Sunday, April 25, 2010

Death of a Salesman

Fab Tourre is the Goldman saleman singled out by the SEC. It's important to remember a salesman's job is to get people to buy things they wouldn't otherwise buy. If a product sells itself it doesn't need salesmen. Salesmen get paid to get people to buy things they otherwise didn't want, and probably don't need or can't afford. If this is a crime, it's being committed right now by millions.

Further, salesmen tend to have a very superficial understanding of what they are selling. Very few salesmen can answer technical questions about their inventory. A really knowledgeable salesmen isn't a good salesmen, because anyone who knows a lot about their product and the competition knows that their product, at best, is not that much better than alternatives. Most things have cheaper substitutes that are just as good, that's what savvy people know--that's the essence of being savvy. Most salesmen are perforce selling inferior products, but to sell a product you can't know that otherwise you are not as convincing when giving the pitch as to why their product is a must buy. Cognitive dissonance is much easier to tolerate when you are too ignorant to sense it.

Persuasion is best done by people smart enough to know a few key selling tricks. For example, Kevin Hogan is a communications expert, and he highlights how words like 'imagine', 'now', 'because', and of course 'please' and 'thank you', are great words when making a sale. He also notes that while first names are great, use them sparingly or it sounds manipulative. So, start a discussion by saying the person's name, and end with their name ( 'OK John, ...make point... thanks, John, talk to you soon'), but don't use their name in the middle! All good stuff, and you can see that to master these tactics you need some skills, though knowing a lot about the product is not one of them.

Aristotle said that a judge should not be young, he should have learned to know evil, not from his own soul, but from long observation of the nature of evil in others. Similarly, bond investors and salemen should have experienced the crises that are the true tests of bond safety. As a 28 year old (circa 2007), Fab never experienced a true credit cycle, and bonds only demonstrate their value during those infrequent crises that occur every 5 to 10 years. Tourre started at Goldman in 2001, missing the tech bubble, and never had any experience with the Commercial Real Estate bubble of 1990, the oil-patch bubble in the 1980's, the interest rate crisis of 1994, etc. Buying a bond from someone who has only read about theses things is a problem because financial market history seems a lot more predictable than it is in real time.

So, when Fab speaks to congress this week, remember, he's a salesman. He probably didn't fully understand the CDOs he was selling, and was exaggerating its safety. That's not a crime, that's the definition of a salesman.

The key fact in this question appears to be whether Tourre or Goldman told asset manager ACA that Paulson & Co. was an equity investor, a material misrepresentation. Goldman flatly denies this, the SEC says they did. I think the real lawsuit should be against ACA for gross negligence, though I'm not sure what's left of ACA could make any restitution.

7 comments:

Anonymous #5 said...

Nice post, but...

[P]ortions of an e-mail in French and English sent by Mr. Tourre to a friend on Jan.23, 2007 stated, in English translation where applicable: “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!!!” Similarly, an e-mail on Feb. 11, 2007 to Mr. Tourre from the head of Goldman’s structured product correlation trading desk stated in part, “the cdo biz is dead we don’t have a lot of time left.”

He was surprisingly self-aware for a mere salesman.

Patrick R. Sullivan said...

#5, that's typical salesman bs. He's just blowing off steam in his high stress position. I've seen this type of thing many times.

Remember that you're only seeing out of context snippets of a few, out of thousands, of e-mails.

Anonymous #5 said...

Oh, I'm not convicting him of anything based on those emails. I'm just saying that the mere fact that he was a salesman doesn't necessarily mean he was too dumb to understand what he was selling.

I've seen good salespeople who could easily put on a different hat if you paid them to do that. Some people just respond well to incentives.

Anonymous said...

You open your post with a total misunderstanding of the role of the salesperson ... so I didn't bother to read the rest because it was based on nonsense. It shows a typical Economist's understanding of the world: all products are commodities that are relatively perfect substitutes for each other.
Manipulating people is hard work. It's a lot easier to listen to them when they have a need/want/demand, and then provide them with a product from your assortment/selection/etc that best satisfies their need.
Your concept of salespeople, and I guess advertising and marketing, is straight out of the socialist handbook. It's obvious your Economics department at wherever was not a part of the business school.
The best salespeople know their product AND the competition's product. There are differences, and it's their job to explain them ... with a spin that favors their product, but never stretching to the point where they lose credibility and trust with the client.

Anonymous said...

Don't be silly. The crime is not getting people to "buy thing they don't need", the crime is selling a defective product or saying that the product has the feature X when it does not.

If a salesperson does not understand the product and misrepresents its features, that's grounds for a lawsuit. People/companies get sued all the time over this.

Robert Johnson said...

"There are differences, and it's their job to explain them ... with a spin that favors their product, but never stretching to the point where they lose credibility and trust with the client."

You're right. The best salespeople aren't ignorant. They're sociopaths.

Anonymous said...

Whatever happened to due diligence in all of this? Either 1) the buyers were idiots, in which case it's better they blow up or 2) they indeed were some of the most sophisticated investors in the world, and so only have themselves to blame.