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Goldman Sachs Scandal: Fabulous Fab and Masters of the Universe

4 years ago
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It was just one sentence in a 2007 e-mail, written in a mixture of French and English, but it conveys the essence of the latest legal and political cloud of volcanic ash hovering over Goldman Sachs. The well-timed scandal -- hitting the headlines just as the Senate is debating financial deregulation this week -- was triggered by a Securities and Exchange Commission complaint Friday against Goldman Sachs and one of the investment banking house's junior vice presidents. The SEC accused them of marketing born-to-lose mortgage-backed securities without making full disclosure to unwary investors.

Fabrice Tourre, the Goldman Sachs vice president described by The New York Times as "an effusive young Frenchman," wrote the alleged smoking-gun e-mail as he chortled over the audacity of the scheme to help a leading client, the hedge fund run by John Paulson, place a $1 billion bet against the housing market. As the Stanford-educated Tourre put it in an e-mail cited in the SEC complaint, "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 that he created without necessarily understanding all the implications of these monstrosities!!!"

You can't make this stuff up -- from the school-girl-diary triple exclamation points to Tourre's seeming admission that even he did not understand the complexities of the "monstrosities" that he was peddling. But what lingers in memory and adds a human element to the scandal was Fabrice Tourre, then in his late 20s, billing himself as the "fabulous Fab." No phrase better conveys the arrogance and grandiosity of youthful Wall Street hotshots out to play the world for suckers in their quest for eight-digit annual incomes.

All this brings to mind someone who did make this stuff up -- Tom Wolfe in his 1987 novel, "The Bonfire of the Vanities." Sherman McCoy, Wolfe's 38-year-old anti-hero, was by lineage old-line WASP white-shoe Wall Street, but he also embodied modern investment banking's aggressive certainty and entitlement. The enduring relevance of Sherman McCoy is impressive, since Wall Street has endured three separate financial cataclysms (the 1987 stock market collapse, the dot.com meltdown and the 2008 debacle) since Wolfe described mid-1980s Manhattan. As Wolfe channeled McCoy in the novel's most memorable passage (and the punctuation is distinctively all his), "On Wall Street he and few others -- how many? -- three hundred, four hundred, five hundred? -- had become precisely that...Masters of the Universe. There was....no limit whatsoever!"

McCoy's pride in a (now penny-ante) $50,000 fee may seem ludicrously old-fashioned, but Master of the Universe (named after a 1980s children's toy) remains as current as the Fabulous Fab. Tourre, who now works in the London office of Goldman Sachs, has consistently refused to comment on the SEC's accusations and, as a result, is still an ill-defined public figure. The New York Post reported that Tourre lived in a $4,000-a-month one-bedroom apartment (nothing arrogant here – these are typical Manhattan rents) and quoted a former doorman in the building, near Washington Square, who claimed that the investment banker gave "a lot of loud parties."

Tourre's counterpart at Paulson & Co. (neither the firm nor any of its employees have been charged by the SEC) was a dapper middle-aged Italian, Paolo Pellegrini, who has his own emblematic back story. Wall Street Journal reporter Gregory Zuckerman wrote about Paulson shorting the mortgage market in his 2009 book, "The Greatest Trade Ever." In 2004, as Zuckerman tells it, Pellegrini was out of work, nearly out of money and living in a one-bedroom apartment in (gasp!) the suburbs. He wangled a job with Paulson's hedge fund and within two years figured out that the sub-prime mortgage market was a gigantic bubble waiting to be burst. By late 2007, on vacation in Anguilla, Pellegrini's new wife (his third) happily discovered that they now had $45 million in their checking account.

Stories like this leave me sadly skeptical that we will ever find a way to rein in the culture of shameless greed on Wall Street. The $45 million checking accounts – and the Gatsby-esque houses in the Hamptons, the Fifth Avenue duplexes and the other perks of show-off richness -- have created a disparity of wealth worthy of Versailles on the eve of the French Revolution. And the justifications that investment bankers and hedge fund managers deserve to earn it (or somehow give back through tax-free philanthropic contributions) ring embarrassingly hollow. As former Federal Reserve Chairman Paul Volcker memorably put it, "The most important financial innovation that I have seen in the past 20 years is the automatic teller machine."

This sense of financial fatalism should not be taken as an excuse to abandon the fight for stringent regulation of Wall Street. But it is also important to face up to the limitations of reform -- even before the lobbyists and special pleaders start watering down the legislation. Other than near-confiscatory rates of taxation when Masters of the Universe begin to make more than, say, Alex Rodriguez or George Clooney, it is difficult to concoct a way to stop enriching those financial geniuses who almost decapitated the world economy.

Forty years ago, in a far more innocent time, culture was dominated by the Fab Four. Now we live in a degraded era defined by the likes of the Fabulous Fab. It is enough to prompt you to put on a nostalgic Beatles song like ... I dunno ... maybe ..."Revolution."
Filed Under: Scandal

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