic, a financial data firm. Goldman, during this period, was the sixth-largest issuer in the world.

A C.D.O., in essence, compiles a package of mortgage-backed bonds into one deal for investors to buy. A synthetic version of a C.D.O. is one that, rather than selling securities with the actual bonds, is arranged through an insurance contract that is linked to the bonds’ performance. One investor bets the bonds will fail; another bets they will succeed.

It was one of these deals that landed Mr. Tourre on the S.E.C.’s radar.

The agency’s case centers on the contention that in 2007 Mr. Tourre and Goldman sold investors a synthetic C.D.O. known as Abacus, while omitting a crucial fact: a hedge fund run by the billionaire John A. Paulson helped construct Abacus and then bet against it. When the mortgage market soured, a handful of sophisticated investors lost more than $1 billion on the deal.

Mr. Tourre’s defense team will counter that synthetic C.D.O.’s required someone to bet on a decline in value, a fact well known to the marketplace. The lawyers will argue that investors on both sides of the deal — those betting for and against it — knew what it contained.

In early 2011, after the S.E.C. announced its case, Mr. Tourre arrived in Kigali, Rwanda’s capital, with the task of creating business plans for local farmers. He would walk a dirt road to work, one roommate recalled, and was often the last to leave the office.

On weekends, the roommate said, Mr. Tourre would play in a local soccer game. Other times, he would watch European soccer at a bar, kicking back with a Mützig beer, a favorite, and meat brochettes.

Not unlike his tenure at Goldman, in Africa Mr. Tourre appeared to have a knack for innovation, except there it was in farming. The March 2011 e-mail to friends describes technology developments for Rwandan farmers, like using “spy-like chips” hidden in coffee beans to track whether crops are being stolen.

His e-mail to friends is also laden with exclamation points, a hallmark of his infamous Goldman missives. In describing a trip to Rwanda’s stock exchange, he recalled arriving on “the trading floor of the exchange on a Friday morning, in the middle of the trading day, to see … nobody!” The scarcity of people, he said, stemmed from the lack of local companies listing their shares. “The visit was a great experience over all, as it is rather unique to witness the birth of local capital markets.”

When he left Rwanda that July, Mr. Tourre returned to the United States to enter the Ph.D. program at the University of Chicago. He also joined an intramural soccer team there, the Bootstrappers, until an Achilles’ tendon injury that required surgery sidelined him for a period of time.

As with many of the people who met him in Chicago, Nancy L. Stokey, an economics professor, initially had no idea of Mr. Tourre’s legal woes. She found out only after he had served as a teaching assistant in one of her undergraduate classes. “He was one of my best students,” she said.

Robert Shimer, another of Mr. Tourre’s economics professors, agreed. “He’s someone who, if he continues on the same track, is going to be one of our top job market candidates.”

Article source: http://dealbook.nytimes.com/2013/07/14/after-goldman-and-before-trial-a-global-education-for-fabrice-tourre/?partner=rss&emc=rss

2 Banks to Settle Case for $417 Million

The S.E.C. has leveled claims against a handful of major banks, including JPMorgan and Credit Suisse, that they painted a deceptively rosy portrait of the securities while some of the underlying loans were already showing signs of delinquency.

Robert Khuzami, director of the S.E.C.’s division of enforcement, called mortgage products like those sold by the banks “ground zero in the financial crisis” in a statement Friday. The S.E.C. cautioned Wall Street to brace itself for more enforcement actions.

While the S.E.C. has brought more than 100 cases related to the financial crisis, the agency has won only piecemeal victories against the banks, and has not yet secured a big victory against any individuals responsible for some of the reckless behavior. In a significant setback for the agency, a federal jury in July acquitted a Citigroup manager the S.E.C. had accused of misleading investors in the sale of a complex security made up of residential mortgages.

In a conference call Friday, Mr. Khuzami acknowledged the challenge of bringing cases against individuals related to “structured” financial products, but noted that “we are by no means shying away from charging individuals.”

JPMorgan and Credit Suisse did not admit or deny guilt. JPMorgan agreed to pay $296.9 million to settle the charges and Credit Suisse agreed to pay $120 million.

The S.E.C. brought the cases in conjunction with the federal-state mortgage task force, which President Obama created in January to investigate the subprime mortgage morass. In its first major salvo against banks, the group sued JPMorgan last month. That federal lawsuit is still pending.

Separately, the federal regulator that oversees the housing finance giants Fannie Mae and Freddie Mac filed lawsuits against 17 financial firms last year over nearly $200 billion in mortgage-backed securities that imploded after the loans soured.

Legal wrangling over Wall Street’s behavior during the housing boom has targeted virtually every step in the process, from making loans to borrowers with tarnished credit to the sale of securities engineered with the subprime loans. As a result of the mortgage-litigation storm, banks have had to set aside billions of dollars to deal with claims from investors and regulators.

In 2010, the S.E.C. secured $550 million from Goldman Sachs. In that case, the agency focused on a single mortgage security created in 2007, just as fissures spread through the housing market. Goldman allowed a hedge fund manager, the S.E.C. claimed, to help construct the security, then bet against it, but never alerted investors.

The S.E.C.’s investigation into JPMorgan included creating troubled securities itself, as well as misleading investors through its Bear Stearns unit, the troubled investment bank it purchased at the urging of the federal government in 2008.

In a December 2006 sale of $1.8 billion of mortgage-backed securities, JPMorgan played down delinquency rates of the mortgages used as collateral in the securities, according to the S.E.C. Despite assurances by JPMorgan that only 0.04 percent of the loans were more than 30 days delinquent, roughly 7 percent of the loans were troubled, the agency said. While the bank reaped $2.7 million as part of the deal, investors didn’t fare as well, losing at least $37 million, according to the S.E.C.

