Making Sense of the Credit Debacle

Splitting the Judicial Difference
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March 3 2009 5:26 PM

Making Sense of the Credit Debacle

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On the corruption/criminal issue, I come down somewhere between Gillian on the one hand and Duff and Jesse on the other, perhaps tilting a little toward Gillian's point of view. This might be a little too Talmudic or Jesuitical (pick your preferred sectarian mode of thinking about complex issues). But it strikes me that there are several different forms of corruption that have been on display that cry out for different types of responses.

There's corruption of the thoroughly-legal-yet-thoroughly-destructive business model: i.e., the fact that the simple structure of the business at hand is absurdly corrupt and yet largely legal. Think Wall Street investment research in the 1990s: the rating agencies getting paid by the investment banks to rate structured financial products or advisory firms getting paid by companies selling themselves to private equity firms to issue "fairness opinions." (Wasn't it funny how the price agreed to was always fair?) This type of corruption cries out for systemic reform/action rather than individual trials, along the lines of what Eliot Spitzer did—hammering out settlements with the big players in investment research, making them pay, and forcing them to change their ways. It may even require legislation a la Sarbanes-Oxley.

There's the corruption of laziness, incompetence, and stupidity—the abysmal performance of board members that Duff refers to, poor management by CEOs, Greenspan's excellent adventure, or what Barry has referred to as "nonfeasance" by regulators. This is a really pernicious form of corruption, and in the Bush administration, it was endemic: People who had no real intention of regulating aggressively were routinely appointed to regulatory posts. Chuck Prince was woefully out of his league as CEO of Citigroup, and the board members failed to recognize that. Ditto for the sages at Lehman, the executives at AIG who oversaw the people running AIG Financial Products, the whole Fannie/Freddie complex (executives, board members, regulators), and the whole debt-underwriting complex. There are a variety of motivations at work here, although fees were the biggest single motivator. But what percentage of these activities were actual crimes? The executives who signed off on underwriting all the debt Sam Zell and Tribune Co. sold to pull off that absurd failed deal—did they commit crimes? Almost assuredly not. All the horrific numbers surrounding the company, its industry, and its prospects were fully disclosed. How about all the fund managers and asset managers who snapped up pieces of that deal? Again, almost assuredly not.

With these first two types of corruption, public trials don't seem to be useful. The bad actors feel the pain through regulatory action that, in many cases, puts them out of business as well as through market action that destroys their wealth and reputation and even their industries.

Then there's the corruption of not complying with regulations, of stealing, of lying to the public, of providing a certain set of numbers or data to the public while discussing a different set of numbers in private, or selling public office for private gain, or simply refusing to do your expressed fiduciary duty. And for these people—a broad stretch of the folks responsible for this mess that may include but is not limited to mortgage brokers, Ponzi-scheme operators, funds of funds that put cash in the hands of Madoff without conducting due diligence, hedge-fund managers who blew up clients' cash while taking their own funds out, certain executives at investment banks who told the public things were fine when in fact they knew things weren't, and financial executives who made misrepresentations to their own superiors—I say, bring on the show trials.

Daniel Gross is a longtime Slate contributor. His most recent book is Better, Stronger, Faster. Follow him on Twitter.

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