Diana Henriques: What Bernie Madoff Can Teach Us About Business Ethics

welcome everybody I'm Jeannie hey I'm Dean of the College of Arts and Sciences at the University of New England and I'm thrilled to to be here for my first of many PD marrow lectures in business ethics I want to welcome all the members of the community who are here today as well as to our speaker Diana and Rica's to Governor angus King and to the multiple members of the une family who are here this afternoon and who also attended our event earlier today that includes our students our staff our faculty our administrators and a number of members of the board of trustees and I would appreciate as I named you and I and I hope we got everybody I'd like to ask the members of the Board of Trustees to stand as I as I name you I understand that we have here today two former members of our board dr. ed Friedman and Donna Cheney as well as current members of our board sandy golden Robert McAfee go ahead you may stand up Dianne Collins field Charlie king and of course our chair of our board Mike Morell and if anybody snuck in at the last moment I apologize but I just I wanted to recognize the members of our board because it's hard to overstate what they do on behalf of our University and the generosity that they show so thank you for coming I did not know Paul D Merrill and by all accounts I'm the lessor for it he was a trustee and a great friend to the University of New England and a very highly respected member of our community and I would like to thank the members of the PD Merrill business ethics lecture committee and especially its chair professor Mike Daly a sociate professor of economics at une who worked very hard to secure top knot speakers for this series every year and their hard work is represented in our speaker today Diane Enrique's I also want to make special note in acknowledging sandy golden and PD Merrill's wife and their son Ethan who is here this afternoon as well sandy is a une trustee and she's the visionary behind this lecture and we're so appreciative of her generosity in time resources commitment and energy to make this series not only continue to be possible but to excel in the way that it does finally and I'd like to introduce former governor of Maine the Honorable angus King whom I had the great pleasure of meeting for the first time this afternoon who will introduce our speaker as I'm a newcomer to Maine and I'm still getting to know the culture the political culture here I asked you know what should I include when I when I introduce governor King what should I say by way of introduction introduction and the very common response was angus King needs no introduction to any audience in the state of Maine so but what some may not know is that he is a very close friend and ally of the University of New England that he was a close friend of PD Merrill and that his son is a current undergraduate student on the bit of her campus and helped us secure a much hard-won victory in in a lacrosse game last night so we're thrilled to have to have the former governor's support and participation in the une community so please join me in welcoming a man who needs no introduction angus King thank well first the most important announcement of the day the une men's lacrosse team last night beat Gordon College in this with five seconds left in the second overtime nine to eight for the first time in fifteen years so it was a wonderful evening and if you haven't been to the Biddeford campus and seen the big blue turf it's really quite a sight it's one of only three blue turf fields in the country and there are rumors that seagulls are confused by it but they aren't true it's it's wonderful to be here again and and to be here for this occasion and the only downside is it always makes me miss my friend PD who I knew for almost 20 years I served on a board with him when we socialized together we knew each other quite well and it's so appropriate to have this lecture series focused on the issue of ethics because PD was one of the most ethical people I've ever known the idea of of doing something cutting corners doing something slightly wrong taking advantage it just wasn't the kind of person he was and as I think we're going to learn today ethics and we can pass all the laws we want but if you have a culture that's unethical if people individual people aren't ethical the whole thing falls apart it's all based upon relationships of trust and PD just for me embodied the idea of ethical conduct of doing the right thing even if nobody is watching and even if it might cost you something but that was just the kind of person that he was now our guest today is a journalist and I many years ago I hastened to I don't want to calculate but it was probably 35 or 40 years ago I used to represent newspapers when I was practicing law in Brunswick and I one of the papers I represented was the main times and the main times was subjected to what at that time and I think still is the largest single libel suit in maine history and i defended the the paper in that case and it caused me to reflect upon journalism and what journalism really is and if you think about it what journalists are who journalists are are people we hire to tell us about things that we either don't have time for or can't experience directly that's what a journalist is there a paid friend if if you come home and a building burns down on your street you ask your neighbor what happened and they describe it and tell you what happened that's journalism and so journalists are people who we ask to help us experience things vicariously and learn from them vicariously history and journalism are nothing more than condensed experience experience that we aren't for whatever reason because of the busyness of our lives are where we spend our time we can't be there to know what goes on and journalism and news and and and information are at the heart of our democracy Thomas Jefferson famously observed if I were to have to choose between government without newspapers or newspapers without government I would immediately choose the latter now lest you get too excited about that Diana Jefferson is sort of like Scripture you can find something you know on all sides he also said the man who reads nothing at all is better educated than the man who only reads newspaper I think that's kind of interesting too but journalists are people that we need to explain things to us to help us to understand what happened and our guest today is someone who has been doing that exceedingly well particularly in a field that's hard to understand finance and business and the world of Wall Street and she's written an extraordinary book about Bernie Madoff and the experience of that case which touched thousands of lives and is continuing to do so and has actually cost lives where people have in their distress have taken their own lives as a result of his actions he's in jail for the rest of his life most certainly she's the only journalist I believe who has actually talked to him who's interviewed him in in prison and has a kind of first-person narrative in this book so we're very fortunate to have her with us tonight it's this afternoon it could not be more appropriate to have somebody talking about the implications of the Madoff case and and the implications of the financial problems of the last several years how they've affected people who who has seen it firsthand and who has the