Ethics Among Thieves
Poor Frederic Mishkin. He was totally unprepared. Confident of his own good intentions – and believing others were too – he didn’t see the ambush coming. Hit with questions to which he didn’t know the answers, he stammered good-naturedly and said that he didn’t know.
Would that all officials – and ex-officials – answered questions to which they didn’t know the answers with Mishkin’s honesty, rather than their usual practiced bluster.
I’m glad I saw the Academy-award winning movie, Inside Job, twice. The second viewing allowed me to reassess the role of Frederic Mishkin, a former Federal Reserve governor and now a professor at Columbia University, one of the interviewees. It changed my view of the movie.
Inside Job, directed by Charles Ferguson, an eminent political scientist with a distinguished background, is a thoroughgoing indictment of the financial industry that has its virtues but relies on some unsavory vices. On the one hand, through interviews, congressional testimony, and other video, the film exposes cronyism, corrupt ethics, and excessive power at the core of the financial industry. On the other, the movie at times unfortunately feels more like a polemic than a hard-hitting, fact-finding investigative reporting piece.
Beware the indignation-jerker
The first time I saw Inside Job, I didn’t like the interview of Mishkin, which made me feel annoyed in the same way as Michael Moore’s Fahrenheit 9/11 once did. I came up with a label for this type of movie and the interviewing tactics that fuel the genre, of which, on first viewing, I counted Mishkin’s interview as an example – “indignation-jerker.”
You’ve heard of tear-jerkers – movies with a maudlin storyline that make you tear up though you know the movie isn’t very good and is just manipulating your tear-ducts. Many people like to see these, because even though they are being manipulated it feels good to have a nice little cry.
Similarly, a lot of people like to see indignation-jerkers, because it feels good to be indignant! Fahrenheit 9/11 aimed to press those buttons – by juxtaposing clips of an apparently clueless President George W. Bush with bombs exploding in Iraq, for example.
One of the things that disturbed me about Fahrenheit 9/11 was that the theater was brimming with cheering indignant theatergoers, while nearly empty was the theater in which I saw a far more intelligent and informative film on the Iraq war, No End In Sight. Indignation-jerking conveys little information or insight – it’s for the already-convinced.
The director of No End In Sight, by the way? Charles Ferguson. Maybe Ferguson learned from Fahrenheit 9/11 that for your documentary to be a box-office hit, it had better be an indignation-jerker.
The Best and the Brightest redux, and redux again
The second time I saw Inside Job, however, I came away prepared to give it more credit. Yes, it was still overwrought. But the director was building a case, though in a way that could make a viewer like me think at first the film was no more than an indignation-jerker. It’s a case that has been built before, again and again, but it’s a lesson we still haven’t learned. Perhaps Ferguson can be forgiven for trying hard to drive the point home this time.
The Best and the Brightest was a book by David Halberstam that has become a classic on the decision-making process about the Vietnam War. It showed how a group of people who are “the best and the brightest” – working together – can collectively make the worst and stupidest decisions.
This book was widely read. It exposed the folly of relying on the collective expertise of smart people whose views back each other’s up. Yet the same thing happened again to cause Enron’s collapse, precipitating yet another book (and movie) by Bethany McLean and Peter Elkind, titled The Smartest Guys in the Room. And it happened with Long-Term Capital Management, as documented in Roger Lowenstein’s book, When Genius Failed. That episode almost caused the recent financial meltdown ten years ahead of schedule.
Inside Job tells us that this phenomenon of intelligence begetting folly not only happened again in the financial crisis of 2008, it’s still happening now. The new Best and Brightest are the gurus of the financial industry, a collective group of smart guys (yes, mostly guys – the prominent women in the industry are among the dissenters), whose beliefs back each other’s up. In Ferguson’s view this self-reinforcing cohort includes much of the economics profession.
