Tuesday, April 27, 2010

The Un-Fab Fabrice Tourre On Brokering Highly Sophisticated Derivatives Deals

WEDNESDAY UPDATE IN PLAIN ENGLISH

THIS FROM THE GUARDIAN:

IS HE FABULOUS OR A FRAUD? Or, indeed, both? The London-based Goldman Sachs banker Fabrice Tourre, who is at the centre of a $1bn mortgage trading scandal, tentatively stepped into the public gaze today for an uncomfortable grilling by lawmakers in Washington.

It was a tough debut for the 31-year-old, who was greeted in Congress by a group of
Code Pink demonstrators dressed in black and white prison stripes, bearing signs reading: "Stop looting America!" Yet Tourre was unflustered – in fact, he proved to be something of a smiler, wearing a faint smirk through opening exchanges in which senators made blustery statements of outrage over the excesses of Wall Street's wealthiest investment bank.

Fabulous or a fraud?

Tourre is neither fabulous nor necessarily a fraud. Rather, perhaps he's both. In truth, he's just a broker----like tens of thousands of others like him----with major swagger and world-class arrogance. He's also the middleman for financial opportunists who are hungry for exotic new financial one-night stands on all sides of the transaction.

It goes without saying that nothing here should fall outside the rule of law. However, just as online, virtual dating is legal, so is what some would call fast financial deals like Tourre brokers. Like booze and fast women, this will never be outlawed in today's speeding, loose world of virtual investments. To the extent that this is casino capitalism based on ephemeral products is considered legalized gambling, I would be for more transparency on every level. Still investors have taken long positions, then hedged their positions with shorts---on every conceivable investment known to man---since time began.

We live in a world of many houses of cards and both the private as well as the public sectors of all political stripes are responsible here.This is not a Republican verses Democratic issue.

So I suggest we tax the winners and refuse to bailout the losers, making things as transparent as possible along the way.

Again let me say, in the stratospheric world of arbitrage and 2nd and 3rd order financial derivatives--- along with those who broker, buy and sell them--- it's going to be very hard for bureaucrats, legislators and especially members of Code Pink to assess guilt and responsibility though they may certainly try. It's a heady world of sophisticated investors who are begging to go long and short on exotic risks. If they're more than willing to play this game and accept responsibility for their risky investment appetites then let them.

I fear too much government intervention will only assure that bailouts will soon become institutionalized thereby exhausting taxpayers even further over time.

The thing all Americans should really be concerned with is why government would ever bail Goldman Sachs and its ilk out with taxpayers funds in the first place. I had no stomach for then Treasury-Secretary Hank Paulson's rescue mission in the last days of the Bush administration. Let investors beware. Let stockholders beware. Let management beware. Let taxpayers/Tea Partiers beware and say NO! to bailouts and the silly policy of Too Big to Fail, especially on all virtual financial products now under scrutiny.

Bethany McLean tells why she agrees and writes at the NYT.

BTW, I don't disagree with anything Sen. Claire McCaskill says below in theory. However, not even Congress can legislate an end to these sophisticated virtual financial products---in long and short form-- anymore than it can do away with the Internet. Both are here to stay for better or for worse.

11 comments:

William said...

Republicans come to the aide of the fraud and block financial reform.

Some can't ignore the truth, McCain said about Goldman, "There is no doubt their behavior was unethical, and there is no doubt the American people will render a judgment as well as the courts."

Webutante said...

Certainly time and the process of law will tell.

Still you are no doubt aware, William, that the financial reform Congress is now talking about will enable more highly leveraged, risky financial behavior at big investment banks while institutionalizing bailouts for the likes of Goldman Sachs et al in the future by taxpayers?

Again, what this means to you and me---if you pay taxes---is that all this talk of reform will not be reform at all and still cost us citizens untold amounts of money we don't have.

The only financial reform I'd like to see government undertake is enforcing current laws and regulations on the books and refusing to make us taxpayers pay for Goldman's etc potential future losses.

Webutante said...

Specifically, William, what provisions of financial reform do you as a liberal favor?

Are you for more bailouts?

Great Quote said...