incredible skill of being able to convey these complex ideas in ways that we can understand and more importantly benefit from so I'm honored to introduce to you Diana Henricus and by the way you're all so lucky today that you have two speakers from Virginia she's from the south side I'm from Alexandria I don't mention it too much politically and I wanted to be born in Maine but my mother was in Virginia that day and it was a big day for her so I thought I should be there but Diana is an extraordinary journalist she's a contributing writer at the New York Times has had a very distinguished career and has written an important cautionary tale for all of our lives Diana welcome to me and Thank You governor King for that very warm introduction and when I consider the hard time that Thomas Jefferson had from the newspapers of his day it makes his initial quote even more remarkable and his second quote even more understandable I like to think that journalism has improved a bit since that era but sometimes he is sort of wonder nevertheless it is both a pleasure and an honor to be here as part of this important and distinguished lecture series and I want to commend the Merrill family for underwriting such an important topic so generously it is a way to Lee to send a set of values out into the future for generations just one caveat bit of a bit of housekeeping while I don't think my views on Ponzi schemes and business ethics differed markedly from those of the New York Times my remarks today reflect only my own opinions and not those of the newspaper I've spent the last three years learning everything I could about Bernie Madoff and his historic fraud the largest Ponzi scheme in history his global fraud erased sixty five billion dollars in wealth that his investors believed they had when they went to bed the night before his arrest it created out of pocket losses of about eighteen billion dollars it stretched from Palm Beach to the Persian Gulf and affected tens of thousands of people at every rung on the economic ladder from bold-faced names in Hollywood to retired school teachers in New Mexico as governor King said at least to investors that we know of committed suicide when they learned of their Madoff losses it was a devastating crime by every measure and it was the brainchild of this one man this man Bernie Madoff why did he do it I think we can concede that Madoff was ethically challenged but where did that come from it isn't useful to say he was a sociopath Steve Jobs was a sociopath you know lots of sociopaths become brilliant entrepreneurs that doesn't explain anything his father Ralph Madoff was a serial business failure after several setbacks and one large bankruptcy Ralph Madoff set up a one-man firm called Gibraltar securities to recruit investors for small businesses for a fee but he deceptively put that business in his wife's name because his own credit history was in ruins like his earlier efforts this small firm also failed but unlike his earlier efforts this little firm had been based on a lie a small eye perhaps but still alive certainly his precarious finances caused intense insecurity for the young Madoff family and perhaps those anxieties helped explain a little of Bernie Madoff nearly pathological refusal to admit failure at anything in his own life indeed in my first of two interviews with him in prison and just to correct the record I was the first journalist of to interview Madoff and the only one to interview him twice in prison but after my second interview a friend said he became the Chatty Cathy of the federal penal system and started chatting with a few other few other journalists but in my first interview with him in prison he startled me when he refused to even admit that his epic Ponzi scheme had been a failure well Bernie you're in jail obviously it had failed no no he insisted he could have kept it going despite the panic in the markets and those crazy weeks reven we remember in late 2008 people were still eager to invest with him he said so no no no no he didn't fail at his Ponzi scheme he simply got tired of the constant tap-dance of raising new money and decided to quit I'm glad we got that straightened out but there was an even more revealing incident back in 1962 when the young Bernie Madoff not much older than some of you student students here was investing money for some family and friends here Ashley and unwisely invested these clients money in high-risk newly issued stocks in the Wild West over-the-counter market then in May of 1962 the market hit an air pocket at the time it was the worst week in the stock market since 1929 we don't even remember it now but for young brokers of Bernie's generation it was a shocking week the ticker was running hours late people were being ruined it was it was a horrible time and Madoff lost tens of thousands of dollars entrusted to him in that market crash but rather than admit that rather than call up Uncle Joe or Aunt Mary and say you know I'm sorry I lost it all he covered it up he used all his young firms capital to buy those shares back out of those accounts at par and cover up the losses without ever telling his clients what he had done they no doubt thought gee what a genius this guy Madoff is he gets through the worst week in the market since 29 and I never lost a penny ally a small one certainly not a Ponzi scheme lie but still a lie even then Bernie Madoff found it easier to live with himself as a liar than to live with himself as a failure the fraud he eventually used to sustain that illusion of success for decades more a Ponzi scheme is actually a very old crime it goes back well before 1920 when an enterprising Boston immigrant named Carlo Ponzi gated his name the Khan name used to be called a Peter to Paul scheme as in robbing Peter to pay Paul and you can find examples of it going back well into the 1800s but Bernie Madoff put his own stamp on the Ponzi scheme and we'll leave it to history to see whether he will actually change the name of that old Peter to Paul fraud to a Madoff scheme but as a result of these changes these innovations he was able to keep his Ponzi scheme hidden for decades longer than most Ponzi schemes survive he had computer programs that created the illusion that all those stocks and bonds he were supposed to own were actually stored safely in Wall Street central curat Clearing House I mean the computer screens were completely bogus they were invented by a guy who wrote software down the hall but they looked very real he kept old letterhead stationery and an old electric typewriter so that he could create realistic looking back dated documents to satisfy regulators questions he swapped his investors with long detailed account statements long and complicated enough to look very reassuring but too long and complicated to tempt anybody to actually read them he told foreign accountants that he traded with US banks and he told us regulators he traded with foreign banks knowing that the extra difficulty involved in making those cross-border checks would likely deter future investigation as it did besides his mastery of camouflage madoff had a gift for seduction unlike any I've ever seen in a Ponzi schemer in real life or in history and one of the advantages of covering white-collar crime for the New York Times if you keep get to meet rather a large selection of Ponzi schemers more than I hope any of you ever encounter the classic Ponzi personality is a gregarious