COMPLIANCE: Fab-ulous, Or Fab-rication?

The world is waiting to hear from Goldman banker Fabrice Tourre, inexplicably scheduled to testify before Congress on Tuesday, together – or going head to head – with Goldman CEO Blankfein. Goldman appears to have moved swiftly to distance the firm from Tourre, issuing a statement that this matter arises from the activities of a single employee. Tourre has been placed on paid leave of absence, and there is a report that his FINRA registration is being withdrawn. We are waiting for the latest installment of the coolest new reality show in years as, on Tuesday, we get to see Tourre and Blankfein try to dump each other in the cannibals’ pot.

The media have made much of the notion that Tourre was “only” 27 years old when he launched his ABACUS tranche. Thus, pundits are announcing with great certainty, Tourre could not have acted on his own. Someone higher up at Goldman, the consensus goes, must have been at the head of this process. At the same time, the Paulson employee primarily responsible for this transaction was not readily identifiable as a superstar, and Paulson himself was not well known. The whole thing has the feel of devilishly smart guys working out of the limelight and finally coming up with something that they knew ought to work, if only they could convince someone to take the other side. It became Tourre’s and Goldman’s task to find that Someone.

As to the blatant question of age-ism that underlies these pronouncements, the press is disregarding the fact that, unlike other firms that give lip service to the crème de la crème, Goldman really does hire only people who are several standard deviations smarter, more focused, and More Likely To Succeed than the average. Goldman’s generational dominance of the world’s capital markets is hardly accidental.

We need not travel back to the time when, at age 27, Alexander was Shahanshah – “King of Kings” – and ruler of an Empire. Internet billionaire Mark Zuckerberg, who hosted last week’s internet conference in San Francisco, launched Facebook at the tender age of twenty. By age twenty-seven… well, he turns 27 next year. Put that in your underage pipe and smoke it.

Unsurprisingly, Goldman’s earnings call was dominated by questions being asked of their general counsel. When asked why Tourre’s and Goldman’s Wells Letter had not been disclosed in the CRD record, the response was, “We disclose everything material, with or without a Wells. We don’t disclose every Wells we get, because that wouldn’t make sense.”

Wells Letters generally close with a paragraph admonishing the recipient that the letter is, itself, a reportable occurrence. As we pointed out last week, Goldman’s practice of not recording every Wells Letter appears to be based on legal doubletalk. While one can make the case that a regulatory charge may not be material in its effect on shareholders, a Wells Letter, most regulators would agree, is automatically reportable in the CRD system.

Our baseline definition of Materiality is: is this information that an investor would consider important in making a determination whether to buy or sell a particular investment? One might argue that the dismissal of a single employee, and possible disgorgement of the proceeds of the transaction – Goldman collected a $15 million fee from Paulson for the ABACUS transaction – are not material in their impact on the value of Goldman’s stock. All the more so as Goldman will take a tax deduction on the loss and will write off the costs associated with Tourre’s employment.

Compare this to a single shareholder selling ten thousand shares of Goldman stock. Not material, we would agree. How about if 100,000 shareholders simultaneously decide to dump 10,000 shares each? Is that material? This is roughly what took place last week, when Goldman’s shareholders lost over a billion dollars in the space of an hour. Material? Ask Mr. Blankfein.

Goldman admits “we don’t disclose every Wells.” OK. Just how many Wells Letters does Goldman receive? Are we the only ones who would like to know?

Moshe Silver
Chief Compliance Officer

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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