A part of the phenomenon is that dissenters are not merely debated, they’re told they’re dead wrong and vigorously frowned upon or repressed – as was Brooksley Born, then-head of the Commodity Futures Trading Commission (CFTC), by no less than Lawrence Summers, for arguing that derivatives should be regulated, and economist Raghuram Rajan, for delivering a paper at the elite Jackson Hole economists’ conference in 2005 titled “Has Financial Development Made the World Riskier?” (Back then, it may be hard to believe in hindsight, the economics profession was in agreement that financial innovation had made the world less risky.)
In short, groupthink is often both wrong and viciously protective of itself. It doesn’t matter that the group-thinkers are exquisitely intelligent, expert or sophisticated, or that they may be well intentioned and ingratiating.
In fact, exposing wrong-headed thinking is more difficult when the group-thinkers are well intended and ingratiating. How do you demolish the views of someone who means you no harm, believes in what he is saying, has a raft of credentials, and can buttress his views with approval and agreement from a phalanx of other distinguished recognized experts, themselves equally well intentioned and ingratiating?
You go with the information you had
Ferguson subjected Mishkin to merciless questioning about a report he co-authored in 2006 saying that the Icelandic financial system was sound. Two years later, Iceland’s financial system collapsed. Mishkin was paid $124,000 to write this report by the Icelandic Chamber of Commerce – an institution with a clear bias in favor of the conclusion to which Mishkin and his co-author came.
The study seems rigged, the authors of the report chosen with the unspoken understanding that the conclusion will be what the Chamber of Commerce wants it to be.
Mishkin readily admits he made a mistake in the report saying that Iceland had sound prudential regulation. Ferguson, interviewing him, asks how he could make such a mistake. Mishkin’s lame response is – repeatedly – “you go with the information you had.” The best defense he can muster in the film says little more than that: “The view was that Iceland had very good institutions, it was a very advanced country. You talk to people, you have faith…”
In short, you consult the in-crowd’s conventional wisdom. You believe them because you know them and are one of them. To be an inveterate skeptic, to question consensus, to drill down beneath the majority view and insist on examining its foundations, is to doubt your colleagues and friends, to endanger your position among them, to impose on yourself the threat of ostracism – not to mention of dramatically lowered fees.
This is why I believe it is inevitable that we need a counterforce to the crony system wherever it arises. There are, perhaps, three candidates for this counterforce:
- An aroused but uninformed public. The Tea Party movement is an example of this. It could succeed in stirring things up and upsetting the applecart of support for the best and the brightest – and its conventional wisdom. But it is a loose cannon.
- An aroused and informed public. Student protesters have served this purpose in the past, but now they too have been co-opted; they are focused on getting Wall Street jobs themselves.
- Government officials with independence and high moral rectitude – like C. Everett Koop, the U.S. Surgeon General who fought the tobacco companies and launched a campaign against smoking in the 1980s.
Both the last solution and, often, the second involve government intervention. Someone needs to provide unbiased information to the public. The crony network will not, on its own, do an honest job of it. That is why Milton Friedman’s claim – that consumers are protected by the market itself, because it is in the producer’s self-interest to provide the best possible products to keep customers satisfied – does not hold up. Without government intervention, it is only the producers who provide information to enable the consumers to determine if they are getting the best possible products. The producers’ information is often biased and wrong.
The Goldman Sachs conundrum
Most of the players in the 2008 financial crisis were insufficiently skeptical group-thinkers. But the congressional testimony in the movie presents Goldman Sachs, at least, as self-aware – if not aware that its activities would contribute to a global financial meltdown. Goldman was not operating under a delusion but under a philosophy of business ethics.
The first of 14 business principles set down by Goldman’s CEO John Whitehead in 1976 was “Our clients’ interests always come first.” Did Goldman violate this principle?
In the testimony of Goldman officials to the U.S. Senate, as recorded in Inside Job, it’s clear they believe they didn’t. But it all depends on how you interpret “serving our clients’ interests.”
Two opposite interpretations are on display in the questions by Senators Carl Levin of Michigan and Susan Collins of Maine and in the answers given by their Goldman respondents.