charismatic bon vivant eager to persuade you that he's the smartest guy in the room but Madoff was a low-key guy who made you feel like you were the smartest person in the room what could be more seductive than that I had a chance to experience this magic trick the first time I interviewed Madoff in prison I knew him slightly when he worked on the street and I covered him a few times but I never actually had a chance to talk to him as intensely as I did then and it was intense I had requested four hours of time from the prison authorities they granted only two I did massive triage with my questions overnight and was watching hearing the clock ticking in the in that reporters back room of mine counting every minute well Madoff started to make a small digression he was going to teach me tutor me about a particular investment strategy shorting against the box if there are any finance mavens in the room and I knew how it worked I didn't want to waste the precious second on that digression so I thanked him and I understand that you'd hurry up well he leaned over to his lawyer Ike Sorkin sitting between us and he said it's such a pleasure to deal with such a knowledgeable reporter I clearly I was the most knowledgeable professional trustworthy intelligent experienced reporter he'd ever met I got to tell you it felt pretty good and I already knew he was a liar so I could imagine in that moment how potent that charm must have been when people still thought he was a genius a genius who thinks I'm the smartest guy in the room people who probably would have been instantly suspicious of that traditional Ponzi personality the guy buying drinks over in the corner they were lured by Madoff's quiet confidence and magnetism and let's not fool ourselves we probably would have been drawn in too because as different as Madoff was from other Ponzi schemers he shared one essential characteristic with all of them he could make you trust him he could make you trust him he could make you believe quite simply that he was a wizard of Wall Street this is what so many smug sceptics forget when they look back at the Madoff case with 20/20 hindsight always everyone's favorite vantage point and boasts that they never would have fallen for that guy they saw in handcuffs cups being marched across your television screens well that wasn't the guy his investors knew the guy they knew seemed utterly trustworthy by definition every successful Ponzi schemer seems utterly trustworthy that's a non-negotiable job requirement for a Ponzi schemer if you can't pull that off you need to go into another line of crime think about it let's say you know a guy and for some reason ladies Ponzi schemers almost always are guys all right but say you know a guy and he doctors his golf score cheats on his wife never pays his debts on time now that guy may commit any number of white-collar crimes he may cheat on his taxes or lie on his loan applications he may take bribes or pay them to other people he may pilfer company property or skim off company cash but I'll tell you one thing he will never ever entice you into a Ponzi scheme Willie no because you don't trust them enough so by definition a successful Ponzi schemer is someone who can earn your trust someone who will seem utterly totally unquestionably trustworthy one fraud analyst Pat Huddleston put it much better than I in a line I wish I'd written when he warned if it sounds too good to be true you're dealing with an amateur think about it think about it madoff was no amateur he knew how to make it sound just good enough to be attractive but not too good to be true only amateurs did that so of course people trusted him we probably would have trusted him too and that's what makes the moral and ethical questions that surround madoff s-- crime so interesting to me I think that's part of why he remains fascinating as years go by and he clicks off another month on that hundred and fifty year prison term he was a well trusted wizard and when we fall under the spell of an evil but trusted wizard like Bernie Madoff every step we take toward him leads us deeper into an ethical quagmire and I'd like to discuss two aspects of that quagmire with you today but first let's pause for a moment and think about this idea of wizards the wizards in our lives these people who tempt us to trust too much who are they they're people who seem a lot like us only better better younger more successful slimmer better at golf better at everything better educated more cultured more sophisticated just better they're so successful at what they do in fact that they almost seem to be magic don't they and sometimes sometimes that magic is real we can all rattle off the names of nature's great extraordinary exceptions Einstein Mozart Thomas Edison Bill Gates Steve Jobs the great Wayne Gretzky of hockey the young Tiger Woods of golf the amazing Warren Buffett on Wall Street take it a step further think about the Wizards in your own lives that's too Nathalie who seems to do everything so well so effortlessly that faculty colleague whose research is so original and who's teaching holds you spellbound the father of your good friend who seems to soar right to the top of the ladder without a single misstep or stumble these are people who are so magically so consistently successful that you always give them the benefit of the doubt and you never worry about taking what they say on faith they inspire trust and almost always they deserve our trust I could name some wizards in my own profession journalists who were given more than the usual amount of latitude by editors simply because they were so magically good at their craft a few were frauds who fell into shame & scandal but most were the real deal and they went on to greatness and well-earned glory clearly not all of life's Wizards are Ponzi schemers but all of life's Ponzi schemers are Wizards at least in the minds of their victims because if they weren't they would not have the power that they have and the great thing about being a wizard is that almost nobody expects you to play by the same rule book as the rest of us people waive the rules for the special wizards in their lives all the time without ever considering that doing so is a potentially disastrous breach of ethics now Madoff benefited enormous Lee from this commonplace tendency to treat our trusted wizards differently regulators ignored warning signs that would have made them instantly suspicious of a lesser genius they had a different standard for Wizards like Madoff due diligence lawyers at major banks and senior accountants at global CPA firms all around the world they made exceptions for Madoff that they never granted their lesser money managers they too had a different yardstick for geniuses institutional investors demanded less paperwork less transparency less cooperation for Madoff than they demanded from others different yardstick that's what happens when people think you're a wizard you don't have to bend the rules all the people who believe in you will Bend them for you consider the news accounts about MF Global the commodities investment firm run by former New Jersey governor and Senator John Corzine who had spent decades as an investment banker at Goldman Sachs it has been reported that the MF Global directors dismissed warnings from the firm's chief risk officer about the portfolio Corzine had assembled after all Corzine was a paid up member of the Goldman Sachs wizard