“Self-Delusion, Rationalization, Incompetence….Willful Deception”

(By Jack Bigelow) Bethany McLean is one of the foremost business journalists of our time. She uncovered the story of Enron, then covered it by writing (with Peter Elkind), The Smartest Guys in the Room. She explores (with Joe Nocera) the greed and sleaze of the financial crisis in All The Devils Are Here, and in her most recent book, On Shaky Ground, she takes us behind the scenes in the sordid story of Fannie Mae and Freddie Mac. Ms. McLean is currently a Contributing Editor to Vanity Fair; earlier she was a Contributing Editor and columnist at Fortune Magazine and a contributor to Slate. Her books are thoroughly researched, giving us engaging detail that verifies the integrity of her account of what happened and when. The Behavioral Forensics Group was privileged to interview her, and posted the first part of her interview earlier. In this part, Ms. McLean discusses the role of ego and self-delusion, blended with incompetence, in fraud situations, and the “slippery slope” character of fraud she found in her research.

You’ve written about Enron, you’ve written about the Financial Crisis, and you’ve written about Freddie Mac and Fannie Mae. What have you learned about fraud and corruption in your research and thinking about these situations?
I would say that from where I started, it has been very shocking. When I first started writing about Enron, I thought it was about bad people doing bad things. You had to be a bad person to do bad things. It was people knowingly doing bad things. And I think the most amazing and interesting discovery for me is the amount of self-delusion that is involved. And often the amount of just pure incompetence that’s involved too. You hear these stories of business gone wrong, but they are often covering up the incompetence of having failed to make their businesses produce profits. And so they’ve had to engage in the shenanigans that they did. So I always think that these stories involve an odd mixture of self-delusion, rationalization, and incompetence and maybe a little bit of willful deception, but a lot less willful deception than self-delusion.
There was a lot of delusion portrayed in “The Smartest Guys….”so I heard that the uncovering of Enron started with you meeting with Skilling and asking him, “How does this company make money?”
Yeah, so I did a piece in Fortune, and I wouldn’t say it really started the unravelling. I did the piece in Fortune in early 2001, when Enron was still at the height of its power, and the title of the article was, “Is Enron Overpriced?” That’s probably the meekest title in business history and the piece got more credit than it was due. It was more a piece of financial analysis than a work of investigative reporting. I didn’t have sources inside the company—it was more a piece of financial analysis and I didn’t get at the heart of what was wrong—I guess I did get at some of the heart of what was wrong, but I would have never guessed that that the company would be bankrupt in nine months. I think we were in a naïve period in American business where the dot-coms were cracking, but the carnage wasn’t obvious yet. And the idea that a major American company could be a fraud was just—would never have occurred to me. Never would have occurred to me. More than that, the idea that the auditors and lawyers and accountants signed off on so much of what Enron did, I thought that I must be the one who is crazy to think that there’s something wrong here because the accountants and the lawyers signed off on it. And I think that the way in which the accountants and lawyers can follow the rules and say the company is following the rules, while totally violating the spirit of the rules—that would not have occurred to me. I coined the term, “legal fraud,” which is following all the rules, but violating the spirit of the laws, so the picture you create of your company’s earnings is entirely false. It is very hard to say whether you have broken the law.
The term I often use which seems to cover this is, “intellectual dishonesty.”
Yeah, that’s the same sort of thing.
In the slippery slope that descends from what appears to be minor violations of rules and standards to outright criminal behavior,—based on what you’ve seen and heard— when do innocent little white lies turn to something darker?
I think it is really hard to live this way, but I think that’s why those innocent white lies aren’t so innocent. And why rationalizations are dangerous. Because what happens is that people will cheat a little bit using the rationalization that they are doing the right thing. So, for example, when Angelo Mozilo steered Countrywide to making riskier loans, he thought, well, he had to do this, because if he didn’t, his profits would fall and his market share would fall, and the stock price would go down and his investors would be unhappy.
He did it for “the good of the cause.”
He did it for the good of the cause. And Jeff Skilling had exactly the same argument with he had to engage in some of the structures that he did because he had to keep the stock price up. It would be bad for his investors to have the stock decline. It’s that rationalization that you’re doing something in service to something larger than yourself, but it is actually very self-serving because it’s your ego that can’t stand defeat. It’s something that’s very, very, dangerous and I think a really good life lesson is that whenever you think you are doing something in service to a cause, you have to really think, “Am I? What’s in it for me?” The problem is that once you do the small transgression, then the small thing becomes something you need to cover up, and so it snowballs from there. It really can. And so, I’m not sure that there is any such thing as an innocent little white lie. That said, well, what is it if you tell your daughters not to tell their friends if their dresses look ugly! Obviously, some white lies help us all get along, but I do think in general these little transgressions are dangerous. More dangerous than you think they are at the time.
Based on your research, what do you think makes people take the risks that result in criminal or unethical behavior or behavior that is intellectually dishonest?
That’s interesting, because I think most people think it’s greed, pure and simple. And I don’t think it is greed. I think it’s ego. I think greed is a part of ego, and greed and egos are a part of our modern world, and so men, and mostly men, who measure their accomplishments and their sense of self-worth not just by whether they can put food on the table for their family, but whether the other guy is worth more than they are. And it becomes a real yardstick of self-worth and I think it’s ego, it’s not greed, it’s not that they need money to go and buy a private island, it’s the ego, it’s the way to keep score. I think that is what it is.
I just finished writing a piece about this company called, Valeant, for Vanity Fair. I don’t think Mike Pearson, the former CEO, was driven by greed; I think he was driven by his deep insecurities that made him need to be the best in the eyes of his investors. He wanted to keep achieving for them. But you can say, “Isn’t that wonderful. He wanted to achieve for his investors.” Well, no, because his sense of self was fed by that, right? It was ultimately narcissistic.
(A third and final installment of our interview with Ms. McLean will be in a subsequent posting.)




The Behavioral Forensics Group is a team of professionals with vast experience in detecting fraud, understanding why it occurs, and in recommending steps to mitigate fraud incidence within the corporate workplace, particularly within higher-level (and therefore more costly to the enterprise) executives.  The fields of investigation, organizational psychiatry, accounting and behavioral forensics, and law enforcement are represented within the Behavioral Forensics Group.  Acting in synergy to help organizations prevent, find, and/or reduce fraud, BFG is a premier, pioneering practice in this field.

We are blogging at: http://www.bringingfreudtofraud.com

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