The first overt indications of the impending global financial crisis manifested themselves in August 2007, when BNP Paribas announced it was severing ties with three hedge funds specializing in mortgage debt for American real estate properties. The crisis was exacerbated by the immediate freeze on credit by banks to their customers – and to each other. The crisis came to a head in 2008 when the United States government refused to rescue investment firm Lehman Brothers from financial collapse. Subsequent actions by the American government and by foreign governments, as well as actions taken by commercial enterprises world wide, have been focused on repairing the financial damage to sovereign economies and to individuals thrown out of work – and out of their homes.
It is not unreasonable that everyday individuals failed to comprehend the exotic and opaque financial instruments and transactions employed by companies like Enron and individuals like Bernie Madoff. Powerhouse accounting firm Arthur Andersen was also taken in by Enron, and paid for its error in judgment by being forced to close its doors after nearly a century of operation. Madoff utilized the services of investment firm JP Morgan Chase for years, nearly until the time of his arrest.
However, the general public found itself deceived by Madoff and Enron due to its complete disinterest in financial matters. From a criminologist’s perspective, Madoff, Skilling, and others like them used the greed and disinclination of their victims to question the plausibility of endless year on year increases in earnings to perpetuate their misdeeds in plain sight. The following is a discourse on the criminological underpinnings of the malfeasance that occurred during and certainly had a hand in the onset of the global financial crisis.
The (Im)Moral Climate Behind the Financial Crisis
There is broad consensus that much of the conduct leading to the global financial crisis that opened the 21st century constituted criminal behavior. Nonetheless, to date, only a handful of the most notorious figures have even faced prosecution. While names like Jeff Skilling and Bernie Madoff are now infamous, the vast majority of the wrongdoing associated with the worldwide financial meltdown has gone unpunished, and is likely to remain so.
In many ways, the financial system often rewards ruthlessness, if not outright criminal behavior. The crime of the financial crisis was not so much the inherent conduct of the players involved but rather their unwillingness – or inability – to stop short of wreaking disaster upon those factions of society with the power to impose punishment. In other words, individuals and entities responsible for causing so much widespread economic pain became labeled as criminals only when their proverbial houses of cards crumbled. Before then, they were admired as “the smartest guys in the room.”
Another factor is the impersonality inherent in the financial system, which encouraged the cavalier handling of financial instruments by individuals within the sector. Mortgages were no longer tied to individual homes, but bundled into exotic “futures” that were allowed to freely fluctuate on the open market because of events far removed from the personal circumstances of individual homeowners. As a result, investors and speculators were not forced to consider what consequences their reckless speculation might have.
This freewheeling mindset and accompanying lack of consequences associated with the global economic meltdown is in line with theories developed by Dan Ariely, a professor of behavioral economics affiliated with the Massachusetts Institute of Technology and with Duke University. In applying Ariely’s theory to the financial crisis, it could be said that speculators were encouraged in their behavior by a system that imposed few consequences for wrongdoing. Moreover, the speculators were able to tell themselves that what they actually were involved in sophisticated – if high-stakes – financial dealings rather than engaging in irresponsible or corrupt behavior that could (and ultimately did) adversely affect the lives of actual people.
Psychopaths and the Financial Sector
In clinical terms, many of the personality traits possessed by Skilling, Madoff and other players behind the financial crisis could be said to match those associated with psychopaths – that 1 percent of the population that possesses neither conscience concerning their own actions nor empathy for their victims. Traits like ruthlessness, the ability to bend and twist facts and the cold absence of remorse are included in the Psychopathy Checklist, a measure of deviancies in personality and behavior developed by Robert Hare, professor emeritus of the University of British Columbia.
According to Hare, psychopaths often hold charismatic appeal that allows them to excel in the corporate arena. In the business world; their psychopathic tendencies are manifested in the form of hard-nosed determination and the ability to successfully “spin” potentially detrimental information to their own advantage. These same traits, without the polish of Armani suits and poshly-furnished corner offices, are identical to those exhibited in Mafia hit men and sexual predators, Hare claims.
Jeff Skilling and Bernie Madoff
Both Skilling and Madoff were high-flying financiers who were well-compensated for their efforts. As long as they made money for their investors, their faults and shortcomings were overlooked. However, each man stands as a vivid example of the devastation that can occur when individuals lacking a strong moral compass encounter an atmosphere that rewards unbridled financial speculation.
Skilling exhibited broad-ranging hubris, at one point declaring “I am Enron.” Yet he was also capable of amazing lack of insight about the detrimental impact of his actions, claiming “I don’t think there was anyone that was as shocked by the collapse of the company as I was.” Skilling kept an iron grip on the company’s dealings through obscure “black box” accounting, which was ultimately exposed for being a blatant cover-up of unethical and outright illegal conduct that was itself a cover-up for non-existent earnings. Nonetheless, Skilling’s deceit and arrogant dismissal of probing questions was allowed to continue – as long as Enron’s stock kept rising. It was only when thousands of workers lost their jobs, and in many cases, their retirement savings, that Jeff Skilling faced prosecution.
At age 71, and serving a 150 year sentence, it is unlikely that Madoff will see freedom again in his lifetime. The length of his sentence is a reflection of the extent of devastation caused by his decades-long Ponzi scheme, the scope of which is eclipsed only by its very brazenness. Madoff’s own lack of conscience was also a major factor in his ability to maintain the charade for so many decades.
In one incident, a disgruntled investor demanded her money back. He responded by writing a check far larger than the amount she expected, gambling that she would be so impressed by the return that she would reinvest with Madoff, which she did. When confronted by a fellow inmate, Madoff expressed only blatant disdain. Dismissing the enormous amount of money he had extracted from his victims, many of whom lost their entire life savings, Madoff responded with an expletive, insisting “I carried them (the victims) for twenty years, and now I’m doing 150 years.”
For Further Reading:
- Andersen Linked to Other Shady Cases
- Bernie Madoff, Free at Last
- Bernie Madoff Goes Down in Silence
- Bernie Madoff’s $50 Billion Ponzi Scheme
- Enron and the Fall of Arthur Andersen
- Financial Crisis Timeline: Collapse and Bailout
- Is Enron Overpriced?
- Skilling Speaks: Enron CEO’s Jailhouse Interview
- Why Enron Went Bust