fraternity so his directors exempted him from the risk officers discipline and it destroyed the firm look back at any number of Wall Street in business scandals from Teapot Dome to Enron and you'll see the same thing the extraordinarily successful trader that star institutional salesman a quantitative genius down on the derivatives desk who knows what he does but he's a genius the brilliant CFO Wizards every one of them Wizards who could get away with almost anything no met no questions asked because no one demanded that they live by the same rules as the rest of us Wall Street can usually be counted on to come up with a totally tasteless joke about any major disaster that happens and they'd all kind of stymied them but they did come up with one funny joke about the Madoff scandal traders would joke that once and for all the case proved that there's really no such thing as a sophisticated investor hundreds if not thousands of sophisticated people lawyers bankers hedge fund managers that Countians utterly failed to save their clients or themselves from Bernie Madoff it's easy to dismiss these actions as a lapse of judgment but I think what happened is that these people flunked the business ethics quiz they didn't know they were taking they would have been on the alert if they'd been dealing with some stranger they thought would pressure them to cut corners oh yes they'd have had their moral compass out on day one if they've been dealing with someone whose track record was a little shady a little conflicted a little mysterious but they weren't dealing with someone like that way they were dealing with someone they thought they knew someone they thought they could trust a highly respected man on the Wall Street named Bernie Madoff the Madoff story reminds us that everyone from hedge fund geniuses to retired school teachers simply everyone invests primarily as a leap of faith and we decide whom to trust for reasons that have absolutely nothing to do with all the fine print that regulators think will keep us safe if we would only read every word of the fine print and we don't admit that you don't at least to yourself I admit I don't we don't need to read the fine print if we're dealing with someone we trust right and why do we decide to trust the people we do trust well they seem knowledgeable they have a good track record other people we trust have faith in them they observe all the rules that trustworthy people follow they pay their bills on time they don't cheat at poker or golf they're comfortable and disciplined and well behaved and generous and they don't tell obvious lies in short we trust them because they seem a lot like well Bernie Madoff who before his arrest was immensely knowledgeable about his field and widely respected and admired by other successful people he never got drunk and never flew off the handle he paid his bills on time he was generous to charity and seemed honest and faithful to his wife Ruth he would have passed at trustworthiness test with fine colors in fact he did pass that trustworthy test with flying colors for decades after he had become a multibillion-dollar crook so in hindsight the clues were there all the time but the trust Madoff inspired shone so brightly that no one could see them how did that happen how many of you are familiar with that famous Harvard cognitive function test called the invisible gorilla anyone familiar with that well I'm going to spoil it for you now I'm afraid the test involves a short video clip of two basketball teams one in white uniforms and one in black uniforms and the test takers job is to count every time the team in white passes the ball in an intense high-speed game in the middle of this video clip here's the spoiler alert a student dressed in a full-body gorilla suit walks onto the basketball court faces the camera for dramatic effect and beats your chest a few times and walks off it takes about 6 seconds in an eight or nine minute video clip at the end of the test the test takers are asked just notice anything odd during the game no so you didn't notice the gorilla then a remarkable percentage of people who take that test drop their jaw and say gorilla are you crazy a gorilla on the basketball listen if there had been a gorilla on that basketball court I'd have seen it how could you miss it how could anybody miss a gorilla on a basketball court so there'd been no gorilla but there had been a gorilla and they had missed it when they were shown the film clip a second time some of them were sure that Harvard had changed the film clip they substituted a different clip when they were brought to believe no no this is the same they simply couldn't believe they'd missed seeing that gorilla because they saw it clear as day after they knew what to look for that same cognitive failing is at work when police gathered confident eyewitness testimony that turns out so often to be dead wrong indeed a notable percentage of the death row convictions that have been reversed by the Innocence Project because of new DNA evidence originally rested on the confident eyewitness testimony of people who were absolutely certain that they had seen exactly what happened and who unwittingly incriminated an innocent man all of us even those who take great great pride in their skepticism and maybe especially those who take great pride in their skepticism all of us have the capacity to miss what seems to be right under our noses if we're not expecting it if we're focused intently on something else or if we have let our trust in someone else or our trust in our own judgment about someone else blur our vision you see we're probably hardwired to trust one another for most of it most of us that's our default position when we meet someone we're inclined to think they're trustworthy until they prove otherwise especially if they look and sound and live a lot like us now some scientists think the inclination to trust one another had some evolutionary advantage and I can see how that would work surely cave dwellers who trusted one another would have fared better on their hunting expeditions than cave dwellers who were riddled with suspicion and mistrust of course that suggests that the only sure vaccine for ponzi schemes is clinical paranoia and while it's true that Ponzi schemes are impossible in a world of early devoid of trust modern Commerce is also impossible in a world of early devoid of trust in the most of human society is impossible in such a world so clearly we cannot fault those lawyers and accountants and hedge fund managers simply for trusting Bernie Madoff we are all hired hardwired to trust one another that's not the fault that they trusted Bernie Madoff we can't simply decree that nobody should trust anybody either unless we want to bring human commerce and human society to a halt but what we must realize is that our inclination to trust others and our ear ill placed faith in our own gut instincts can combine to create blind spots big enough to hide a fraud as big as Bernie Madoff and by definition we never see our own blind spots until it's too late that's one of the two ethical dilemmas I want to discuss with you today how do we monitor and police the people we truly trust policing the people were suspicious of is easy right you watch them like a hawk you got rules you got monitors you got cameras you got how do we police the people we truly trust is it unethical to play favorites to have one rule book for the Wizards