The PhDs of Financial Scandals: Power, Hubris and (Billions of) Dollars

Citibank Game Final2Current financial scandals may be more complex and less glitzy than Wall Street crimes of the 1980s, but they involve similar underlying factors, according to two noted authors. Power, influence, egos, and hordes of money still play significant roles. Wolves still prowl Wall Street these days, though their fur has changed.

Bryan Burrough, co-author of Barbarians at the Gate: The Fall of RJR Nabisco, and William D. Cohan, author of Money and Power: How Goldman Sachs Came to Rule the World, spoke at a Museum of the City of New York event earlier this month to discuss changes in Wall Street culture and offer comments on the evolving cast of characters.

Press Coverage and Politics:
Press coverage has been hindered by complex “Wall Street jargon”, said Cohan. Financiers “created a black box so that fewer reporters can cover the subject since terminology is so foreign.” Financial reporting isn’t an area that can be easily added as a specialty.

The political climate also factors into today’s situation. “The public resents that bankers got bailouts for problems they caused and everyone else got bupkis”, said Cohan. He lamented the “symbiotic relationship between government and Wall Street and the revolving door” of former government officials joining financial firms.

Shifting Financial Dynamics:
“In the 80s, mergers and acquisitions were a phenomenon. Today’s scandals are not nearly as glamorous. They’re not takeover-driven, they’re more focused on hedge funds trading on insider information, quarterly earnings reports and expert networks”, said Cohan. Perpetrators are “still treated like mafiosos, and Feds use wiretaps to listen in on their conversations”.

“Financiers used to received bags of cash for secret tips about corporate takeovers”, said Burrough. “It’s all blurry and abstract now, and hedge funds are often called victimless crimes. Managers may trade on information they received four people ago” in the chain. “The hedge fund business is so opaque”.

The Human Factor:
“Sometimes the human component explains more than the money”, said Burrough. “In certain cases it’s about the executive’s desire to curry favors”. Those in power like to prove they have valuable, sought-after financial information.”

Cohan agreed, observing, “Egos and hubris take over and get out of control, and financiers start believing their own B.S. That happens repeatedly on Wall Street”.

Different Characters:
While The Wolf of Wall Street movie has been controversial, Michael Milken really embodied 1980s Wall Street excess. Retrospectives on Milken paint a mixed picture though, since he also created the junk bond market, Cohan said.

More recently, Steven A. Cohen of S.A.C. Capital Advisers hedge fund serves as a notable financial villain. While he’s yet to be charged criminally, his key employees have been either found guilty of insider trading or their trials are now underway. Burrough once interviewed Cohen for Vanity Fair, noting that at that point he “still thought he had an image he could salvage. Otherwise he wouldn’t have talked to me.”

Burrough’s assessment of Cohen’s predicament is less than rosy. “His assets are sexy (referring to his enormous net worth, real estate holdings and prized art collection, which he’s recently been auctioning and selling), but he comes across as a nebbishy guy, who’s been cautious and smart about staying out of the public eye. But whether or they get Cohen criminally, he’ll never recoup his reputation.”