This is your brain on deregulation of derivatives... Any questions?

If Americans didn’t know who Marion Jones was before the 2000 Summer Olympics in Sydney, they certainly did afterwards.   In Sydney, Jones’ winning performance made her a household name and she made history as the first female to win 5 medals in track and field (3 Gold and 2 Bronze).  

However, in September 2007, Jones’ legacy was instantly transformed from one of Olympic gold and glory to a cautionary tale punctuated by shame and embarrassment when she pled guilty to the use of performance enhancing drugs.  Jones also admitted to two counts of lying to federal investigators about her use of drugs in the BALCO steroid investigation.   As a result, Jones was publicly shamed as the face of fraud in athletics and forced to return the medals she won.  An emotionally fraught Jones issued public apologies to fans and teammates as she was sentenced to six months in prison – she began serving her time in March 2008.[1]

In a recent Daily Show interview to promote her book On the Right Track, Jones emphasized the point that she didn’t know that what she was doing was wrong at the time – she trusted her “inner circle” (the people who gave her drugs) and believed that the “performance enhancing” cocktails she was injecting were legal. [2]  According to Jones, she didn’t know there was an issue with the drugs until the BALCO investigation in 2003. 

As I watched the Jones interview today, I couldn’t help but think she sounded a lot like the cast of characters in Charles Ferguson’s documentary Inside Job.   From ivy league economists to the evasive Goldman Sach’s executives who testified before Sen. Carl Levin, the people who had a hand in promoting deregulation of derivatives and creating risky financial products seemed – like Jones – insistent that they were blithely unaware of the great risks.  The rest declined to be interviewed. 

There is no doubt that what Jones did was wrong.   However, the difference between her and the cast of characters inInside Job is twofold:  first, Jones was held accountable for her actions whereas the bankers, rating agencies, professors, and government leaders who led us into this mess were not; and second, as hard as it is to believe Jones had no idea whatsoever that the drugs she was injecting before a race might not be totally kosher, it’s even harder to believe that a highly educated leading government economists who were repeatedly presented with research indicating that deregulation was bad could not find a way to put a stop to it.

After seeing Inside Job, it seems there are only two conclusions one can make:  at worst - the banks, rating agencies and government heads who all ignored warnings about the impending financial crisis were and are totally corrupt or - at best – they made a serious oversight and exercised poor judgment.  But either way – those that were in charge, should be accountable for their decisions and no longer be in charge. 

Don't get me wrong - I'm rooting for QE2 to succeed, but it does seem like the decision to put Bernanke in charge of the Federal Reserve was like putting a doctor who for many years, ignored the research indicating that smoking is bad for his patients health in charge of national health policy.    

My hope is that as a result of Ferguson's documentary  more Americans will be energized to demand real change and reform starting with the following:

1) All the leaders who helped ban the regulation of derivatives or otherwise contributed to the crisis by ignoring the research need to be fired.   We desperately need fresh, ethical people in the government’s top economic seats. 

2) The three big rating agencies should clearly not be paid by the banks who issue the securities they rate (by the way, whoever thought that was a good idea?) 

3) There should be full disclosure of financial conflicts of interest in the academic world.  So if you’re the chair of the Harvard Economics department and also on the board of AIG, you need to disclose this when you write a paper on how wonderful AIG is. 

4) There needs to be an antitrust investigation of banking given that five US firms control 95% of global derivatives trading [3]

5) The Justice Department should go after the Wall Street executives and companies involved in the collapse.   As Ferguson lamented in a Huffington Post article, “It was possible to conceal liabilities, inflate assets, bet against the securities that you sold as totally secure, without committing a single fraud.  Isn’t that amazing?”

Finally, as I reflect on the corruption or - at best we’ll call it oversight - made by the White House, investment bankers, rating agencies and academics leading up to the financial crisis of 2008, I’m inclined to recall the 1980’s anti-drug campaign “this is your brain on drugs” because that’s exactly how I imagine our nation’s elite minds on the deregulation of derivatives – totally fried.

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[1] http://sports.espn.go.com/oly/trackandfield/news/story?id=3282477

[2] http://www.thedailyshow.com/watch/mon-november-15-2010/marion-jones

[3] http://www.huffingtonpost.com/charles-ferguson/post_930_b_738597.html

"The Parable of the Sadhu," aka "The Parable of the Man With No Ethics"

I enjoy watching Jon Stewart’s Daily Show when I have the time because he provides comic relief on the discourse surrounding issues of the day which frankly is sometimes so ridiculous that if you don’t laugh, you have to cry.   That’s kind of how I feel when I think about Bowen McCoy and his parable.  

