Chin, Edwin

Tourre, Fabrice

Yale University

Yale University EliScholar – A Digital Platform for Scholarly Publishing at Yale YPFS Documents Browse by Media Type 1-1-2007 Goldman Fabrice Tourre email to Marine Serres, PSI Exhibit 62 Fabrice Tourre Edwin Chin Follow this and additional works at: https://elischolar.library.yale.edu/ypfs-documents Recommended Citation Tourre, Fabrice and Chin, Edwin, "Goldman Fabrice Tourre email to Marine Serres, PSI Exhibit 62" (2007). YPFS Documents. 4389. https://elischolar.library.yale.edu/ypfs-documents/4389 This Document is brought to you for free and open access by the Browse by Media Type at EliScholar – A Digital Platform for Scholarly Publishing at Yale. It has been accepted for inclusion in YPFS Documents by an authorized administrator of EliScholar – A Digital Platform for Scholarly Publishing at Yale. For more information, please contact elischolar@yale.edu. From: Sent: To: Subject: Tourre, Fabrice Tuesday, January 23,200711 :34 PM Serres, Marine Fw: ft--friday - = Redacted by the Permanent Subcommittee on Investi ations ....... e. you should take a look at this article ... Very insightful ... More and more leverage in the system, l'edifice entier risque de s'effondrer a tout moment ... Seul survivant potentiel, the fabulous Fab (as Mitch would kindly call me, even though there is nothing fabulous abt me, just kindness, altruism and ........ i· •••• I1!1 ••••••• .................................... ), standing in the middle of all these complex, highly levered, exotic trades he created without necessarily understanding all the implications of those monstruosities !!! Anyway, not feeling too guilty about this, the real purpose of my job is to make capital markets more efficient and ultimately provide the US consumer with more efficient ways to leverage and finance himself, so there is a humble, noble and ethical reason for my job ;) amazing how good I am in convincing myself!!! I am now going to try to get away from ABX and other ethical questions, and e into Freakonomics ... Sent from my BlackBerry Wireless Handheld ----- Original Message From: Chin, Edwin To: ficc-mtgcd-traders Sent: Mon Jan 22 19:36:04 2007 Subject: ft--friday The unease bubbling in today's brave new financial world By Gillian Tett Published: January 19 2007 02:00 I Last updated: January 19 2007 02:00 Last week I received an e-mail that made chilling reading. The author claimed to be a senior banker with strong feelings about a column I wrote last week, suggesting that the explosion in structured finance could be exacerbating the current exuberance of the credit markets, by creating additional leverage. "Hi Gillian," the message went. "I have been working in the leveraged credit and distressed debt sector for 20 years . . . and I have never seen anything quite like what is currently going on. Market participants have lost all memory of what risk is and are behaving as if the so-called wall of liquidity will last indefinitely and that volatility is a thing of the past. "I don't think there has ever been a time in history when such a large proportion of the riskiest credit assets have been owned by such financially weak institutions. . with very limited capacity to withstand adverse credit events and market downturns. Permanent Subcommittee on Investigations EXHIBIT #62 Confidential Treatment Requested by Gold GS MBS-E-003434918 "I am not sure what is worse, talking to market players who generally believe that 'this time it's different', or to more seasoned players who. . privately acknowledge that there is a bubble waiting to burst but . . . hope problems will not arise until after the next bonus round." He then relates the case of a typical hedge fund, two times levered. That looks modest until you realise it is partly backed by fund of funds' money (which is three times levered) and investing in deeply subordinated tranches of collateralised debt obligations, which are nine times levered. "Thus every €lm of CDO bonds [acquired] is effectively supported by less than €20,000 of end investors' capital - a 2% price decline in the CDO paper wipes out the capital supporting it. "The degree of leverage at work ... is quite frankly frightening," he concludes. "Very few hedge funds I talk to have got a prayer in the next downturn. Even more worryingly, most of them don't even expect one." Since this message arrived via an anonymous e-mail account, it might be a prank. But I doubt it. For, while I would not normally write an article about responses to an article (it is the journalist's equivalent of creating derivatives of derivatives) I am breaking this rule, since I have recently had numerous e-mails echoing the above points. And most of these come from named individuals, albeit ones who need to stay anonymous, since they work for institutions reaping profits from modern finance. There is, for example, a credit analyst at a bulge-bracket bank who worries that rating agencies are stoking up the structured credit boom, with dangerously little oversight. "[If you] take away the three anointed interpreters of 'investment grade', that market folds up shop. I wonder if your readers understand that . . . and the non-trivial conflict of interest that these agencies sit on top of as publicly listed, for-profit companies?" Then there is the (senior) asset manager who thinks leverage is proliferating because investors believe risk has been dispersed so well there will never be a crisis, though this proposition remains far from proven. "I have been involved in [these] markets since the early days," he writes. "[But] I wonder if those who are newer to the game truly understand the impact of a down cycle?" Another Wall Street banker fears that leverage is proliferating so fast, via new instruments, that it leaves policy officials powerless. "I hope that rational investors and asset prices cool off instead of collapse, like they did in Japan in the 1990s," he writes. "But if they do, monetary policy will be useless." To be fair, amid this wave of anxiety I also received a couple of "soothing" comments. An analyst at JPMorgan, for example, kindly explained at length the benefits of the CDO boom: namely that these instruments help investors diversify portfolios; provide long-term financing for asset managers and reallocate risk. "Longer term, there may well be a re-pricing of assets as the economy slows and credit risk increases," he concludes. "But. there is a very strong case to be made that the CDO market has played a major role in driving down economic and market volatility over the past 10 years." Let us hope so. And certainly investors are behaving as if volatility is disappearing: just look at yesterday's remarkable movements in credit default swaps. But if there is any moral from my inbox, it is how much unease - and leverage - is bubbling, largely unseen, in today's Brave New financial world. That is definitely worth shouting about, even amid the records now being set in the derivatives sector. This email is being sent to you for your information pursuant to your request. This information is not warranted as to completeness or accuracy. The views expressed in the message are those of the individual sender, except where the message states'otherwise and the sender is authorized to state them to be the views of George Weiss Associates, Inc. or any of its affiliated entities. This message is for the named person's use only. It may contain sensitive and private proprietary or legally privileged information. No confidentiality or privilege is waived or lost by any mistransmission. You must not, directly or indirectly, use, disclose, distribute, print or copy any part of this message if you are not the intended recipient. 2 Confidential Treatment Requested by Goldman Sachs GS MBS-E-003434919 

Goldman Fabrice Tourre email to Marine Serres, PSI Exhibit 62

https://elischolar.library.yale.edu/cgi/viewcontent.cgi?article=5437&context=ypfs-documents

Goldman Fabrice Tourre email to Marine Serres, PSI Exhibit 62

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