of the world and another rule book for the rest of us now this situation so common in our lives and yet so rarely recognized as an ethical dilemma is technically the ethicists would tell you a conflict of interest although it's admittedly an odd sort of one but as a professional journalist I've had to deal with this kind of conflict issue countless times in my career in some cases there are bright lines that make conflicts like this quite easy to detect for example I don't cover news stories about close friends or loved ones or about institutions in which I have a close personal state like my college or my husband's employer that we clearly be unethical and most journalists would see such a conflict instantly and no to avoid it here's a wrinkle on that sometimes overtime professional sources gradually become more than just sources you meet for dinner a few times it chitchat about the kids and gradually as that relationship changes the journalist must monitor when sources have become so close to the line of personal friendship that the journalist can no longer ethically write about them it is a difficult call I've had to make it only a handful of times in 45 years but it's one that every journalist has to make from time to time because we know that we simply cannot write about friends with the neutrality and skepticism an impartial judgment that our job requires it would be foolish and arrogant to believe that we could to believe that our judgment is so insulated from our emotions as to eliminate any dangers from this conflict of interest so let's go back now to those accountants and those other professionals who failed so spectacularly in the Madoff case the regulator's the examiners auditors due diligence lawyers investment bankers hedge fund managers who trusted Bernie Madoff now they all had high professional standards of conduct tough due diligence tests best practices that set them apart but what they didn't have was enough humility about their own judgment to realize that their decision to trust Madoff to waive the rule book for Madoff to cultivate cultivate a close relationship with Madoff had created a devastating conflict of interest that impaired their ability to do the right thing they trusted Madoff too much because they trusted themselves too much most of them were so convinced they were right about Bernie Madoff that they never even considered the possibility that this Wall Street Statesman might be running a Ponzi scheme now is there a way to avoid this deadly blind spot there's some clues woven into the Madoff story in my book The Wizard of Lies you'll meet a very wealthy retired businessman who wanted to invest with Madoff but ultimately didn't because he had a firm rule about how much he would entrust to a new money manager and it was well below made offs minimum de jour which I'm convinced Madoff made up on the spot depending on the bankroll of who was sitting across from him but this was a fixed amount quarter of a million dollars maximum that's all he would give to a new money manager and Madoff explained off sorry my minimum is five million dollars can't do it now this businessman could have easily written a check for five million dollars for him it would have been a rounding error he could have done but he wrestled wrestled a little more and decided no no he wouldn't the rule it stood him in good stead over the years and and as much as he wanted to invest with Madoff he wasn't going to break it he wasn't going to waive the rule for this incredible wizard so disappointed chagrin he shook Madoff hand and left not even knowing what an escape he'd had until Madoff was arrested similarly a charity in New York was tempted to invest with Madoff so many of its donors did they got such good results he was such a generous and charitable man himself and they had a chance to invest with him and they wanted to but they had this rule tested over time that they would only invest with a money manager who used an independent third-party custodian institution to hold the assets somebody outside to be sure those stocks and bonds were there and Madoff didn't use a third-party custodian so the only way they could invest with madoff was to waive that Rule four made off and they wanted to they were tempted to but they didn't they had enough respect for the people who'd put that rule in place that they stuck to their guns and disappointed walked away now did you notice the trick the businessman the charity were spared not because they were suspicious of Bernie Madoff far from it like everybody else clamoring to invest with Bernie Madoff they trusted him trusted him completely like everyone else they thought he was a genius but they knew that people are fallible and so they made some sensible rules and they had stuck to them over the years even when they were sorely tempted to weigh those rules for this wonderful wizard they trusted so much the board of MF Global didn't have to be suspicious of former Governor Corzine it simply had to be humble enough about its own judgment to listen to the chief risk officers warning and take it seriously the board of Enron it didn't need to be suspicious of its brilliant CFO it just had to stick to the time-tested rule that immensely lucrative conflicts of interest in the chief executives that sweet are never a good idea because well you might be wrong about the CFO's character they didn't need to be suspicious they just needed to resist the temptation to waive the rules for the people they had decided could be trusted without the rules Trust is a two-edged sword and the magic spell that can keep us safe from the occasional evil wizard is not suspicion its humility we must recognize that we all make mistakes we all have blind spots once we trust someone we all can miss the invisible gorillas beating their chests and warning us that we're in trouble but those who fell prey to bernie madoff forgot that or ignored it and that that was their downfall not that they trusted madoff but that they forgot they could have been wrong in trusting bernie madoff now even worse a few of those who entrusted their own and their clients money to bernie madoff actually did wonder if maybe burning was a little crooked they suspected he might be committing a form of insider trading called front-running using his knowledge about incoming order flow at his legitimate brokerage firm to earn little secret profits for them his clients but even though they suspected he was sort of a criminal they were confident that he wasn't that kind of criminal they were right that he was breaking the law they were wrong about the crime he was committing but because they had so much faith in their own judgment they failed to see that they were confronting a serious conflict of interest when it came to monitoring Bernie Madoff that's when we lose our moral compass when we think our own judgment will always be true north if these professionals had simply adhered to their principles as faithfully and humbly as that businessman and that charity did they'd have realized they might have been wrong about Madoff too and realizing that for safety's sake they'd have insisted that Madoff comply with the rules however much they admired and trusted him and when he refused as he surely would have done they too would have sadly but firmly walked away without ever realizing what a close call they had a clearer grasp of business ethics would have pulled them out of harm's way in