(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 GroupTM was privileged to interview her, and has been posting the interview in installments (See Interview Part I, Interview Part II, Interview Part III). In this, the final installment, Ms. McLean comments on the role of critical thinking, how Arthur Andersen, the Enron auditor, could have missed the mischief there, and the unknowing complicity of fraud victims.
I’d like to talk about critical thinking, because I think critical thinking is somehow involved in this. I’m not exactly sure how, but if you were to measure the amount of critical thinking that occurs today versus in the 1980s, how do you think the comparison would turn out?
I have no way of measuring that, I don’t know. I do think that there is too much emphasis in today’s world on creativity and not enough emphasis on critical thinking. It’s funny—I came from a meeting this morning, totally different context, but they were talking about all the importance of creativity and all the tools to help people bring out their creativity. What I was actually thinking was, “We don’t need more creativity. What we need in writing is not creativity, it is clarity.” I think there is less value in our society on clarity, but I’m not sure. Some of that may be changing today as respect for the sciences grows again. But we definitely went through a phase when I was in college, when you didn’t have to have any classes in hard science to graduate. I’m a math major, and there is something about math and science that teaches you a very precise way of thinking and I think it’s important. And it applies to writing too. I get annoyed when things don’t hang together. It offends me.
I often think that the amount of critical thinking in this country could be a matter of national security. It could apply to the election, but I’m thinking it could also apply to Enron, to the financial crisis, how much critical thinking was involved?
Not very much. But there was very much a belief in the efficiency of the market. And that was simply Alan Greenspan’s view—that lenders wouldn’t make, and banks would not buy, securities made up of loans that people couldn’t pay back—the system just wouldn’t permit that. It was almost a religious belief in the efficiency of the market that prevented people from seeing what was actually happening on the ground, which was that people were getting loans that they couldn’t pay back. I think that’s another very interesting tension in life—between ideology, which is what you believe, and a willingness to see the facts that don’t respond to your ideology. It’s funny how people get blinded by ideology and can’t see the facts staring them in the face.
From your perspective, what do you think happened at Andersen in the Enron thing?
I think that it was micro versus macro rationalization. What I mean by that is with every transaction, people could convince themselves that they met the letter of the law, they weren’t violating the accounting standards. And so, in a very micro way, they could rationalize that they were meeting the needs of the clients and doing an OK thing. But if anybody could have stepped back and realized that they were doing thousands of these transactions a year, with all of them adding up, the financial statements are not representative of reality. And is this going to be a problem for us some day? Everybody would have sat up and said, “Oh, we can’t do this.” Does that make sense? I think it’s very easy to rationalize the micro and then not see the big picture. I think that’s a large part of what it was. And then, once you realize that growing the revenue and keeping the business is so important, you are going to do what you can to keep the business.
The rationalization I heard [at Andersen] was, if we don’t grow the business, we can’t attract the people to meet the institutional needs of the investing public.
You see, that’s very powerful, right? There’s some truth to it. There’s always some truth to the rationalizations that people use. That’s what makes them so hard. Sometimes I think that everything has these catches. I sometimes think that everything has these tensions. You want to believe that you are making the right decisions and everything all lines up perfectly, then you will feel tension-free. But if you are making decisions that limit the growth of your business, even if those decisions are right, well, there’s a cost to that, particularly in the short term.
Regarding the efficiency of the market, could we not say that there is tension between the long-term efficiency of the market and the short-term efficiency of the market? Maybe what people lost sight of was the long term efficiency of the market?
Yes, that’s probably fair. It’s funny, because most of the people who say they live by the efficiency of the market don’t actually believe in the efficiency of the market. That’s one of the things that I’m actually struck by—in every case, whether it was the executives at Enron or the people in charge of our nation’s big financial institutions, they were huge believers in the market, but as soon as the market turned against them and said, “You’re going out of business,” they said “the market’s wrong,” that the market is making a mistake. “They don’t understand our business.” I think it’s so funny, the hypocrisy. Lloyd Blankfein, at Goldman, you know, was a big proponent of the efficiency of the market, but when his firm was about to go under, did he say, “The market is speaking?” No, he did not!
One last question: What have I not asked that would be well worth thinking about?
I think that almost every story about a business gone wrong is about the complicity of the victims. The least of those who are ultimately going to pay the price. And what separates them from the perpetrators in the modern world is that they really do end up paying the price. Along the way, they don’t want to listen. They want the party to continue too. And, I think that if you were to ask one thing of people, it would be, —and this gets back to your point about critical thinking—it is to engage with things that you don’t want to hear because they aren’t in the interest of your pocket book and so you’re shutting them out. So, if you were warning out the housing market, during the bubble years, you were just assaulted by people saying, “You horrible journalists, you terrible person.” And then afterwards, people were saying, “Why didn’t you tell us?” Well, you know what, the press didn’t call it a crisis, nobody saw how these cascades of financial securities would cause the failure of the financial firms, but the press did call the housing market, over and over again. They said that this is a bubble, this is a problem, but nobody wanted to hear it. It was the same thing with Enron, with Valeant. People were doing critical pieces about Valeant, and they were just shot down, and called hacks, and people were just up in arms. They didn’t want to hear it. And so I guess I would say that if you don’t want to accept blame after the fact, engage in critical thinking. There are things that are too good to be true.
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