Home -> Law Blog Directory -> Legal Commentary Blogs -> JURIST - Forum

Legal Commentary

: JURIST - Forum

Scumbag Millionaires (Or, Weekend at Bernie's -- Again)

JURIST Contributing Editor Nancy Rapoport of the William S. Boyd School of Law, University of Nevada Las Vegas, says that until we recognize that smart people can and will do some very dumb and even crooked things, no amount of regulation will stop the financial shenanigans that are wrecking America's economy....

---

Not too long ago, I watched the movie Weekend at Bernie?s (20th Century Fox 1989) for the umpteenth time, and it got me thinking about the similarities between that movie and our current financial crisis -- especially Bernie Madoff?s Ponzi scheme. In the movie, two young accountants who have discovered some financial legerdemain have reported their discovery to their boss (Bernie). Unfortunately, Bernie is smack-dab in the middle of the fraud. The bad guys associated with Bernie want Bernie to kill the accountants, but Bernie gets killed instead. The accountants spend the rest of the movie pretending that Bernie is still alive -- he even goes water-skiing, although he?s dead -- because they believe that, as long as they?re with a ?live? Bernie, they?ll be safe.

In both the movie and in real life, some modicum of due diligence could have discovered that the various Bernies in question weren?t thriving, but it was more convenient for people to ignore the warning signs. It didn?t take much for people in the movie to talk themselves into believing that Bernie was still alive. And we?re going to discover, in the next few months, what kinds of clues there were about Bernie Madoff?s enterprise.

Why don?t people want to face facts? What makes us so uncomfortable about acknowledging that many of our fancy financial ideas over the past few years were nothing more than smoke and mirrors, discoverable with just a little bit of forethought? It?s frightening to think that we apparently based the health of our entire economy on the ideas that housing prices would never decline, and that people without the ability to repay their mortgages should buy a house. Granted, it took some seriously fancy financial two-stepping by the financial sector itself. But we did; and now we?re certainly paying the price.

I will always wonder what might cause a Bernie Madoff -- or a Peanut Corp. of America?s Stewart Parnell -- to ignore the harms that their actions will invariably cause so many innocent people. Madoff?s Ponzi scheme has caused ripple effects not just to the very rich who invested with him but to numerous non-profits who were to be the beneficiaries of his gargantuan returns. Parnell?s decision to keep shipping his product in light of clear positive tests for contamination led to deaths and serious illnesses. It?s not that hard to foresee such obvious effects of fraud or malfeasance. Is it just because Madoff, Stewart, and the like were harming unknown, faceless people that they proceeded with their destructive decisions? (Madoff, though, knew many of his victims quite well, so it can?t just be the facelessness of the victims that allows such knavery.)

And what of those who are supposed to guard us against these knaves? If it?s true that the SEC was warned about Madoff, was it just the understaffing of this agency that caused it to miss Madoff?s scams? After the tests came back positive for salmonella at Peanut Corp., why couldn?t we just stop the company from putting its contaminated product into commerce?

More regulation isn?t going to be the fix we?d like to have. More staffing at agencies -- without giving people training in working smarter, not harder?isn?t going to be the fix, either. The fact is that, time after time, we?ve had warnings before crises, but we haven?t picked up on them in time. Why?

In large part, the problem lies in how we?re wired. Even very smart people can fool themselves pretty easily. We can use whiz-bang mathematical models, but if those models are based on flawed assumptions, than we still find that ?garbage in, garbage out.? It seems as if we?ve been throwing good money after bad with the TARP funds, by giving various sectors a massive cash infusion without the concomitant responsibility of using that cash to help garden-variety consumers. (Where?s the help for those who are underwater in their homes but are paying their mortgages nonetheless?) In other words, we?re correcting our recent errors by making all sorts of new ones.

Social scientists know all about these cognitive errors. They know about cognitive dissonance (talking ourselves out of believing that we?ve done anything morally wrong), social pressure (also known as ?groupthink?), and the diffusion of responsibility (?someone else will take care of this?; ?someone else will report the fraud?; someone else will fix this problem?).

It?s time for the lawyers, regulators, and businesspeople to recognize that, even though they may actually be the smartest guys in the room, they can?t outwit human nature. Until we recognize that smart people can and will do some very dumb things, we?re going to repeat the mistakes that led to the current financial meltdown ad infinitum. We?re not going to stop any financial shenanigans solely by creating regulations. Regulations help relatively honest people stay on the right side of the law, but they don?t do much for smart crooks. We need to understand that we?re prone to thinking about complicated issues all wrong -- and that we need someone to call our attention to our faulty assumptions on a regular basis. The more I think about how dumb smart people can be (even well-intentioned ones), the more I realize that what we really need is designated skeptics. We need people whose jobs require them to question assumptions, even the most basic ones, and to slow down decisions. We need people inside corporations telling presidents that their shareholders really don?t need them to ship tainted food just to keep quarterly earnings looking good. We need people inside rating agencies who don?t call a disastrously bad idea something that?s worthy for AAA treatment, just so the financial products can keep moving through the economy. And we certainly don?t need people who have made seriously flawed decisions being rewarded with short-term bonuses. I?d rather reward the cynic, the doubter, the one who slows down ?groupthink.? That person does us a whole heck of a lot more good.

Weekend at Bernie?s is fun entertainment, because it?s fiction. Watching our economy crater or people dying from poisoned food isn?t fun at all.

Nancy B. Rapoport is the Gordon & Silver Professor of Law at the William S. Boyd School of Law, University of Nevada, Las Vegas.

Full post as published by JURIST - Forum on February 17, 2009 (boomark / email).