A gold-plated scandal hits the bonus bank

Goldman Sachs, the blue blood of global banking, faces serious charges. And it may not end there

US banks are braced for a massive sell-off of their shares this week, as the fallout of the alleged fraud at industry blue blood Goldman Sachs continues to spook the New York Stock Exchange.

Although the grand old institution of the US banking industry has been embroiled in a number of controversies – bonus rows and claims by the chief executive, Lloyd Blankfein, that Goldman does "God's work", and angering critics by skilfully making money out of the start of the financial crisis in 2007 – few expected that the $45bn-revenue group would ever be accused of a scandal of this magnitude.

No less shocked were Goldman executives, who on Friday discovered that the company, and a London-based executive director, Fabrice Tourre, had been named in an alleged $1bn fraud in and around 2007, involving dodgy mortgages, powerful hedge funds and extraordinarily boastful emails. Nearly 13 per cent was wiped off Goldman's share price, while Bank of America, JPMorgan Chase and Morgan Stanley were also hit.

The blue-chip bank, which traces its history back to 1869, intends to fight the action and vigorously defend its reputation. Executives believe the bank is being victimised as part of a political move by Barack Obama to gain support for his financial reform policies. President Obama's weekly video address was yesterday entitled "Holding Wall Street accountable", and promised shareholders additional powers in a more heavily regulated financial system. Also, Goldman's results for the first quarter of this year, which are expected to be strong, will be announced on Tuesday, leaving Mr Blankfein open to media questions on the affair.

The Securities & Exchange Commission (SEC) has been privately investigating the case for two years, though Goldman had not been contacted by the Wall Street watchdog since September. This led some in the bank to believe that the investigation was running out of steam.

Goldman and Mr Tourre, through a civil claim, have been accused of failing to tell investors of the role that Paulson & Co, the hedge fund founded by the American billionaire John Paulson, had in the creation of a "collateralised debt obligation" (CDO). These fiendishly complicated financial instruments package together a variety of different loans, in this case including mortgages given to people who couldn't afford them.

Paulson would make money if the CDO was devalued, while investors, including ABN Amro, the Dutch bank that is now owned by Royal Bank of Scotland, would gain only if the scheme performed strongly. Goldman is accused of misleading investors to put money in a rotten mortgage product to the benefit of a hedge fund that was betting against the market. Paulson has not been charged.

Recently, Mr Blankfein has been emphasising the strength of Goldman's relationships with its clients. In the introduction to Goldman's 2009 annual report, Mr Blankfein and the company president, Gary Cohn, said: "The firm's focus on staying close to our clients and helping them to navigate uncertainty and achieve their objectives is largely responsible for what proved to be a year of resiliency across our businesses and, by extension, a strong performance for Goldman Sachs."

Royal Bank of Scotland, which lost $841m as the CDO failed, has been working with the SEC for the past year. A small team of former ABN Amro employees has been passing on information to the US authorities. Privately, RBS does not expect the case to be resolved in the courts until next year. A leading City lawyer said that the only way of speeding up the case would be if the SEC decided to "water down" the charge from fraud to negligence, and Goldman then decided to settle. However, Goldman would fight even this lesser charge.

Included in the SEC complaint are extracts of emails Mr Tourre sent to a friend. In one, from 23 January 2007, he wrote: "More and more leverage in the system. The whole building is about to collapse anytime now... Only potential survivor, the fabulous Fab[rice Tourre]... standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities [sic]!!!"

The Independent on Sunday decided to doorstep the clearly colourful Mr Tourre, now based in north London, and visited his abode in a vibrant corner of fashionable Islington. There, next to the world-renowned Sadler's Wells theatre, stands the former Metropolitan Water Board headquarters. Built in 1920, it is an imposing structure of brick and stone which, from the outside, looks almost like a fortress. It wouldn't have looked out of place in Soviet Russia.

Through the great oak wooden front doors, however, which stand at the top of a stone staircase flanked by cast-iron lamps, it is a different story. The doors, each carved with the MWB crest, open on to the kind of art-deco splendour usually reserved for Hollywood films. The ground floor atrium is like a ballroom. Polished marble floors shimmer in the light which floods through the glass and steel roof.

From this building, before privatisation and hose-pipe bans, London's water supply was masterminded. It has long since been sold off, however, and turned into luxury flats. Behind the double oak doors which line the inside walls of the four-storey building, are not offices, but two- and three-bedroomed mezzanine flats – with just as many bathrooms. They cost upwards of £1m.

Mr Tourre was not at home, no doubt hiding away from the investigatory and media glare that is now bearing down on him.

Under investigation: UK regulators kept in the dark by bank

Goldman Sachs failed to inform the Financial Services Authority (FSA) that Fabrice Tourre was under investigation in the US when the bank transferred him from New York to London.

To work in prominent financial services roles, such as managing client investment portfolios, individuals must be approved – on the FSA's public register. Mr Tourre was approved on 24 November 2008, several months after Goldman had first been approached by the Securities and Exchange Commission over his activities.

Goldman believed that the investigation was groundless, and so felt Mr Tourre was "fit and proper", as the register requires, to work in the UK.

Mr Tourre had to pass several key but innocuous tests, such as criminal record and qualifications checks. His resulting registration code, CF30, allows him to discuss transactions with members of the public.

That Mr Tourre was accepted casts further doubt on the suitability of the tests that the FSA uses to vet bankers dealing with hundreds of millions, sometimes billions, of dollars.

