Tag Archives: Hedge fund

Fabrice Tourre: The Last (Gold)Man Standing

While most Goldman Sachs employes are busy starting new hedge funds or preparing for new jobs, like central bank president or chief economist for a major European bank, Fabrice Tourre stands as the only Goldman banker to face a trail.  However, something strange happened recently, something that may spin the case in an unexpected direction.

“It’s impossible that only one person was involved with fraudulent activities in connection to the sales of these mortgage securities.”

G. Oliver Koppell

Yeah, yeah…we know that… The “Fabulous Fab” is just a trader who carried out the order of his superiors. An order that was very simple and impossible to misunderstand: “Make money!” It is, however, harder to figure out how a newspaper accidentally gets hold of a laptop, accidentally found in the trash, accidentally containing crucial evidence.

I won’t waste any time speculation about something I’m sure I’ll never find out.

But that seems to be the case at moment – the mysterious laptop, that is.

The New York Times published recently a long article about Fabrice Tourre, who as of now stands as the only Goldman Sachs employee charged individually in the firm’s CDO follies.

Tourre appears to be keen on fighting the civil charges in court, something that, according to US financial media, has caused a little bit nervousness amongst the top Goldman Sachs executives.

Many have suggested that Tourre in fact has little choice but to engage in a  scorched earth defense in an attempt to make it clear that many people are to blame for the scandal, besides himself.

Fingers have been pointing at his boss, Jonathon Egol, and questions raised on why he was not charged.

But the article in NYT is built new information that arrived in a reporters hands in a rather odd way.

The article explain that a New York filmmaker was  given a laptop by a friend who claimed it had been found in the trash.

Amazingly, it had many email to Fabrice Tourre on it. Including several emails from Egol that suggest he had a dire view of the market, one that Tourre didn’t necessarily share.

And even more amazing – the emails continues to stream in.

Based on those emails, the NYT concludes that Tourre’s legal team will focus on the fact that he was in fact a small player, and cannot alone be held accountable for the entire ABACUS fiasco.

According to Fierce Finance, it is likely that others will be drawn into the center stage.

Indeed, it would be remarkable  if Tourre alone is found guilty. That would mean that one single trader is capable of taking down the whole global economy!

The NYT  indicates that Tourre has been made a scapegoat, and that other Goldman executives should be charged.

One interview suggests that Tourre was targeted because he was prone to logorrhea, unlike his colleagues.

Anyway, he has hired a legal team that (also amazing) do not have ties to Goldman Sachs.

Everything is set for a very interesting case. But a case built on email is not necessarily a strong one.

“Perhaps, the SEC should make one final push to settle,” Fierce Finance writes.


Of course! Now, I get it….

Related articles:
Why Goldman should be hoping that SEC drops Fab case
Fabrice Tourre, a minor player in larger CDO drama


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Filed under Laws and Regulations, National Economic Politics, Philosophy

Regulations May Increase Risk of Flash Crash, Traders Says

A political drive to impose new regulations and rules at stock exchanges at a breakneck pace in the aftermath of another incident similar to the “flash crash” could actually increase risks in the financial system, according to hedge fund managers. They also claim that the politicians have no idea of how the financial markets work.

“What is new is technology. We need to understand it and we have to work with it.”

Michael Levas

“With a rush to bring new rules, you bring more layers of complexity, which in turn creates more risks. I would be very scared of a rush to add more layers of complexity to the markets because all they are doing is increasing the risk of something bad happening again,” says hedge fund manager Nick Nielsen at Deutsche Marshall Wace in London.

“I am a bit scared to see what the public response would be if that did happen again. There could be some pretty aggressive regulation coming very quickly, similar to what happened when all of the bank stocks were getting hammered in 2008,” Nielsen says.

Fractions of a Cent, Millions of Times

In Nielsen’s opinion is the current form of high-frequency trading (HFT“essentially a casino.”

“They make a lot of bets and they lose a lot of bets. But they happen to win more than they lose,” he says.

Peter Nabicht, chief technology officer at Allston Trading, a Chicago-based trading firm, also agreed that the casino analogy had some validity.

“Casinos make very small amounts on each bet and HFT firms do the same thing,” he says.

At the moment HFT accounts for 54 percent of equity trading in the US and 34 percent of equity trading in Europe, according to Tabb Group, a US-based financial technology consultancy firm.

Politicians Have “No Idea” About Trading

Nabicht and Nielsen agreed that the increasing grip HFT has on the financial markets formed part of an evolution of the financial markets towards increasingly electronic and automated trading strategies.

Michael Levas, founder and chief investment officer at Olympian Capital Management, a proprietary trading firm based in Florida, called for regulators and market participants to embrace the new trading technology shaping the trajectory of the financial markets.

”What is happening in the market place is nothing new,” he says.

“What is new is technology. We need to understand it and we have to work with it. That is the only way that we are going to be able to fix all the inconsistencies which are prevalent in the market place.”

Levas attacked politicians in Europe such as French Finance Minister Christine Lagarde for having “no idea” what it is like to work in the financial markets.

