U.S. News

Bank Says Losses Prove No Ill Intent

Louise Story

Fabrice P. Tourre was in a bind: his seemingly lucrative deal for Goldman Sachs was going horribly wrong.

Goldman Sachs
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It was spring 2007, and Mr. Tourre, a young salesman, was struggling to extricate Goldman from a faltering mortgage investment that he had also sold to Goldman’s customers.

As the troubles that began in subprime mortgages started to spread, Mr. Tourre embarked on a desperate, and ultimately fruitless, search for someone to buy Goldman’s stake in the deal, Abacus 2007-AC1, according to two people with knowledge of Goldman’s trades.

Goldman now says it lost roughly $100 million on the Abacus investment, which is at the center of accusations that Goldman and Mr. Tourre defrauded investors in the deal.

Goldman points to its losses on Abacus 2007-AC1 and, indeed, in the broader mortgage arena, as evidence that it did not create a mortgage security that was intended to fail, as the Securities and Exchange Commission claims. But interviews with people with knowledge of Goldman’s trading paint a more nuanced picture of the bank’s losses — and profits — in mortgage trading during that time.

While Goldman lost money on the Abacus deal now under scrutiny, the bank made a profit on other bets against the mortgage market. And Goldman tried to entice investors to buy its portion of the Abacus investment, these people said. A Goldman Sachs spokesman declined to comment.

Mr. Tourre was the only person named in the S.E.C. civil fraud suit. The agency’s commissioners narrowly voted 3-2 to file the claim, according to an official familiar with the vote.

But the pressure on Goldman is mounting. On Tuesday, British authorities said they had opened an investigation into Goldman’s mortgage business.

John A. Paulson, the hedge fund manager involved in the Abacus deal and who bet against the investment, told his investors on Tuesday that he operated in “good faith,” according to a letter provided to The New York Times by one of the investors. He said that he did not have final authority over the mortgage assets in the deal and that he merely suggested some bonds that he wanted to bet against.

“It is easy to forget that before the collapse, the overwhelming view of investors, ratings agencies and economists was that the housing market was strong and would continue to get stronger,” wrote Mr. Paulson, who was not named in the complaint.

It is difficult for outsiders to know exactly how much Goldman made or lost in its mortgage business during the boom and subsequent bust.

On Tuesday, as Goldman reported another round of robust quarterly results, the bank’s general counsel, Gregory K. Palm, took the unusual step of speaking on a call with Wall Street analysts. He pointed to Goldman’s loss on the Abacus deal as evidence that the claims were unfounded.

“G.S. had no economic motivation for this transaction to fail,” Mr. Palm said. “If we believed there was something wrong with this transaction, we obviously wouldn’t have put our skin in the game in that way.”

But almost from the start, Goldman tried to unload its stake in the Abacus investment, according to two people with direct knowledge of the matter. The bank suffered losses because it couldn’t find investors who would pay what Goldman wanted for the final vestiges of the deal, these people said.

Mr. Tourre had been counting on one of the parties in the Abacus investment, ACA Management, to buy the stake that Goldman ended up with. At the last minute, ACA backed out, leaving Goldman holding part of Abacus.

Goldman executives urged Mr. Tourre to sell that stake. And they urged his colleague, Jonathan M. Egol, who is not named in the case, to purchase large amounts of insurance that would pay off in the event that mortgage investments like the Abacus stake lost value. That insurance ultimately offset the losses that Goldman claims it suffered on Abacus 2007-AC1, several former Goldman employees said.

Goldman Sachs has declined requests for information about its overall profits or losses in the mortgage business from mid-2006 to the present, a period during which it made winning and losing bets in the market.

Instead, Goldman provided only an example of its losses. The bank has repeatedly said that it marked down the value of its mortgage investments in 2008 by $1.7 billion. But those markdowns do not reflect potential gains elsewhere in Goldman’s mortgage holdings, including the insurance the bank purchased against mortgage bonds.

“Goldman is opaque,” said Brad Hintz, an analyst with Sanford C. Bernstein & Company. “They’ll never tell you how much they make off of anything like that. They give you one number, and it’s combining lots of businesses together. It’s succotash. It’s bouillabaisse. It’s a real mix.”