time of course not everyone thought Bernie Madoff was a fabulous Wall Street wizard or at worst a guy who bent rules a little to earn them a nice steady profit a few people suspected all along that Madoff was a con artist running a massive swindle and that brings us to the second big ethical knot we need to unravel in the aftermath of this epic crime the Madoff story made it clear if the rest of 2008 happened that there simply is no old-fashioned honor code on Wall Street an honor code of a--sort Thomas Jefferson invented for the road out for the University of Virginia that ironclad commitment to neither lie cheat nor steal nor tolerate those who do now there are tens of thousands of decent law-abiding ethical people working on Wall Street who would never ever lie cheat or steal from their company or its clients but what about tolerating those who do that's the rub isn't it that's the rub for all of us after Madoff surest a small army of hedge fund managers and private bankers and industry consultants came forward to claim while they'd seen through Bernie Madoff magic all along they'd never believed that he was anything but a crook they kept their clients out of trouble well imagine how different this story would have been if all those brilliant impressive influential folks who came forward after Madoff surest had quietly taken their doubts to the SEC or better yet the FBI before Madoff's arrest but they didn't they just quietly escorted their clients out of harm's way and waited until the roof fell in on somebody else's clients so here is the second post Madoff question I think we need to wrestle with are we our brother's keeper when our brother is wandering around Wall Street what is it about the Wall Street world that caused so many decent ethical people to keep silent for so long about Madoff about the rising risk of mortgage securities about predatory loans and sloppy foreclosure filings and dubious underwriting standards and unethical rating agencies what is it about the broader world of business that makes people so reluctant to report wrongdoing and so quick to heap scorn on those who do report it and is there some way to change that in the aftermath of the Madoff scandal the SEC overhauled its entire machinery for dealing with whistleblowers the new system even gets high marks from that notable whistleblower Harry Marco Polo's the quirky Boston analyst who tried repeatedly to persuade the SEC that there was something fishy about Bernie Madoff the new system doesn't rely on some sort of honor code as Jefferson would have it relies on a whistleblowers greed it offers cash incentives in the form of a share and the penalties that the SEC ultimately collects in exchange for timely useful information about wrongdoing now this may encourage more people to blow the whistle on corporate misbehavior and I'm sure we all hope that it does but it will do nothing I promise you to improve the image of whistleblowers in the business community indeed it will likely compound the image problem which is pretty bad already look at all the synonyms we have for those who report wrongdoing when they see it snitch stool pigeon rat tattletale the nicest synonym in the modern thesaurus is informer which doesn't sound too bad if you don't stay it with a sneer informer so no no adding a bounty to the whistleblower equation isn't going to help that image problem at all whistleblowers are still going to be objects of Storn unless we have a deeper more profound cultural change consider that bizarre accounting scandal unveiled at the olympus corporation in japan over the past year where long ago investment losses were covered up year after year by successive generations of accountants and top executives in that scandal the stool-pigeon was the company's new CEO and even he got fired for blowing the whistle we might think it was his duty to report wrongdoing to his board of directors but they thought it was his duty to keep silent and preserve the corporation's reputation in the marketplace perhaps you've heard the story of the security guard of the Swiss bank who in 1997 discovered that stacks of old account Ledger's were being shredded by bank employees in the night he secretly salvaged what he could and he turned them over to a group that was pursuing Holocaust era property claims against that Bank claims that were supported by those Ledger's his actions helped the claimants win a substantial settlement against the bank but do you know what happened to that security guard ever wonder he became the first Swiss citizen in history to be granted political asylum in the United States his life in Switzerland had become a nightmare of threats against him and his family official ones from the authorities concerned about bank secrecy and anonymous ones from his fellow citizens even as children with threatened he left and he sought refuge here believing that the US would at least be safer and maybe marginally more tolerant of whistleblowers and it is it is scorn they may be but whistleblowers in the u.s. are not quite the pariahs they are in many other countries but it's still not a career move you're dreaming of making is it future graduates so the Madoff case forces us to ask ourselves some very tough questions why is it that society almost universally condemns the very behavior that could have shut down the massive madoff crime long before it costs tens of thousands of people their life savings long before it had cost at least to ruin investors their very lives I'm told that in prison Bernie Madoff is admired today as a stand-up guy for not having fingered any of his accomplices in fact at his plea hearing he actually perjured himself by swearing an oath that he had acted alone although his right-hand man frank dipascali at that very moment was negotiating a plea deal in which he would plead guilty to helping madoff carry out this fraud indeed four other people have pleaded guilty five more are awaiting trial on on indictments that they deny to inmates blowing the whistle is definitely not an act of honor and integrity in prison an honorable man is one who keeps quiet about the wrongdoing of others is corporate America are we one bit more enlightened than those inmates let's play a thought game let's say students you're the CFO of an upstanding ethical company with no skeletons in its closet you're proud of your financial control you work for a place like PD Merrill ran and you you feel sure that your track record is spotless and you found the perfect candidate for that vacancy as your senior deputy and then you discover that this person years ago and another company blew the whistle on an accounting fraud that he had discovered will you hire him if you do hire him well your fellow executives trust him or will you be inclined to maybe keep quiet about that little stop on his career path just in case they take it the wrong way here on campus do you feel an obligation to report those who cheat or steal or lie or do you feel a stronger obligation to keep quiet to be a team player do you feel a stronger duty to protect the institutions research funding or its reputation by looking the other way in the lab or in the administration building and if you did speak up how do you think you would be treated by your peers yes these are difficult ethical questions and the Madoff case reminds us with painful heartbreaking clarity how much is hanging on how we answer those questions if we continue