Tyler at Zero Hedge reflects on a little hypocrisy from Warren Buffet, a Democrat, below. Bottom line seems to be unregulated CDOs for me, but not for thee:

"Recently the general public had the unpleasant experience of seeing what the real face of Warren Buffett looks like when it comes to derivative reform: a man ready to maim and kill to prevent even a minor loss when it involves controlling what he previously called "weapons of financial mass destruction." Sigh - yet another another hypocrite unmasked. However the battle over derivatives is just beginning. As the attached presentation from erdesk.com indicates, the big banks are not about to let a $55 billion annual revenue stream go away without a massive fight. And despite what Blanche Lincoln thinks, with Financial Reform suddenly stalling hopelessly in yet another indication that Chris Dodd's many years of robbing the middle class blind need to end yesterday, derivatives are not going anywhere in a hurry: with $11 billion in IR, $22 billion in FX, $10 billion in Credit, $10.5 billion in commodities and $1.5 billion in mortgages, most of it split between Goldman, DB, CS, MS and JPM, for anyone to think that the firms who run the world will cede such a core part of their business to the exchanges is naivete defined. We recommend the attached simplified overview to anyone who has a passing interest in not only the fascinating $600+ trillion world of OTC derivatives but of ongoing (futile) attempts to reform it.

fraydna52 said...

From John Hinderaker at Powerline:

"Today's inquisition was a sideshow. Here is what really happened: there was a bubble in housing prices. The bubble was mostly the result of government policy--loose money, combined with pressure on banks to make bad loans to unqualified home buyers. It all worked for a while because Fannie Mae and Freddie Mac, under the leadership of Congressman Barney Frank and others, created a secondary market for shaky mortgages. Goldman Sachs participated in this market, downstream, along with many other players. But the whole thing wasn't an accident or a conspiracy, it was government policy. The home price bubble could have only one possible result. All bubbles burst--there is nothing else they can do--and the bursting of a bubble is always painful. The whole disaster that began in 2008 was the inevitable result of government policy, which is why Senators are so anxious to pass the buck to Goldman Sachs."

Link:
http://www.powerlineblog.com/archives/2010/04/026171.php

Let those who have ears to hear, hear.

Webutante said...

Thank you, fraydna, for again putting this unfolding drama into context with this link. What part of the Community Investment Act doesn't Congress want to see.

When we put things in context, there is more than enough responsibility and blame to go around. It is not ever either/or but both/and.

Somehow context gets lost in the political process and political correctness these days and it makes for very faulty decision making and often avoids the real issues that need reform.

William said...

Guarantee future bailouts? False, not in the sense of the previous bailout. This is a GOP obstructionist talking point.

First, Obama's reform creates a new consumer protection agency with the power to stop abusive practices by the financial industry, including sudden credit card interest rate hikes, hidden bank fees and predatory loans.

Why are Republicans against this?

The bill will prevent future bailouts by giving the Treasury Department power to force failing banks into bankruptcy. It would create a $50 billion fund, financed by the banks themselves - not the government, to cover the bankruptcies.

Additionally, the bill regulates the kind of high-risk speculation on derivatives that some say helped to cause the financial meltdown in the first place. Banks would be forced to open their books on the multi-trillion dollar derivative business.

The Republicans are against this because now they are getting huge bucks to obstruct from wall street. Tuesday’s Wall Street Journal that “for the first time since 2004, the biggest Wall Street firms are now giving most of their campaign donations to Republicans.”

A recent Washington Post/ABC News poll found that almost two-thirds of Americans favor tougher regulation of Wall Street. Another survey, conducted by Pew, had similar findings. In that survey, 61 percent of Americans favored stricter regulation of financial firms, up from 54 percent in October.

Why are the Republicans going against Americans? They are greedy takers and obstructors whose success is riding on their ability to make the government fail.

Webutante said...

William, I am growing tired of your anger and your tone. If you want to comment here, please stick to the issues. Everyone who's ever been here knows you hate us evil conservatives.

fraydna52 said...

Anyone who works in the business world is well aware of the cost to consumers of the Sarbanes-Oxley regulations. And the people who do unfair things with money continue to do them by finding new ways around the current regulations.

A good analogy is the computer virus/worm/hacker world. No matter what back doors you shut, someone will find another way in.

The reality is that all these regulations never have, do not now, and will not solve the problems; instead, they create more problems and cost the ordinary taxpayers increasingly higher percentages of income.

Any new consumer protection agency will simply challenge creative minds to figure out the next work-around.

Webutante said...

Absolutely true and wise observations. The private sector is much more stealth and quick of foot than government regulators and will always find ways to make new money, new way.

Meanwhile, government will end up burdening taxpayers with untold amounts of bailout monies and set-up its own agencies and decision with no accountability, only speeding up the time of the next financial meltdown.

Bob's Blog said...

Well said, as I would expect from Webutante.