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By Prosecuting Fabrice Tourre but Not Goldman Sachs, the SEC Courts Failure
The SEC already reached a 'no fault' settlement with Goldman Sachs, so how can it bring down Tourre for the same non-crime?
Monday sees the opening of the trial of a colorful former Goldman Sachs trader, Fabrice Tourre: a made-for-TV Wall Streeter, a Frenchman with a quick wit who dubbed himself "Fabulous Fab" even as he worked on mortgage deals which, it is alleged, he knew would fail.
The trial is sure to be entertaining. It is also certain to add nothing to the sum of human knowledge; nor will it create any kind of catharsis or sense of justice for the mortgage crisis.
First, some quick background: the deal for which Tourre is on trial is known as Abacus. It was a set of sure-to-fail subprime mortgage securities that Goldman Sachs created exclusively for rich investor John Paulson. Paulson wanted to bet against subprime, but he was having trouble: mortgage securities are mashed-together bundles of all kinds of mortgages, some of good quality, some of excellent quality, and some of subprime quality. Paulson wanted a purely subprime product so that he could bet against it. Goldman Sachs created such a product for him.
Then, Goldman, without telling clients that Paulson had effectively created the securities so he had a better chance of winning, sold them to clients such as Germany's IKB and the Royal Bank of Scotland. Those clients, active investors in subprime mortgages, both needed government bailouts later. Goldman later argued that those clients were too dim and lazy to do their homework and see the securities were destined to fail. The SEC argued that those investors were taken for a ride.
Goldman Sachs is not on trial for Abacus. The bank paid a fine, neither admitted nor denied wrongdoing, and endured a few days of public embarrassment in 2011 as a result of a very entertaining congressional grilling.
With Goldman off the hook, we're supposed to believe that Fabrice Tourre was solely responsible for Abacus. There is no chance this could be the case: he is the lowest-ranking face on the totem pole of Goldman's former mortgage team, and Goldman cut him loose to fend for himself. The expectation of the SEC is that Tourre could put a face on the recklessness of the mortgage crisis.
And he might – knowing how these public trials work – but it would be a false face. The mortgage crisis did not start or end with people like Tourre; it began in the executive offices of banks. No prosecution, however, is likely to reach that high.
Tourre, now a PhD student at the University of Chicago, is largely a scapegoat. He saw, as many scapegoats have, his own impending professional death looming.
It was Tourre who wrote, as he was being asked by his bosses to cobble together Frankensteinian derivatives:
More and more leverage in the system, the entire system is about to crumble any moment … the only potential survivor the fabulous Fab (as Mitch would kindly call me, even though there is nothing fabulous abt me …) standing in the middle of all these complex, highly levered, exotic trades he created without necessarily understanding all the implications of those monstruosities [sic]!!!
That's what Fabulous Fab was – barely even fabulous to himself. Putting him on trial for the mortgage sins of Abacus, or other mortgage securities, is like prosecuting a footsoldier for war crimes. Meanwhile, the generals – the high-ranking executives who gave the orders – continue to collect payouts worth millions of dollars because they are under the protective wing of Goldman Sachs. The SEC most likely knows that it has neither the money nor the clout to reach that far.
There is another reason that Tourre's trial is the kind of Kabuki theater that regulators love, but which will not actually accomplish the goal of holding anyone really responsible for the financial crisis. Goldman Sachs has already escaped any admission of guilt on the same deal that Tourre is allegedly guilty of putting together.
As noted above, the SEC already extracted a $550m settlement from Goldman back in 2010, with one of those wishy-washy "neither admit nor deny" agreements that let the bank avoid actual responsibility. In addition, last year, the Justice Department passed up any chance of bringing a lawsuit against Goldman for this case.
If the deal itself is not a bad or fraudulent one, according to the SEC's own (admittedly dim) terms of settlement, how can the SEC then turn around and argue that Tourre, in putting it together, committed any kind of fraud?
This is why the SEC has to push for better, clearer, more damning settlement terms than "neither admitting nor denying". If the SEC already allowed Goldman Sachs to escape with a "no harm, no foul" excuse, it makes no sense to go after a relatively junior former Goldman Sachs employee and accuse him of harming investors.
Yes, the SEC came out with guns blazing when it first accused Goldman of malfeasance back in 2010, but as Occupy Wall Street came and went, the ardor for true Wall Street prosecutions cooled. The Justice Department, which also considered prosecuting Goldman Sachs, has appeared to be intimidated by the power and clout – and expensive lawyers – of big banks. Perhaps as a result, prosecutions for financial fraud hit a 20-year low in 2011, leading to the mocking coinage of the term "too big to jail".
Of course, it is inconceivable that Tourre acted alone, or even that he was a mastermind of the deal. He was just along for the ride. This prosecution is less about Abacus or Tourre, in fact, than it is about the SEC. Under siege for years from other regulators, including the savvy Preet Bharara in New York and numerous state attorneys general, the SEC needs to regain its dignity and prove it is the cop on the beat.
The SEC made an admirable and long-awaited effort to actually pursue malfeasance under Robert Khuzami, the outgoing director of enforcement. So it was inevitable that the SEC bring this case. But its credibility hinges on showing that it pursues people who are truly guilty and responsible. To do that, it has to aim its sights higher than petty criminals.