On that particular issue, I belive the hedge fund managers are right.

Read the full post at; ultrahighfrequencytrading.com

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Filed under International Econnomic Politics, Laws and Regulations, National Economic Politics, Philosophy, Technology

The EU End Game: Regaining Control

It is one week left before the top leaders of the European Union get together in Brussels for their most important meeting so far. The European debt problems has to be solved; at least a realistic plan that every member state can accept has to be put on the table. The outcome of next weekends summit will determine the future of the union. It’s make or break time. This the first of a series of articles focusing on possible solutions – this is the final countdown.

“The EU ban on naked sovereign CDS may be a signal that regulators and legislators now understand the issues and are prepared to address them, bringing about meaningful reform in the control of derivative trading.”

Satyajit Das

“Predictably the EU ban on “naked” credit default swap (“CDS“) contracts on sovereigns has brought forth an angry response from dealers and the industry body ISDA (International Swap & Derivatives Association). Just as “patriotism is the last refuge of a scoundrel”, arguments citing market efficiency and the benefits of speculation seem to be the first resort of dealers,” Satyajit Das at eurointelligence.com


The EU leaders have lots of important issues to discuss next weekend, but we have to start somewhere so why not with the new regulations and the demonized Credit-default swaps?

Former derivative trader  Satyajit Das with the eurointelligence.com knows what he’s talking about.

Here’s Mr. Das proposal on how to deal with the problem:

The familiar case was that prohibition was unnecessary, would decrease liquidity, increase borrowing costs and create greater uncertainty for European firms. The arguments are self-serving and do not present a balanced view of the issues.

The EU rule does not impede genuine hedging. If an investor owns sovereign securities or a firm has receivables that rely on the sovereign directly or indirectly, then purchasing protection using a CDS is permitted.

ISDA argues that banning naked CDS would have a detrimental effect on individual country’s borrowing costs. An EU study that found that the sovereign CDS market was small relative to the size of underlying bond markets and had negligible effect on credit spreads. Given this evidence, it is puzzling why banning these contracts would somehow affect pricing.

The real issue is that a ban on naked CDS on sovereigns is seen as the “thin end of the wedge”, ushering in greater control on the size of the derivative market, limits on the purposes for which derivatives are used and also on the types of derivative contract permitted. Given the substantial derivative trading profits earned by major dealers, ISDA’s position is predictable.

Historically, CDS contracts were used for hedging. Buyers of protection used these contracts to hedge the risk of default of a firm or country. CDS contracts avoided the need to transfer loans or sell illiquid bonds. It also allowed greater flexibility in hedging and offered ease of documentation. Investors could sell protection to acquire credit exposure, especially advantageous where there was no liquid market in the borrower’s bonds.

Over time, speculative factors came to drive the CDS market. The ability to short sell credit became more important. Buyers of protection, where they did not have any underlying exposure to the issuer, sought to profit from actual default or deterioration in its financial position.

Sellers of protection used CDS contracts for leverage. Selling protection on an issuer required minimal commitment of cash (other than any collateral required by the counterparty). In contrast, purchase of a bond required commitment of the full purchase price.

As trading was not constrained by the physical availability of bonds or loans, the CDS markets were more liquid than comparable bonds, facilitating trading.

The shift from hedging to speculation improved liquidity but at the cost of increased risk. The global financial crisis exposed the complex chains of risk and the inadequate capital resources of many sellers of protection.

ISDA’s argument that a ban on naked sovereign CDS will adversely affect Europe’s financial stability is disingenuous. Speculative trading in sovereign CDS is likely to be more destabilising, allowing potential market manipulation.

In practice, sovereign CDS volumes are low and large traders can influence prices, which frequently affect the values of bonds as well as CDS contracts. Commenting on the problems of AIG’s CDS positions, George Soros accurately stated the true use of these contracts: “People buy [CDS] not because they expect an eventual default, but because they expect the CDS to appreciate in response to adverse developments. AIG thought it was selling insurance on bonds and, as such, they consider CDS outrageously overpriced. In fact, it was selling bear-market warrants and it severely underestimated the risk.” [George Soros “One Way to Stop Bear Raids” (23 March 2009) Wall Street Journal].

The response of the industry to the EU proposal reveals that participants are unwilling to admit the unpalatable realities of derivative trading. Much of what passes for financial innovation is a vehicle for unproductive speculative activity, specifically designed to conceal risk or leverage, obfuscate investors and reduce transparency. The aim is to generate profits for dealers.

The EU ban on naked sovereign CDS may be a signal that regulators and legislators now understand the issues and are prepared to address them, bringing about meaningful reform in the control of derivative trading.

By Satyajit Das


Satyajit Das is a former derivative trader, now author of “Extreme Money: The Masters of the Universe and the Cult of Risk” (Forthcoming in Q3 2011) and “Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives”  (Revised Edition – 2006 and 2010).

Read also Satyajit Das’ 3-part analysis of the European economy and debt crisis:

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Filed under International Econnomic Politics, National Economic Politics, Philosophy