If I was a producer at The Daily Show and having just watched the Parable of the Sadhu video (and assuming it was current), I’d be on the phone right now saying something like this -

“Get one of our reporters over to the house of Bowen McCoy right now or better yet, get him on the show.  This will be a segment on Wall Street’s lack of ethics.  What’s The Parable of the Sadhu?  Oh you have to see it.   Basically it goes something like this  – highly privileged and Harvard educated Western man (McCoy) meets a man in a life or death situation on a mountain in Nepal and chucks basic human decency out the window because he wants to get to the top of the mountain.   Instead of helping the guy to safety he just keeps trekking up the mountain.  It’s like he’s Gordon Gekko personified. 

Yeah.  Yeah.    Just get him talking about the Sadhu piece.  He’s bound to say that there is some struggle to know what the right decision is when faced with the issue of saving a man’s life or climbing to the top of the mountain…   Yes, I know that sounds absurd – it’s an obvious choice, but not to this guy.

[In my sarcastic voice] Now don’t forget the context  - he was in a tough situation.  It’s important to know he traveled all the way to Nepal from New York City– and it was a long grueling flight in First Class – they didn’t even have any of the good scotch on the plane.   And do you have any idea how hard it was to get six months time off from his “Master of the Universe” boss at Morgan Stanley.  Masters of Universe don’t just give 6-month sabbaticals out every day you know.  

Another sad part of this story that went unmentioned in the HBR article is that Mr. McCoy’s wife and kids had to go on their St. Bart’s vacation without him this year because of all his mountain climbing training.   I mean, when you put all that in perspective, it really is a tough decision. “

When I watched the Parable of the Sadhu video in class I felt I was having a moment like the child in the Hans Christian Anderson story, The Emperor’s New Clothes.   Ummmm, does anyone else notice that this guy is totally devoid of moral character?  He’s not wearing a stitch of moral fiber.

I can understand that not every ethical dilemma has a clear answer, but this one definitely does.  So I thought for sure when I came home and Googled “Parable of the Sadhu” that I would find a large number of people mocking this parable.  But again I was surprised.  Instead of mocking, I found search results hailing the Parable of the Sadhu as an “HBR Classic” and a 2008 blog by another business student raising the questions of ethics that came up, but not really taking a firm stand either way.  

Am I missing something? Is it really that difficult to make the choice of whether to go on up the mountain in pursuit of an individual goal rather than help someone – in this case the Sadhu – survive rather than die on the mountain? Or to at least realize that the way Mr. McCoy acted flies in the face of simple human decency?  I think that even in a complex corporate situation, the group has responsibility for the individual.  If someone needs help, you give it to them.  If someone can’t make it all the way up the mountain the first time, then help them prepare for the second try.  Get them the training and the gear they need to succeed. 

So here’s what I’d like to say to Bowen McCoy:

Dear Mr. McCoy (or, Hey McCoy):

OK - here’s the deal McCoy – I understand you’re a real muckety muck- a Master of the Universe straight off the pages of The Bonfire of the Vanities.  You’ve scaled the heights of the corporate real estate mountains and risen up the ranks at Morgan Stanley - and you’re an upstanding member of society on several boards.   Your background is outstanding and that’s what makes this all the more tragic.  You represent what is supposedly the best of the best of our society and you actually have to ponder whether you did the right thing on that mountain.  This shouldn’t be so hard for someone as sophisticated as you.  The group always has responsibility for the well being of an individual.  It’s the right thing to do.   It’s also an old Army adage - leave no man behind.   But don’t pass this off on the group – the leader (read: you) should have known that the right thing to do was to help the Sadhu to safety and make sure he was taken care of. 

So you had a once in a lifetime chance to climb to the top of the mountain.  Well, here’s a news flash - you also had a once in a lifetime opportunity to save the life of another human being.  To save a life!  How amazing is that!  The former choice of climbing to the top of the mountain must have been personally satisfying.   I’m sure you felt proud that day.  But guess what, the latter choice is way better.   I understand from the video that you are haunted by this choice day.  Well, you should be more than haunted – you should feel intensely guilty.   The mountain is always going to be there – a person is not.  There is no dilemma because there are no shades of grey here - the bottom line is that you were wrong and you failed as a leader.  I hope you learn from that.

Sincerely,

Andrea Berry

P.S. My Google search did not yield the full text of your parable for free (I could have paid $6 for it, but decided it wasn’t worth the cost).  If, by some chance, you reveal cognizance that you clearly failed as a leader, I apologize – this was not clear in the video clip that I saw.

