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Goldman Sachs, Goldfish Eat Their Young

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Is paranoia necessary to survive on Wall Street?

In one sense, Goldman Sachs is no different from other investment banks. Junior employees are expendable. Like goldfish, investment banks eat their young when brand-protection and self-interest make cannibalism seem rationale.

Smart guys, rainmakers, anybody in the trenches--they're all vulnerable. Case in point: "fabulous Fab" otherwise known as Fabrice Tourre. He's thirty-one. His time at Goldman Sachs, it seems, is running out.

I'm no apologist for Tourre. But he's turning into a villain, which misses the point. Here's why:

1. During 2006, Goldman's traders clashed over the direction of subprime mortgages.

According to the New York Times, there were two camps inside Goldman Sachs. The pro-CDO traders enjoyed the upper hand until the fourth quarter of 2006. They placed big bets that mortgage bonds were safe and would rise in value.

These traders skirmished with others inside Goldman, who were structuring bets against subprime. In a firm the size Goldman Sachs, it's plausible that different camps had conflicting calls on CDOs.

2. Fabrice Tourre, negative on CDOs, found a way to do business.

There are no bonuses for avoiding train wrecks. Wall Street pays employees to write business. Not to wring hands and cry, "The sky is falling."

Tourre generated $15 million in fees from a hedge fund that shared his skepticism. Abacus 2007-AC1 was a synthetic CDO, which means it was based on credit default swaps. Said another way, Abacus 2007-AC1 could only exist by virtue of an investor's negative sentiment. In this case, it was John Paulson.

3. After subprime blew up, Goldman employees acknowledged Tourre's prescient call.

Goldman Sachs made $4 billion on its short bets during 2007. I never worked at Goldman and have no direct knowledge whether Tourre reached hero status. But employees, according to The New York Times, acknowledged and respected his market savvy.

"Egol and Fabrice were way ahead of their time," said a former Goldman worker. "They saw the writing on the wall in this market as early as 2005."

Somewhere along the way, Tourre received a $2 million bonus. Investment banks don't pay this kind of money to people who do a bad job.

4. In an angry world, Tourre became an easy target.

Goldman paid about $16 billion in bonuses on its 2009 bungee-jump earnings. This comp decision turned into the mother of all PR nightmares--except perhaps for one. Fabrice Tourre wrote some really unfortunate e-mails.

First, there was "fabulous Fab." Tourre's words evoke images dating back to Tom Wolfe's Bonfire of the Vanities. Now, there are additional e-mails that reveal Tourre's doubts about subprime and details about his personal life. On Saturday, Goldman released them, which led the Wall Street Journal to write:

The scope of the released documents led to widespread speculation that Goldman was seeking to make more-senior executives who also are caught in an uncomfortable political and public-relations spotlight look better by comparison to the 31-year-old trader.

I'm not buying it. Fish rot from the head down. And so do corporations. If Goldman Sachs turned negative on the subprime sector during the first quarter of 2006, why didn't they pull the Abacus 2007-AC1 deal at the last minute. Firms pull deals all the time.

5. It's not just "client beware." It's "employee beware."

We'll see what happens to Tourre in the months to come. On the Abacus 2007-AC1 pitch book, I counted the names of sixteen Goldman Sachs employees. It's not clear, from the marketing materials, why Tourre was so prominent on this deal.

We know Goldman will maximize its self interest. It's normal behavior. We know Goldman faces huge challenges to its brand. There's not only the Abacus problem but also the allegations that link an ex-director to insider trading at Galleon.

What we don't know, in the aftermath of the financial crisis, is whether the employees of investment banks can trust their firms. If firms sacrifice their employees, Tourre in this case, what kind of future does scapegoating spell for Wall Street and the guys in the trenches?

Norb Vonnegut