The clearest exchange is between Senator Collins and Goldman vice president Fabrice Tourre, the only person named in an SEC case settled by Goldman for $550 million. Senator Collins asks, “Do you believe that you have a duty to act in the best interests of your clients?”
Tourre’s response is that “we have a duty to serve our clients by showing prices on transactions that they ask us to show prices for.”
Similarly, Senator Levin asks Goldman CEO Lloyd Blankfein, “Is there not a conflict when you sell something to somebody and then are determined to bet against that same security and you don’t disclose that to the person you’re selling it to?” Blankfein’s response is, “In the context of market-making, that is not a conflict.”
In short, you serve the client by fulfilling the purchase of a product that the client requests, even if the client requests it solely because the selective and biased information you provided has led the client to a faith in that product that is in stark opposition to your own belief.
This is an extreme interpretation of caveat emptor, one with which most people would not agree. That is the heart of the problem – the warping of ethical precepts.
The strange case of Eliot Spitzer
The ethical precepts bend in the industry’s interest. There’s a sequence in the movie that I find chilling. It involves Eliot Spitzer, the ex-Governor of New York and former New York State Attorney General.
I think we sorely need Attorneys General to counteract the transgressions of the financial industry. But the sequence suggests subtly that the combat is unfair – the government official is vulnerable to a type of weapon to which, for some reason, the industry is not vulnerable.
Spitzer is interviewed during a segment in which the movie also shows evidence of how frequently men in the financial industry use prostitutes. The film notes that, though it would be relatively easy to obtain the records necessary to use executives’ illegal private behavior as leverage while pursuing wrongdoing in the financial industry, there seemed to be an unwritten sensitivity about people’s personal lives that forbade doing so.
In his last comment on-camera, Spitzer says, “There is a sensibility that you don't use people's – uh, personal vices in the context of Wall Street cases, necessarily, to get them to flip. I think maybe it's, after the cataclysms that we've been through, maybe people will reevaluate that. I'm, I'm not the one to pass judgment on that right now.”
If anybody still doesn’t know, Spitzer lost his position as Governor after an investigation revealed that he had illicitly visited a prostitute.
As New York Attorney General, Spitzer obtained a $1.4 billion settlement from investment banks for giving biased investment advice.
It’s hard to avoid the feeling that the powers that be – of course prominently including the financial industry – showed him who’s boss.
A final quibble
All of these important messages come through in Inside Job, which does an excellent job of outlining the financial crisis and the forces that shaped it, but in the end it still feels like a biased exposé that reached its conclusions long before filming began. Unsuspecting interviewees are exploited to prove the foregone conclusion. This can be done seamlessly – the long-running television program 60 Minutes does it successfully, and Ferguson’s previous film No End in Sight did it too – but in Inside Job it is less expertly done. The scaffolding of its constructed message occasionally shows.
Here is an example: The film frequently displays a message on the screen that a potential interviewee declined to be interviewed – usually juxtaposed with narration implying that the potential interviewee had something to hide: “In 1999, at the urging of Summers and Rubin, Congress passed the Gramm-Leach-Bliley Act, known to some as the Citigroup Relief Act. It overturned Glass-Steagall and cleared the way for future mergers. [Robert Rubin would later make $126 million as vice chairman of Citigroup. He declined to be interviewed for this film.]”
In one scene, Michael Greenberger, former deputy director of the CFTC under Brooksley Born, is heard saying that after the CFTC issued a proposal in May of 1998 to regulate derivatives, “I happened to go into Brooksley's office. And she was just putting down the receiver on her telephone. And the blood had drained from her face. And she looked at me, and said: That was Larry Summers. He had 13 bankers in his office. He conveyed it in a very bullying fashion – sort of directing her to stop.”
It’s a powerful scene. But don’t tell me that Ferguson didn’t try to interview Brooksley Born herself instead of only her deputy. Is there an on-screen message saying “Brooksley Born declined to be interviewed for this film”?
No there isn’t. Ferguson’s laudable message would be more persuasive if his film less obviously lacked objectivity.