(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 we have posted two installments earlier at this blog site (See Installment I by clicking here; See Installment II by clicking here). In this, the third installment, Ms. McLean talks about the difference between ethical and criminal wrongdoing, how to remain ethical when surrounded by unethical influences, and the risks of rationalizing to justify choices.
When you speak before groups, what is the question that you are most frequently asked?
I would say the human nature questions, the motivators. In the wake of the financial crisis, the question that is asked in almost every event is, “Why did no one ever go to jail?”
And your answer?
My answer is that it is complicated. My answer is that there is a difference between ethical wrongdoing, something we can all look at and say, “That’s wrong,” and criminal wrongdoing. And there’s a reason for that. Our laws don’t work to throw people in prison for what we perceive as being wrong, our laws are written that there has to be criminal intent, there has to be actual rules broken. It is really difficult to prosecute people and the system we have in corporate America—I’m not sure there are better ways to set it up, but it is really screwed up.
The people at the top of a company can insulate themselves with accountants, lawyers, and chains of command, such that they can plausibly claim they don’t actually know what the people in the trenches are doing, even if their paycheck is being boosted by what those people are doing. Like Angelo Mozilo at Countrywide wasn’t prosecuted, he ended up settling with the SEC for a paltry sum. I don’t think there was any lack of desire to prosecute him; the case just wasn’t there. And yet, he was benefitting, directly, from Countrywide’s stretch for market share with all the shoddy loans he was making. You can’t have a CEO be directly responsible for the acts of all their underlings, right? That’s not a workable system. And yet the system we have—there’s something perverse. I think that’s an interesting issue. And it goes back to that question of self-delusion. If someone did what they did out of self-delusion and incompetence, that’s not necessarily criminal intent.
I do think there is a glaring—another factor in the financial crisis—there’s a glaring difference between the outcome of Enron and the outcome of the financial crisis in that in the Enron case, they did go to jail. Skilling went to jail for a long time. And to me, what happened at Enron and what happened with the financial crisis, they are not so different. It’s not like one is horrible behavior and the other is fine. They are both somewhere in the grey to black area, and yet people weren’t prosecuted in the wake of the financial crisis. For me, unfortunately, the Enron guys weren’t in the halls of power, they were these cowboys down in Texas and so the mentality was, “Get them at all costs.” And I think that in the wake of the financial crisis, the bankers were the power elite, and so they were seen as, “Well, they made mistakes, this was the perfect storm, and they were all the power structure, and so there was not the same “Go get them” mentality, as there was with the outsiders.
They “didn’t know what was going on.”
No, everybody did it, this was the thousand-year flood, you know, and that was what you heard, frequently, and so I think that’s the excuse. The bankers aren’t to blame! They were just caught up in events. You can hear the hypocrisy at work when you compare the treatment of the GSEs (Government Supported Enterprises) with that of the banks. I hear officials in the Treasury and the government say over and over again, “Well, we have to get rid of Fannie Mae and Freddie Mac because the crisis proved their business model doesn’t work.” What about the big banks? Doesn’t the crisis prove their business model doesn’t work too? How can you use that argument for one and then not use it for the other? But they don’t —because the banks are of the power structure, and Freddie and Fannie weren’t, at the end of the day. Fannie and Freddie had enough enemies that they could be thrown under the bus, whereas the banks are different.
Is the lawsuit over Fannie and Freddie over now?
No, the lawsuit, things are heating up. It’s very ugly. One of the lawsuits led to the government finally unsealing all these documents that reveal that they thought Fannie and Freddie were about to become very profitable when they changed the terms of their bailout. The lawsuits are very interesting and there are a lot of them.
You’ve become a scholar of how people dig themselves into troublesome trenches from which there are no good escapes. You document very well the influence of “the times,” “the era” or the wild and crazy environment of various excesses. Do you see an antidote for the influence of the environment?
I think there are two answers. I sometimes wonder what if, after leaving Goldman Sachs where I had been working since after college, I had been recruited by Enron, down in Houston. Would I have become a whistle-blower? Or would I have been a part of the setup? I probably would have been part of the setup. I think about it. I don’t know. So I say these things without putting myself on a moral pedestal. But I do think one thing that saves you is just if there is an inherent sense of right and wrong. During the financial crisis, there was this guy named Dave Zitting, who was a small residential mortgage lender—ran a good sized company in Arizona. He started making sub-prime loans, and he was selling them to bigger institutions like small lenders did, and the bigger institutions were saying, “Make more of these loans, come on, keep ‘em coming.” And Dave would reply, “I can’t underwrite them and make sure people can pay them back. And if people can’t pay them back, I’m not giving them the loan.” And the bigger institutions kept saying, “What’s the matter? They’re off your books, just keep them coming.” And Dave thought about it and said, “You know what? That’s wrong.” And so, in 2005, he shut down his company and stopped doing business at a huge cost to his firm, and watched as the market went crazy for the next a year and a half, but they all got caught when they all had these loans that they couldn’t sell, while he runs a successful company today. And I think that when you hear about the moral decisions that people make, there is often this moment of clarity of, “Well, that’s wrong.”
I think Valeant was another great example. All these investors ended up losing fortunes and destroying their own reputations and to me there’s a simple right and wrong about it, because this was a company that was making existing drugs that people needed to stay alive and jacking the price up and not recycling the proceeds to make the drugs better. You can justify that in all sorts of ways, you can say, “well, the insurance pays,” or “that is the value of the drug, because it saves lives,” or you can just look at it and say, “You know what? That’s wrong. I’m not going there.” I often think that these things can be very simple, and I’m not putting myself on a moral pedestal and say that I wouldn’t find a rationalization, but smart people find rationalizations and I think rationalizations can be very, very dangerous.
I think the other thing that saves people is long-term thinking. That’s such a cliché, but it’s so true. I spent an 11-hour day with Warren Buffett, for a rare positive story, and he said that the most important part of his legacy would be to have Berkshire Hathaway around in a hundred years, and so his whole orientation is to have a company that lasts. And I do think that if people thought, “How do I build this institution to be around in 50 years, or 100 years,” rather than, ”How can I make as much profit as I can today?” People would make different decisions. If people saw their legacy as one part preservation as well as one part success, I think they would make different decisions.




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, B4G is a premier, pioneering practice in this field.

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