The financial crisis is finally over, folks: We have found a scapegoat.
In a rare legal victory for the Securities and Exchange Commission in a case tied to the crisis, a jury in a Manhattan civil court on Thursday found former Goldman Sachs banker Fabrice Tourre liable on six counts of securities fraud. The case involved a toxic mortgage deal known as Abacus, which Goldman created in 2007 at the request of hedge-fund manager John Paulson, so that he could bet against it, part of his strategy for making $15 billion on the crisis.
The jury found that Tourre had misled investors about the nature of the deal, tricking them into thinking it had not been built for failure from the start. Tourre now faces the possibility of heavy financial penalties and a lifetime ban from the securities industry.
Not on trial in the case was Goldman Sachs itself, although the bank was paying Tourre's legal fees. That is because it settled with the SEC in 2010, paying a $550 million penalty without admitting or denying wrongdoing.
The SEC had taken a big gamble on this case, turning what ordinarily would have been a fairly quiet matter involving a young, mid-level banker into a make-or-break moment for its response of the financial crisis.
Though the SEC's gamble paid off, the nearly three-week trial did not often seem to go well for the agency. Its star witness contradicted himself on the stand and undermined the agency's case. The jury was frequently lulled to sleep by gentle waves of jargon. Tourre's lawyers didn't call any witnesses, a sign that they felt confident in the outcome. Too confident, if so.
Pro tip for future lawyers: Based on this trial and Michael Lewis's account in Vanity Fair of the trial of former Goldman Sachs programmer Sergey Aleynikov, confusing and boring a jury half to death is the key to convicting somebody in a Wall Street case.
After watching far too many settlements that let banks get away with pre-crisis misdeeds without admitting or denying wrongdoing, some might find satisfaction in Tourre's loss. And if this win encourages the SEC to start bringing more charges against higher-level bankers, then that could be good, too, although the deterrent effect of being threatened with a civil lawsuit is debatable.
Otherwise, though, the victory feels hollow. Tourre was surely not the only person at Goldman Sachs who knew what was happening with Abacus, and yet he is the only person who went to trial. Goldman Sachs was not nearly the only bank crafting these such securities, and yet somehow Tourre's is the only scalp the government has managed to take so far -- maybe just because he had the bad judgment to write dumb emails. No one at any bank has gone to jail, nor even to a criminal trial, for actions that led to the crisis. (The SEC can only bring civil charges, so this is not the agency's fault.)
"No one should be allowed to break the law, but the SEC must stop chasing minnows while letting the whales of Wall Street go free," Dennis Kelleher, CEO of the nonprofit group Better Markets, said in an email. "That only rewards and incentivizes more crime. The American people deserve better."
Here's hoping the Tourre verdict doesn't end up being the government's crowning achievement in the wake of the crisis.
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