The FSA has been strengthening its rules – for example, establishing a committee to review appointments at the UK's biggest banks. But, as a then fairly junior vice-president, Mr Tourre would still have been approved under the current system.

The FSA is set to go to Goldman's UK arm to demand information on Mr Tourre. It could widen its search to see if the bank has been involved in conflicts of interest – in effect, favouring one client over another.

Vince Cable, the Liberal Democrat Treasury spokesman, said the FSA had to prove its mettle with a thorough investigation of the bank's UK dealings, saying: "Now is the time for the FSA to show that it can be tough with guys in big business."

Mark Leftly

Have you tried new the Independent Digital Edition apps?
ebookA unique anthology of reporting and analysis of a crucial period of history
Life and Style
Jodie Stimpson crosses the finishing line to win gold in the women's triathlon
Commonwealth games
John Barrowman kisses his male “bride” at a mock Gretna Green during the Commonwealth Games opening ceremony
peopleBarrowman's opening ceremony message to Commonwealth countries where he would be sent to prison for being gay
Arts and Entertainment
Jamie Dornan stars as Christian Grey in the Fifty Shades of Grey movie
filmFirst look at Jamie Dornan in Fifty Shades of Grey trailor
Shinji Kagawa and Reece James celebrate after the latter scores in Manchester United's 7-0 victory over LA Galaxy
Life and Style
Phillips Idowu, Stella McCartney and Jessica Ennis
fashionMcCartney to continue designing Team GB Olympics kit until 2016
Farah returns to the track with something to prove
Commonwealth games
voicesGood for Lana Del Rey for helping kill that myth, writes Grace Dent
Life and Style
fashion Designs are part of feminist art project by a British student
Arts and Entertainment
The Tour de France peloton rides over a bridge on the Grinton Moor, Yorkshire, earlier this month
Very tasty: Vladimir Putin dining alone, perhaps sensibly
Travel Shop
the manor
Up to 70% off luxury travel
on city breaks Find out more
Up to 70% off luxury travel
on chic beach resorts Find out more
sardina foodie
Up to 70% off luxury travel
on country retreats Find out more
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Biomass Sales Consultant

£20000 Per Annum: The Green Recruitment Company: The Green Recruitment Company...

Java Developer

competitive: Progressive Recruitment: My Client are a successful software hous...

Senior Analyst - Financial Modelling

competitive: Progressive Recruitment: This really is a fantastic chance to joi...

MS Dynamics NAV/Navision Developer

£45000 - £53000 per annum + Benefits: Progressive Recruitment: **MS DYNAMICS N...

Day In a Page

Screwing your way to the top? Good for Lana Del Rey for helping kill that myth

Screwing your way to the top?

Good for Lana Del Rey for helping kill that myth, says Grace Dent
Will the young Britons fighting in Syria be allowed to return home and resume their lives?

Will Britons fighting in Syria be able to resume their lives?

Tony Blair's Terrorism Act 2006 has made it an offence to take part in military action abroad with a "political, ideological, religious or racial motive"
Beyoncé poses as Rosie the Riveter, the wartime poster girl who became a feminist pin-up

Beyoncé poses as Rosie the Riveter

The wartime poster girl became the ultimate American symbol of female empowerment
The quest to find the perfect pair of earphones: Are custom, 3D printed earbuds the solution?

The quest to find the perfect pair of earphones

Earphones don't fit properly, offer mediocre audio quality and can even be painful. So the quest to design the perfect pair is music to Seth Stevenson's ears
US Army's shooting star: Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform

Meet the US Army's shooting star

Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform
Climate change threatens to make the antarctic fur seal extinct

Take a good look while you can

How climate change could wipe out this seal
Should emergency hospital weddings be made easier for the terminally ill?

Farewell, my lovely

Should emergency hospital weddings be made easier?
Man Booker Prize 2014 longlist: Crowdfunded novel nominated for first time

Crowdfunded novel nominated for Booker Prize

Paul Kingsnorth's 'The Wake' is in contention for the prestigious award
Vladimir Putin employs a full-time food taster to ensure his meals aren't poisoned

Vladimir Putin employs a full-time food taster

John Walsh salutes those brave souls who have, throughout history, put their knives on the line
Tour de France effect brings Hollywood blockbusters to Yorkshire

Tour de France effect brings Hollywood blockbusters to Yorkshire

A $25m thriller starring Sam Worthington to be made in God's Own Country
Will The Minerva Project - the first 'elite' American university to be launched in a century - change the face of higher learning?

Will The Minerva Project change the face of higher learning?

The university has no lecture halls, no debating societies, no sports teams and no fraternities. Instead, the 33 students who have made the cut at Minerva, will travel the world and change the face of higher learning
The 10 best pedicure products

Feet treat: 10 best pedicure products

Bags packed and all prepped for holidays, but feet in a state? Get them flip-flop-ready with our pick of the items for a DIY treatment
Commonwealth Games 2014: Great Scots! Planes and pipers welcome in Glasgow's Games

Commonwealth Games 2014

Great Scots! Planes and pipers welcome in Glasgow's Games
Jack Pitt-Brooke: Manchester City and Patrick Vieira make the right stand on racism

Jack Pitt-Brooke

Manchester City and Patrick Vieira make the right stand on racism
How Terry Newton tragedy made iron men seek help to tackle their psychological demons

How Newton tragedy made iron men seek help to tackle their psychological demons

Over a hundred rugby league players have contacted clinic to deal with mental challenges of game