Resisting Corporate Corruption, 3rd Edition

Case 7Facing Reputational Risk on Goldman’s ABACUS 2007-AC1

Rosenblum thinks there could be reputational risks. So, he wants us to review ABACUS 2007-AC1 with the Mortgage Capital Committee (MCC). I sort of understand. This thing is a monstrosity. Still, I’m not exactly sure what he means by ‘reputational risk’ and what difference that might make for how we construct and sell this product.

IT WAS LATE FEBRUARY, 2007. FABRICE TOURRE, a Vice President working for Goldman Sachs’ “structured products correlation trading desk” was just finishing up engagement letters for a new deal, ABACUS 2007-AC1. The deal, a Synthetic Collateralized Debt Obligation (SCDO), was rounding into shape. Tourre had defined the subprime mortgage-backed Collateralized Debt Obligations (CDOs) that the deal would reference. He had received a verbal commitment from ACA Management LLC (ACA) to act as the “portfolio selection agent.” Tourre had calculated that ABACUS 2007-AC1 would earn Goldman Sachs $15–20 million dollars with the firm taking little risk. Everything was falling into place.

To make sure that all bases were covered, Tourre asked David Rosenblum, one of his bosses, whether the deal needed to go to the MCC. Rosenblum said that it did. Then he had added a comment that reputational risk for Goldman was the reason for holding the review.¹

Rosenblum’s comment stirred up doubts that had festered inside Tourre since the deal was broached. ABACUS 2007-AC1 had developed in an unusual fashion. The deal ...