The S.E.C. also faulted Bear Stearns for pocketing compensation it received from mortgage lenders for shoddy loans that the firm had purchased to package into mortgage securities. Bear Stearns, the agency claimed, never passed that money on to investors in the securities. As a result, Bear Stearns received $137.8 million, the agency said.

Credit Suisse was also accused of keeping roughly $55.7 million in such payments from investors. The Swiss bank was also faulted by the agency for misstating when it would buy back mortgages if homeowners fell behind on their payments, as part of $1.9 billion in securities it underwrote in 2006.

In a statement on Friday, JPMorgan said that it was pleased to “put these matters” behind it. Credit Suisse also expressed relief, noting that the bank was “committed to the highest standards of integrity and regulatory compliance in all its businesses.”

The S.E.C. said it would distribute the money to investors harmed by banks’ practices.

Despite the settlement, JPMorgan is still dogged by mortgage-related headaches. The mortgage task force case filed last month by New York’s attorney general, Eric T. Schneiderman, claimed that Bear Stearns sold securities between 2005 and 2007 that caused roughly $22.5 billion in losses for investors.

In another mortgage feud, JPMorgan is one of the 17 firms that the Federal Housing Finance Agency claims sold shoddy loans to the government without adequately disclosing the risks. In court filings, JPMorgan has pushed for the lawsuit to be thrown out.

Beyond the government actions, JPMorgan and other Wall Street banks face an onslaught of battles with private investors. Dexia, a Belgian-French bank, for example, sued JPMorgan in federal court in Manhattan over $1.6 billion in mortgage-backed securities bought from Bear Stearns and Washington Mutual.

In a statement Friday, Kenneth Lench, head of the S.E.C. enforcement division’s structured and new products unit, said, “These actions demonstrate that we intend to hold accountable those who misled investors through poor disclosures in the sale of R.M.B.S. (residential mortgage-backed securities) and other financial products commonly marketed and sold during the financial crisis.” He added: “Our efforts in that regard continue.”

Article source: http://www.nytimes.com/2012/11/17/business/jpmorgan-and-credit-suisse-to-pay-417-million-in-mortgage-settlement.html?partner=rss&emc=rss

S.E.C. Charges Alan Levan with Misleading Investors

Alan B. Levan, chairman and chief executive of BankAtlantic Bancorp, was accused of making misleading statements in public filings and on earnings calls in 2007 in order to hide mounting losses in much of the portfolio, which consisted of loans on large tracts of land intended for real estate development. The Securities and Exchange Commission complaint also names BankAtlantic Bancorp, the holding company for BankAtlantic, one of Florida’s largest banks.

The complaint says that Mr. Levan and the company committed accounting fraud when they “schemed to minimize BankAtlantic’s losses on their books by improperly recording loans they were trying to sell from this portfolio in late 2007.”

In a statement, Robert Khuzami, director of enforcement at the S.E.C., said that “BankAtlantic and Levan used accounting gimmicks to conceal from investors the losses in a critical loan portfolio.”

“This is exactly the type of information that is important to investors,” he said, “and corporate executives who fail to make that required disclosure will face severe consequences.”

Eugene Stearns, a lawyer for Mr. Levan and BankAtlantic’s holding company, said that the S.E.C.’s case was an example of “scapegoating” and that the company’s financial disclosures were adequate. He said that in the fall of 2007, the company voluntarily issued extra disclosures about the risk classifications of its loans and that even before that, the bank company was clear about its risk profile.

Mr. Stearns said that all of the bank regulators overseeing the company had taken the position that banks should not release details about the risk classifications on loans.

“There’s a war going on between banking agencies and the S.E.C.,” Mr. Stearns said, noting that bank regulators wanted less disclosure and the S.E.C., which watches out for investors in the public markets, wanted more.

This is not the first case of a bank executive blaming regulators. Michael W. Perry, the former chief executive of IndyMac, the failed California bank, is being sued by the S.E.C. and has also said in defense documents that some of his accounting decisions were approved by regulators.

Mr. Levan and BankAtlantic were featured in a 2010 New York Times article about the company’s battle with an analyst, Richard X. Bove. BankAtlantic sued Mr. Bove over a report he wrote at the height of financial crisis evaluating the health of a long list of banks, including the Florida bank. The report — titled “Who Is Next?” appeared just after IndyMac collapsed, and as bank investors fled from bank stocks.

Mr. Bove at the time said that he had to fight the suit to protect the interests of analysts to freely produce their research reports. The bank and Mr. Bove settled.

On Wednesday after the S.E.C. filed its case, Mr. Bove said he did not feel vindicated because he had $700,000 in legal fees. “There’s no vindication if all you did was walk away with a huge hole in your pocket,” he said.

According to the S.E.C. complaint, Mr. Levan knew in early 2007 that the loan portfolio had problems because borrowers were not able to make payments.

The complaint says that both Mr. Levan, who grew BankAtlantic into Florida’s second largest bank over a more than two-decade banking career, and the company knew that many loans had been internally downgraded to “nonpassing status,” reflecting deep concern by the bank. Nevertheless, BankAtlantic’s public filings for the first two quarters of 2007 made only general warnings about the dangers of Florida’s real estate downturn.

The problems were finally disclosed in the third quarter of 2007 when BankAtlantic announced an unexpected loss, causing its stock to drop 37 percent, the complaint says.

BankAtlantic said in November that it would sell its branches, some loans, and deposits to BBT Corporation.

Article source: http://feeds.nytimes.com/click.phdo?i=80fc84d0daade231273ecad621e6a9f1