Liberty v. Safety

Class 2 had no shortage of food for thought, but I really savored the quote by Ben Franklin, “those who give up essential liberty to purchase a little temporary safety deserve neither Liberty nor Safety.”

On a side note, it was sad to hear that roughly 60% of Americans could not name three Supreme Court Justices while they could easily remember the three stooges.  But of course I also had to wonder, what percentage of Americans can remember the Justices and not the Stooges?  Less than one percent?  Or, maybe it’s just one person – that would be me.  I couldn’t remember the third stooge.  My parents did not let me watch TV growing up.  – sigh!  oh and thanks a lot Mom and Dad.

Getting back to the Ben Franklin quote, this cautionary quote and the clip from The Siege seems remarkably relevant to present day and it instantly reminded me of the recent mosque debate in New York. 

Now I’ll be the first to admit – when I first heard the shocking headline “mosque at ground zero” – my knee jerk reaction was shock and horror.  What?! How can they put a mosque *at* Ground Zero? This makes no sense!

Fortunately, I also felt compelled to learn more – this was a good thing because as it turns out that little preposition, “at” was seriously misused in the news headlines as Clyde Haberman of the New York Times has astutely pointed out.  The fact is the proposed mosque site is about two and a half blocks away from the perimeter of Ground Zero. Hardly what anyone could legitimately call "at" Ground Zero. 

Nonetheless, correct use of prepositions was not a concern of many news organizations as they continued for weeks to suggest that building a mosque “at” Ground Zero was un-American, insensitive and dangerous (who knows where the money is coming from, who knows what they’ll plan in there).  

Even members of my extended family said things like, ‘every terrorist I can think of is a Muslim,’ and clearly echoing Newt Gingrich, ‘Saudi Arabia won’t let us build churches, why should we let “them” build a mosque.’   I could try and reason with them until I was blue in the face (stop listening to Newt Gingrich and Glenn Beck, not all Muslims are terrorists, we don’t really want to emulate Saudi Arabia, don’t forget the 1^st Amendment, freedom of religion, etc), but to no avail.

For my relatives – and apparently for most Americans – building a mosque near the perimeter of Ground Zero was almost like building a terrorist command center.  Just for the record, I’m against building a terrorist command center near Groud Zero or anywhere in the country for that matter.   

Even the President seemed a little shaky in his response to the mosque debate.  I was dismayed to read that about 70% of Americans were against the building of this mosque.  I wondered when anyone with a voice would ever speak with wisdom on the topic. 

Finally, there was Mayor Bloomberg. 

At the annual Ramadan Iftar dinner at Gracie Mansion, Mayor Bloomberg spoke directly and eloquently to the issue of the mosque:

"… if we say that a mosque and community center should not be built near the perimeter of the World Trade Center site, we would compromise our commitment to fighting terror with freedom. We would undercut the values and principles that so many heroes died protecting…. Islam did not attack the World Trade Center – Al-Qaeda did. To implicate all of Islam for the actions of a few who twisted a great religion is unfair and un-American. Today we are not at war with Islam – we are at war with Al-Qaeda and other extremists who hate freedom….. This is a test of our commitment to American values. We must have the courage of our convictions. We must do what is right, not what is easy. And we must put our faith in the freedoms that have sustained our great country for more than 200 years” (emphasis added).

Thank you Mr. Mayor!  Compromising the liberties of Muslim Americans, their right to practice religion in New York - or in any state - because of our underlying fear of the unknown is wrong.  The internment of Japanese Americans was likewise wrong spurned by a fear that spiraled out of control – in that case it was the fear that Japanese Americans might have divided loyalties to the US.  Clearly, it isn’t always easy to think through the fear, but history has taught us that’s when it’s most important to abide by our country's guiding values and principles.... and take a little less liberty with the proper use of prepositions.

How I feel about our Ethics class visiting Federal Prison for a day

Since this blog is for a law and ethics class, a statement of full disclosure seems like an appropriate way to begin. 

As I take time out to think about our class and pour through the first day's notes, I’m reminded of many things  - from the importance of checking Blackboard assignments to that surprising picture of Mr. DeMent, to my favorite Jeopardy answer: “Bay of Pigs-in-a-Blanket,”  Fr. Mark Bandsuch’s comments on product liability and the ethics of advertising to children,  John Pepper’s breakdown of the “value of values,” Carly Fiorina, and Lynn Brewer of Enron fame (although I’ve just read in a USA Today article that popped up on a Google search that there is some question as to whether Brewer exaggerated her role at Enron in order to achieve notoriety on the speaking circuit and thereby – highly ironically – committed an ethics violation whilst speaking out against ethics violations??  Could it be?) – but then there it is – that one little note  - the one that suddenly overshadows all other reflections and abruptly halts my ruminations on Lynn Brewer - indicating that we are taking a trip to Federal Prison…  Federal Prison! 

