WASHINGTON—The world has been yearning to put a name and a face to the financial quackery. We need a flesh-and-blood crook. The bank CEOs—gray, old, predictable—were not enough. Bernie Madoff was an abhorrent byproduct, not a core player. Until “Fabulous Fab” made the perfect fit.

Or so thinks the U.S. Securities and Exchange Commission, which has charged Fabrice Tourre and his firm, Goldman Sachs, with fraud in connection with a 2007 subprime mortgage security scheme.

Tourre was 29 at the time. He was a mathematical whiz with a master’s degree in operations research and a Goldman vice president who structured financial products eerily called “ABACUS” that he marketed with panache. Calling himself “Fabulous Fab” in e-mails to a friend, he predicted that “the whole building is about to collapse anytime now.” He boasted he would be the “only potential survivor.” Could the SEC find a more perfect villain?

And yet . . . the case against Fabulous Fab and Goldman is balderdash. Few insiders think it will stand in the courts. If this is the best way in which the SEC can strengthen President Obama’s hand as he seeks to overhaul financial regulation and in which British Prime Minister Gordon Brown, whose government will also pursue the case, can try to win the upcoming election, let’s pack and move to Pandora.

The SEC alleges Goldman sold more than $1 billion worth of Collateralized Debt Obligations (CDOs) tied to subprime mortgages—which had been put together at the behest of hedge fund manager John Paulson—without disclosing to investors Paulson’s involvement and his bet against the product.

In 2007, Paulson asked Goldman to put together another of its “ABACUS” products, whereby a type of bond linked to subprime mortgages was created. Those were “synthetic” bonds—i.e., the issuer did not own the underlying mortgage securities but bought and sold insurance against them. Two investors bought the note in question: ACA, an experienced company brought in as a “manager” to select the securities that served as reference to the CDO, and IKB, a German bank familiar with these products.

The operation involved three things on Goldman’s part: selling the bonds to the investors, selling credit insurance to Paulson—the way in which the hedge fund manager could bet against the product—and buying credit insurance from ACA to offset the transaction with Paulson. When the mortgages failed, the investors lost, and Paulson gained more than $1 billion. Goldman lost $75 million because it had sold to Paulson slightly more protection than it had bought from the investors.

What Paulson did—generate a product so he could bet against a blatant bubble—was an island of common sense amid a sea of insanity. What Goldman did—brokering a deal between informed sellers and buyers—is what a broker/dealer does. What Tourre did—market the product—was his job description. What ACA did—select the subprime mortgages with advice from others and acquire the product believing the bubble was sustainable—is what people such as Paulson, who had been preaching in the wilderness against it, and Tourre realized was crazy. What IKB did was continue to bet on mortgages taken by people who had scant creditworthiness.

Who would you rather have working in Wall Street—the geniuses who fed the bubble or the prescient minds who acted against it?

The investors the SEC thinks were duped were among the most experienced and fully aware of the nature of the mortgages behind the product. Numerous documents given to them by Tourre, including a 65-page flipbook that mentioned that Goldman might bet against the CDOs, attest to this.

Goldman did not reveal Paulson’s role. Not revealing to one client what the others do is . . . pretty commendable. Doing the opposite, which is what the SEC filing suggests Goldman should have done, is unethical. Neither ACA nor IKB would have acted differently had they known that Paulson, considered a killjoy contrarian, was betting against the product. The important thing is that they knew someone was betting against it just as they were betting for it. That is how this type of deal works. Goldman might have done other things wrong in the bubble years. But not this one.

And, yes one final thing: How many of us would come out impeccably humble, prudent and serene if our conversations with a friend were printed for all the world to see?