to believe that we can trust our gut about who is honest and ignore the conflicts that creates and if we continue to scorn the people who blow the whistle on wrongdoing and ignore the hypocrisy that involves in short if we do what we've always done then we'll get what we've always gotten a world in which the next bernie madoff will feel right at home now you know the definition of insanity doing the same thing over and over again and expecting a different result so as you wrestle with your answers to these puzzles in your own lives please consider this warning from the final pages of my book in a world of lies the most dangerous ones are those we tell ourselves thank you very much thank you during the Q&A please wait to use the microphone before you ask your question I think their microphones on both sides and I'm having a little trouble with the light seeing your hands so maybe if you just could stand if that's not difficult ah okay there you go ask away oh oh I know the microphones are in the aisles I thought you were standing to ask a question are there are there questions that you would like to pose here we have our hands up gentlemen getting the mic right there I wonder if you would comment on the situation where we can we could we can feel that jeez I really don't trust this person and I don't know why we can have a gut instinct about not trusting this person and we can turn out it can turn out that we're wrong and that in fact this person was in fact trustworthy so our gut can be you talked about our gut being wrong in that yes this is a trustworthy person and we find out in fact they were not but I wonder if you care to comment on the obverse of that it can work the other way I think it less often does just based on the sociology studies that I've examined in the course of research for The Wizard of lies I think what get the key point to remember is that gut instinct I've been fascinated by the by the book Thinking Fast and Slow is that on someone else's reading list besides mine I heartily recommend it it's it's sort of the antidote to Malcolm Gladwell's blink Gladwell stands for the proposition that you can go with your gut you know here's this museum curator he opens his book with who looks at this this antiquity and he instantly suspects maybe it's a counterfeit well the author of Thinking Fast and Slow says well if you had about 10,000 hours of experience assessing antiquities go with your gut if you haven't maybe you should do a little research first so that that understanding when we can trust our gut when we have enough experience of that person of that situation of the probabilities of the likelihood that we've had enough experience I mean I mean there are things I've done for so long I've got more than 10,000 hours I believe believe me in reading newspaper headlines so when I see what headline a copy editor is decided to put on my story I've got a good pretty good gut about whether or not that headline is going to confuse people send them off in the wrong direction not be clear and we can have a conversation about my gut reaction to that my gut reaction about what the auto mechanic tells me is wrong with my muffler what do I know I mean I haven't had 10 minutes studying mufflers so I think that's where we find the dividing line we make fairly good gut instinctual decisions where we have a massive amount of expertise and experience when we don't we don't so I think that's an important thing to remember and we tend to have way too much faith in the accuracy of our gut instincts there was a question further in yes thank you I have a concern I would like you to comment on which I don't think I'm alone in sharing we live in a very complex economic environment and we all respond to incentives around us and my concern is about the incentives that are put in place for the people like Bernie Madoff Madoff and others who may be functioning in Wall Street today to lie cheat steal because it serves the investors interest perhaps to cut corners in service of the stockholders and I'm wondering if we live in a climate in which the incentives to do wrong outweigh the incentives to satisfy our own conscience you know I've been a business an amateur business historian and I made a specialty of the study of fraud so I can confidently reassure you this isn't new this is not the first generation in which Wall Street has put pressure on those who live and work there to cut corners to maximize profits indeed you could almost say looking back historically if you take the longer view that this is one of the best regulated periods in the modern markets time I think our regulation has gone a little bit off the rails I think there there's been too much of a infatuation with the glories of deregulation but I don't think there is anything new about these incentives to lie cheat or steal they've always been there what so what we need to figure out is if that's the case then how do we police the people we trust so that there are consequences for committing those crimes that's what changes over time not the temptation to do wrong but the consequences of doing wrong and that's where we need to address our attention we will never I submit change the temptation to do wrong but I think we can address the consequences of doing wrong on Wall Street more athletically to put it that way one of the ideas I suggest in the epilogue of The Wizard of lies is well maybe Wall Street really would police itself if the penalties for wrongdoing were so draconian that they'd be scared to death not to do you know in China they execute white-collar criminals I'm not suggesting that we should I'm just saying that there are other ways to shape the consequences of doing wrong and if we truly want to address white-collar crime that's what we'll do not by trying to produce a world in which there are no incentives to cheat maximizing profit is the nature of capitalism that's it it's like complaining that dogs bark capitalists maximize profits but you put that capitalist in a well-regulated market and even Adam Smith suggested that we should and you can make sure that when he's tempted to cheat you catch him or you stop him or you shut him down so they can't do it again and you penalize him so I think that's where our attention needs to be in what the consequences are wrongdoing in our modern society are and I think the track record is they have not by definition been serious enough because they have not had a sufficient deterrent effect and when you know everybody's running the red light maybe you need to raise the penalties for running the red light but what happened with mothers against drunk driving drunk driving was an activity that in my father's day was frightening ly common older people here in this audience people my age and older will remember that it is now harshly punished by the criminal justice system and you know what doesn't happen as much so we can reduce the amount of white-collar crime we have if the penalties for white-collar crime represent actual deterrent penalties and when people talk to me about regulatory reform that's what I want to know so how does this change the penalties for wrongdoing not how does it change the incentives I hope that's been helpful are there other questions I have one over here it's as you were talking I kept having images that flashback to the 60s and 70s I think it was when you had five executives from cigarette firms testifying in front of Congress