Fabrice Tourre has drawn the short straw.
The last five years has seen a near-constant parade of current and former bank CEOs and executives brought before various Congressional bodies and regulatory organizations – not to mention a special commission charged with investigating the financial crisis. To the dismay of many Americans, however, very few corporations and far fewer individuals have been held accountable for the mess that brought the financial system to the brink of collapse.
Dick Fuld, CEO of Lehman Brothers, may have lost his standing among his peers (which may, in its own way, be an appropriate punishment), but he is still able to do business in the industry, having worked for a hedge fund and then a securities firm after Lehman’s collapse. Angelo Mozilo, former CEO of Countrywide Financial, forked over $67.5 in fines to settle civil charges of fraud and insider trading (and accepted a lifetime ban from the securities industry), but federal prosecutors reportedly abandoned their probe into his activities. Two Bear Stearns hedge fund managers accused of misleading investors were acquitted of criminal charges back in 2009. Since then, disgruntled critics of the banking system have had few targets on which to focus their wrath.
Today, that may change as Fabrice Tourre, better known as “Fabulous Fab,” is brought to trial at a federal courtroom in New York, accused of selling investment products that he knew would turn sour and leave investors with big losses. This isn’t a criminal case: Even if Tourre loses, he won’t face jail time. But he could be hit with a big fine and be banned from the financial services industry for life. That would limit the options available to Tourre, who recently entered the University of Chicago’s doctoral program in economics and, who, according to The New York Times, has won plaudits from his professors.
Goldman Sachs has long since settled the case that gave rise to the charges against Tourre, agreeing to pay a hefty $550 million to the Securities & Exchange Commission. That leaves Tourre to face the music alone.
By any standards, whatever follows from the trial that is scheduled to begin today (absent a last-minute settlement) won’t be justice. For critics of the financial system, it will be far too little and far too late. Holding a single 20-something accountable for the misdeeds of a multi-billion dollar investment bank and the entire financial system just isn’t appropriate.
Nonetheless, there is a risk that members of Tourre’s jury may be among the ranks of Americans who believe justice for ordinary folks on the losing side of Wall Street’s shenanigans is long overdue. The jury may decide to make an example of Tourre. Alternatively, if he gets off scot-free, as the two Bear Stearns traders did, it will send a different kind of inaccurate message: That he did nothing wrong.
The problem is that the real culprit here isn’t an individual or even an institution. The culprit here is the culture – the way of thinking about financial markets that prevailed throughout the period leading up to the crisis in 2007/2008 and, to some extent and in some ways, still endures. And you can’t put a culture in the dock.
Tourre certainly was a product of that culture. He was extremely good at his job, packaging and selling synthetic debt securities. He was extremely good at another vital Wall Street survival technique: blinding himself to the risks associated with what he was doing. As some of his peers pointed out at the time, the kinds of deals that put Goldman Sachs and Tourre in the spotlight were done in part because if those bankers didn’t do them, they knew that one of their rivals would. So, when hedge fund manager John Paulson wanted to structure a portfolio of mortgage securities to bet against, Goldman was happy to comply. When he wanted to have a voice in deciding what went into that portfolio, the bank agreed to that, too.
The dispute remains over the question of what the duties of Goldman and Tourre were to the investors they persuaded to take the other side of the trade, and who ended up losing more than $1 billion. As Goldman Sachs execs said in explaining the deal to Congress, it was up to those investors to do their own due diligence. Caveat emptor.
Tourre has long since left Goldman Sachs’s employ, although the bank continues to finance his defense. After all, it wouldn’t look good if he was found guilty of defrauding investor while working for them. But even if the jury brings in a guilty verdict, what difference will it make?
Tourre is just one of thousands of young Wall Street people who, in the years leading up to the financial crisis, probably had pretty much the same attitude toward their jobs: Make as much money as possible for your financial institution, be aggressive, don’t lose business to your rivals, pursue a big bonus. It’s unlikely that Tourre is the only one to have crossed the line in this way, and – unlike a rogue trader – he didn’t end up in his current predicament by deliberately flouting the mores of Wall Street or by doing an end-run around his bosses and the systems they had created to prevent wrongdoing. Rather, his major misdeed may have been, when told by those bosses to jump, to respond by saying “how high?” rather than “why?”
In some ways, it is almost is irrelevant at this stage whether Tourre is acquitted or convicted. He isn’t another Nick Leeson, bringing down a centuries-old bank, or another Yasuo Hamanaka, single-handedly controlling and distorting the market prices for a specific asset. Only if he and Goldman together had been held accountable, and if the SEC had been able to develop similar kinds of cases against other financial institutions, would this trial serve as a significant step in the quest to make Wall Street accountable.
Instead, it feels like a sideshow. Worse still, it will generate a lot of attention that might better be devoted to the ongoing debate over regulatory reforms and the quest to make sure none of this happens again. Worst of all, it may end up making Tourre a minor celebrity and, if he is acquitted, convince others like him toiling in the ranks of Goldman, Morgan Stanley, Jefferies and myriad other Wall Street firms that the way to get ahead is to push the envelope. That would be a real loss across the board.