In my rational mind I know that the title of the class is “Business Law and Ethics” the objective of which is to “develop a heightened awareness of the legal and ethical aspects of business,” but right now all I’m reading is: “The Class That Is Going to Federal Prison for a Day… and Apparently Also Eating Lunch with Prisoners.”   Thoughts such as ‘what have I gotten myself into’ and ‘where have all the boring professors gone’ have fleetingly crossed my mind. 

So here’s my full disclosure: I’m not looking forward to spending a day in a Federal Prison. 

Needless to say, I’m inspired with what is probably a slightly above normal level of apprehension, fear, and even flat out dread of that particular day.  

Beyond the dread, however, the thought of visiting a prison in the context of a business law class definitely provides fodder for reflection as it brings to mind many recent cases of famed white collar criminals such as Martha Stewart, Bernie Madoff, Ken Lay, the Christie’s and Sotheby’s executive indicted for price fixing, et al…. This impending trip  also reminds me of the time I visited a former friend and co-worker convicted of fraud at a military confinement facility in South Korea.    

The man I was going to see was a former Master Sergeant in the Army (out of respect for his privacy I’ll refer to him as MSgt. Smith) whom I had worked with in the 19^th Theater Support Command’s Public Affairs Office in Daegu.  The entire time we worked together – roughly four months – I knew MSgt. Smith to be a good NCO who took care of the soldiers working under him, produced quality work, and was enjoyable person to work with in the office.   In other words, there were no outward signs of any kind of criminal tendencies.   When I was questioned by investigating officers before his trial, I had nothing but good things to say about him.  However, as it turned out – the evidence showed that for many years, MSgt. Smith had been committing Basic Housing Allowance (BHA) fraud by stating that he was married with children living in his custody when he was in fact divorced.    How could our good sergeant have totally abandoned his Army values and done this was a question that stymied everyone in the office.  Not to mention, how could he think he would get away with it? 

Some time after his conviction and sentencing, I picked a nice hot sunny day to drive a few hours north on the Korean highway in a Hyundai I had purchased for $500 with doors that opened only from the outside and no air conditioning to make a visit to MSgt. Smith.  The good news is that my Hyundai got me there and back.  The bad news is that the man I found in confinement was completely unlike the proud soldier I’d known – he appeared deeply humbled and shamed wearing chains around his ankles (perhaps a bit drastic for a white collar criminal, although as a young lieutenant I was in no position to question the uniform of the day at a military confinement facility).   The objective of my trip was not to uncover MSgt. Smith’s motivations for committing fraud, but I was hoping that he might drop some hint or give some explanation.  That day, to my dismay, I was left without answers.  Over the following years, the simplified explanation that I created to explain MSgt. Smith’s crime of fraud was that some people must lack commitment to values whereas others do not.  

However, now I’m sure it’s not quite that simple.  When I recount this story and reflect on the anecdote in class about the prosecutor and the ham, an alternate answer presents itself – there’s no way to know for sure, of course, but it’s quite possible MSgt. Smith committed BHA fraud for ham.  By that I mean, I’m beginning to think he felt a sense of entitlement to the BHA money that he had while he was married.  When he was first divorced it probably seemed like a leap to continue getting the extra BHA allowance.  I’m sure he knew that what he was doing was wrong, but then over the many years as the money kept coming, he probably came to believe it was money he was owed – in other words, it was a slippery slope before he came to believe he should be getting the ham in every paycheck.

If there’s one lesson to take from MSgt. Smith in a business context, I believe it’s the importance of guarding against that slippery slope - realizing that it isn’t necessarily just a matter of some people are unethical and some are not, but to realize that all of us are susceptible (ok, some perhaps more than others, but no one is completely immune) to acting unethically (even if it’s in a small way, i.e. the people who stiff the 'bagel guy' in Freakonomics).  Obviously, a business organization can’t spend all its time talking ethics, but it must take absolutely every opportunity to reinforce and emphasize in as many ways as possible within the organization the importance of living and promoting values every day.  

Ethics violations don't necessarily happen overnight or in one big bold move, but are probably - more often than not - a slippery slope starting from what may at first appear to be a minor violation.