Breakout

Fabulous Fab ‘Show Trial’ Won’t Make the System Safer: Hoenig

Jeff Macke
Breakout

This week a 34-year-old ex-Goldman Sachs trader (GS) and French PhD student stands trial in New York, accused of fraud in the selling of complicated securities that cost investors around $1 billion in the 2007 - 2008 housing meltdown. "Fabulous Fab" Fabrice Tourre, then a 28 years old, helped create then sell a product, dubbed "Abacus" that was a basket of securities linked to the health of the subprime mortgage market.

Tourre is accused of misleading investors by failing to notify them that hedge fund manager John Paulson had a hand in the design of Abacus. As the seller Paulson was placing a bet against the housing market. Tourre's job was to find institutional investors willing to take the other side of the bet.

By playground rules Paulson won, the institutional buyers lost, and the guy in the middle didn't have much to do with it. Any security that's ever purchased requires a seller. No one ever bought something they thought was going lower. The institutions buying Abacus from Fab were by definition accredited, meaning qualified to understand what they were being sold.

The smoking gun seems to be an email Tourre sent to his girlfriend in January of 2007. In it Tourre suggested the financial markets were on the brink of collapse and the "only potential survivor, the Fabulous Fab... standing in the middle of all these complex, highly levered exotic trades he created without understanding all the implications of those monstrosities!!!"

A 28-year-old Frenchman who was pulling down $2 million a year and referring to himself as "Fabulous" while peddling toxic assets makes an ideal scapegoat. Jonathan Hoenig of CapitalistPig.com bemoans what he sees as a "show trial" taking precedent over regulators taking a hard look at themselves or exposing the institutions who profited from the deeply-flawed system that allowed the housing bubble to inflate.

There are two reasons for the SEC to pursue this case.

The most noble would be because regulators actually think Fab Tourre really was a central player in the housing crisis. That's absurd on the surface. The other and perhaps more useful reason to bring Tourre to trial would be to restore a sense of confidence in the public that the government is looking out for them.

To the extent Main Street buys into the idea of Fab Tourre as evil genius, his prosecution actually does much more harm than good. As Hoenig says in the attached clip, the belief that regulations and those who enforce them are maintaining a level playing field reduces individual accountability and fosters greater risk taking.

What Tourre himself is on trial for is the crime of being obnoxious in writing. "Don't ever send emails" is the only lesson being learned in the endless investigation of the crisis. Tourre sent a stupid email to a woman he was trying to impress. In it he overstated his importance and insulted powerful agents who would later lose billions.

"One of the unfortunate net results of all this regulation and this scapegoating, this Salem Witch Trial of the Fabulous Fab is that it basically curtails information sharing," concludes Hoenig. "This does nothing to restore financial confidence or restore financial safety in the system. All it does is make the honchos at the SEC feel a little bit better and like themselves."

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