{"id":703,"date":"2016-09-20T16:12:31","date_gmt":"2016-09-20T20:12:31","guid":{"rendered":"http:\/\/www.bringingfreudtofraud.com\/?p=703"},"modified":"2016-09-20T16:15:52","modified_gmt":"2016-09-20T20:15:52","slug":"rationalizations-can-be-very-very-dangerous","status":"publish","type":"post","link":"https:\/\/bringingfreudtofraud.com\/?p=703","title":{"rendered":"\u201cRATIONALIZATIONS CAN BE VERY, VERY, DANGEROUS\u2026.\u201d"},"content":{"rendered":"

(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<\/em>. She explores (with Joe Nocera) the greed and sleaze of the financial crisis in All The Devils Are Here<\/em>, and in her most recent book, On Shaky Ground<\/em>, 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<\/em>; earlier she was a Contributing Editor and columnist at Fortune Magazine<\/em> and a contributor to Slate<\/em>. 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<\/em> was privileged to interview her, and we have posted two installments earlier at this blog site (See Installment I by clicking here<\/a>; See Installment II by clicking here<\/a>). 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.
\nWhen you speak before groups, what is the question that you are most frequently asked?<\/strong>
\nI 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, \u201cWhy did no one ever go to jail?\u201d
\nAnd your answer?<\/strong>
\nMy 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, \u201cThat\u2019s wrong,\u201d and criminal wrongdoing. And there\u2019s a reason for that. Our laws don\u2019t 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\u2019m not sure there are better ways to set it up, but it is really screwed up.
\nThe 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\u2019t 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<\/em> wasn\u2019t prosecuted, he ended up settling with the SEC for a paltry sum. I don\u2019t think there was any lack of desire to prosecute him; the case just wasn\u2019t there. And yet, he was benefitting, directly, from Countrywide\u2019s stretch for market share with all the shoddy loans he was making. You can\u2019t have a CEO be directly responsible for the acts of all their underlings, right? That\u2019s not a workable system. And yet the system we have—there\u2019s something perverse. I think that\u2019s 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\u2019s not necessarily criminal intent.
\nI do think there is a glaring—another factor in the financial crisis—there\u2019s a glaring difference between the outcome of Enron<\/em> 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\u2019s 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\u2019t prosecuted in the wake of the financial crisis. For me, unfortunately, the Enron guys weren\u2019t in the halls of power, they were these cowboys down in Texas and so the mentality was, \u201cGet them at all costs.\u201d And I think that in the wake of the financial crisis, the bankers were the power elite, and so they were seen as, \u201cWell, they made mistakes, this was the perfect storm, and they were all the power structure, and so there was not the same \u201cGo get them\u201d mentality, as there was with the outsiders.
\nThey \u201cdidn\u2019t know what was going on.\u201d<\/strong>
\nNo, everybody did it, this was the thousand-year flood, you know, and that was what you heard, frequently, and so I think that\u2019s the excuse. The bankers aren\u2019t 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, \u201cWell, we have to get rid of Fannie Mae<\/em> and Freddie Mac<\/em> because the crisis proved their business model doesn\u2019t work.\u201d What about the big banks? Doesn\u2019t the crisis prove their business model doesn\u2019t work too? How can you use that argument for one and then not use it for the other? But they don\u2019t —because the banks are of the power structure, and Freddie and Fannie weren\u2019t, 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.
\nIs the lawsuit over Fannie and Freddie over now?<\/strong>
\nNo, the lawsuit, things are heating up. It\u2019s 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.
\nYou\u2019ve 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 \u201cthe times,\u201d \u201cthe era\u201d or the wild and crazy environment of various excesses. Do you see an antidote for the influence of the environment?<\/strong>
\nI think there are two answers. I sometimes wonder what if, after leaving Goldman Sachs<\/em> 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\u2019t 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, \u201cMake more of these loans, come on, keep \u2018em coming.\u201d And Dave would reply, \u201cI can\u2019t underwrite them and make sure people can pay them back. And if people can\u2019t pay them back, I\u2019m not giving them the loan.\u201d And the bigger institutions kept saying, \u201cWhat\u2019s the matter? They\u2019re off your books, just keep them coming.\u201d And Dave thought about it and said, \u201cYou know what? That\u2019s wrong.\u201d 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\u2019t 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, \u201cWell, that\u2019s wrong.\u201d
\nI think Valeant was another great example. All these investors ended up losing fortunes and destroying their own reputations and to me there\u2019s 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, \u201cwell, the insurance pays,\u201d or \u201cthat is the value of the drug, because it saves lives,\u201d or you can just look at it and say, \u201cYou know what? That\u2019s wrong. I\u2019m not going there.\u201d I often think that these things can be very simple, and I\u2019m not putting myself on a moral pedestal and say that I wouldn\u2019t find a rationalization, but smart people find rationalizations and I think rationalizations can be very, very dangerous.
\nI think the other thing that saves people is long-term thinking. That\u2019s such a clich\u00e9, but it\u2019s 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<\/em> 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, \u201cHow do I build this institution to be around in 50 years, or 100 years,\u201d rather than, \u201dHow can I make as much profit as I can today?\u201d 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.<\/p>\n

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BEHAVIORAL FORENSICS GROUP<\/span><\/b><\/p>\n

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The\u00a0Behavioral Forensics Group<\/i>\u00a0is 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.\u00a0\u00a0The fields of investigation, organizational psychiatry, accounting and behavioral forensics, and law enforcement are represented within the\u00a0Behavioral Forensics Group<\/i>.\u00a0\u00a0Acting in synergy to help organizations prevent, find, and\/or reduce fraud, B4G is a premier, pioneering practice in this field.<\/span><\/p>\n

We are blogging at:\u00a0<\/span>http:\/\/www.bringingfreudtofraud.com<\/span><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

(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 … Continue reading \u201cRATIONALIZATIONS CAN BE VERY, VERY, DANGEROUS\u2026.\u201d<\/span> →<\/span><\/a><\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-703","post","type-post","status-publish","format-standard","hentry","category-audit"],"_links":{"self":[{"href":"https:\/\/bringingfreudtofraud.com\/index.php?rest_route=\/wp\/v2\/posts\/703","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/bringingfreudtofraud.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/bringingfreudtofraud.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/bringingfreudtofraud.com\/index.php?rest_route=\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/bringingfreudtofraud.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=703"}],"version-history":[{"count":4,"href":"https:\/\/bringingfreudtofraud.com\/index.php?rest_route=\/wp\/v2\/posts\/703\/revisions"}],"predecessor-version":[{"id":708,"href":"https:\/\/bringingfreudtofraud.com\/index.php?rest_route=\/wp\/v2\/posts\/703\/revisions\/708"}],"wp:attachment":[{"href":"https:\/\/bringingfreudtofraud.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=703"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/bringingfreudtofraud.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=703"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/bringingfreudtofraud.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=703"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}