Thoughts From Moscow on Show Trials
Making Sense of the Credit Debacle
Thoughts From Moscow on Show Trials
E-mail debates of newsworthy topics.
March 3 2009 3:35 PM

Making Sense of the Credit Debacle


Well, having arrived in Moscow (where the weather is cold and gray and the mood feels similar), I can now pen a response. You might have decuced from my last, hastily written message that I am in the camp that wants to "go soft" on the bankers. That is absolutely not the case. On the contrary, one of the reasons I worry about the excessive focus on show trials, etc., is that I think it will actually end up letting most bankers off too lightly. By all means, where there are clear-cut cases of criminality, prosecute. In the cases of Madoff or Stanford, such prosecutions are clearly going to happen. Perhaps in relation to some of those who were in charge of the banks or hedge funds, similar cases will emerge. But I would hazard a guess that much (if not most) of the most pernicious behavior that created the credit madness was behavior enacted inside the law. Why? Because many financiers have spent the last few years pouring huge amounts of effort into regulatory and legal arbitrage and using innovation to constantly go to the limit of the law while behaving in stupid and utterly unethical ways. Indeed, one might suggest that legal arbitrage of some form or other has been a central driver for innovation.

So, if you just focus on the strict "Did you breach the letter of the law?" argument, you may end up missing much of the worst behavior. You may also encourage more of the same legal arbitrage in the future, i.e., financiers will end up dancing around the rules in whatever ways they can, and damn the wider consequences or the ethics, as long as they meet the letter of the law. The Enron trials might have made white-collar executives very nervous about breaching laws and horrified by the thought they might end up in prison if they did so. But while making people stick to the letter of the law, did they make them adhere to the spirit? Did the trials prompt financiers to stop and think about the wisdom of off-balance sheet vehicles that might be technically legal but conceal activity from investors or regulators? Did they stop bankers from creating products to conceal leverage levels? Did it stop bankers or anyone else from trying to book profits upfront?  As far as I can see, the answer is "no."

So, Jesse, et al, chuck me some ideas about how you deal with this. I offer that not in a combative way but more because I am searching for answers, like many others. I agree that merely saying "tut tut" is too weak, but I would feel sick to the stomach if we end up with a situation in 10 years time where a half-dozen colorful financiers have been at the center of show trials that made them look terrible and left everyone else feeling they were basically OK because they were not in those show trials. Before I became a journalist, I used to be a social anthropologist. I learned that ritual sacrifice often serves the "function" of enabling a society to feel a sense of atonement or release. If we end up with that occurring via show trials on Fox or CNBC or wherever else, that will miss the point this time (even if it also produces fabulously colorful copy for all of us journalists!)


Gillian Tett is the Financial Times' U.S. managing editor.

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