and they all raised the right hand and said that they had no evidence that smoking was harmful now I think I know where where you'll come out on this but I just wonder if you have a few thoughts to add about that kind of a situation or with investors who invest in some of the the new genetic stocks and so on that may have research behind them that is questionable is there anything you can add to those two situations well I'm I'm not sure I quite get what you're going at but I think we do need to understand how easily we can deceive ourselves if it's very much in our interest to believe that something is true I can see an executive priding himself on his skepticism about the science that points in the opposite direction he would see it not as delusional but as skeptical of of that science I don't think we're going to you know get any smarter about that as a society unless we start getting smarter about that as individuals but in in that in that of course famous instance that that swearing occurred at the time when the evidence within the firms was mounting and was quite quite clear but I don't find myself astonished that people made those representations when there was so much hanging on it in terms of their career and their businesses is there another question yes Michael might be my question is actually about individual investors which is Michael oKWU specifically the victims here were individual investors albeit ones that were defined as sophisticated because of their level of liquid assets what is your opinion on the you know much-delayed fiduciary standard that's being debated and deferred and obfuscated but which ultimately would protect all of us if it were clarified clearly that's my opinion potentially not yours yeah I know how you clearly that's your opinion and not mine and these are clearly my opinions and not those those who will write about this topic for the New York Times the issue for those who are not in the in the realm is it's a current regulatory debate about whether or not or about about which of our financial intermediaries should have a fiduciary duty to us and that's a braided term the lawyers in the room will know that a fiduciary duty for someone gives you a positive obligation to do what is best for them not for you but for them and penalties presumably would attach if you failed to do so I understand the debate and I'll be interested to see how it turns out but I am unpersuaded that it is going to be a particularly powerful weapon of investor protection because someone who will lie to you will lie to you whether or not they have a fiduciary duty towards you there's nothing about imposing upon that person a fiduciary duty which will instantly make them say oh I was going to rip you off but now I won't because I have a fiduciary duty not to and it doesn't work that way I and I worry a little bit that a fiduciary standard will give the unfortunate impression that just the opposite has happened that in fact because now a whole subset of stockbrokers who did not previously have a fiduciary duty towards you will have that duty people will lower their guard and not take the naturally skeptical steps that they should take because you have this fiduciary duty so it's an important debate mostly because of what it will say about the wall street culture that is where it is important is Wall Street willing to take on a fiduciary duty and say okay we may have some rogue brokers who violate it but this is our mandate and this is what we hope to achieve it will be aspirational certainly but it will tell us something about the wall street culture I understand the practical problems of those who oppose it I understand the debate about how it should be framed and what the penalties for violations should be but you can achieve the same thing by increasing the penalties for white-collar crime without a fiduciary responsibility so it still comes down to what happens if you cheat what happens to you if you cheat and if the penalties seem well you'll be drummed out of the stock brokerage business you know this isn't going to be a big deterrent so I am agnostic about that particular debate I just urge that we not hang too much of our hopes for an honest market on that particular outcome we have time for one more question well that's pressure it I recognize it Happy Valley isn't Wall Street but it occurs to me that Penn State and other organizations like that could take a page out of this playbook I agree with you because it is human nature that was at work both in the Penn State situation and in and in the Madoff case that that capacity to trust that and the way Trust blinds you to things that if you didn't trust you'd see instantly and you know I thought as a new trustee at my alma mater George Washington I was watching that unfold at Penn State with Chun's I mean it's your worst nightmare you just go on the board at Penn State and this mess blows up on your mind let me tell you I'm sure I'm not telling the trustees here anything that hasn't happened in their life the next board meeting you wanted to know everything there was to know about how transgressions like that got handled on that campus so we do we hope learn from such things but you're right these are not problems that are unique to Wall Street these are not problems that you won't have to ream out as long as you go into widget manufacturing that you won't have to worry about as long as your job after graduation is in the oil business no these are going to be problems that you are going to confront everywhere you go because you will meet wizards everywhere you will need to have a rulebook that keeps you safe when you are tempted to waive the rules for those you trust too much you need to have some answers about your obligations to report wrongdoing when you see it and to make sure it is effectively reported as with a nod to Penn State and to respect people who do report wrongdoing as truth tellers not whistleblowers so I think that that's a universal lesson we all need to learn it whether we're going to Wall Street or not if I'm sorry if I didn't get to your questions I do have a website called Diana B Henricus comm and many interviews that I've done elsewhere are posted there and you may find that your question if we didn't get to it is answered in in some of the interviews that are posted there I also hope that you will give a thought to the Wizard of lies a small plug the paperback edition will be out on May 8th and I would love to add you to my readers I've enjoyed your your presence here today am I too to invite you to say something yes No Oh tell them about the movie oh what fun yeah cool um yeah this was my fourth book but it might be my first movie how cool HP wait they don't call a tencel town for nothing ladies and gentlemen it's HBO did option the movie the book for a possible movie for HBO and they are Syrian serious negotiations with Robert De Niro to play the role of Bernie Madoff which I think would be really neat I had one can i name drop here I had one conference call with DeNiro as these negotiations were unfolding who I know whoever knew I was I was such a horrible fan I said mr. DeNiro I couldn't call I couldn't bring myself to call him Bob but he gets on the phone on this conference call and he says Diana yes mr. dear Diana I am Bernie Madoff so you know I we're hopeful a lot can go wrong before the final the final details are signed but it would be a lot of fun and there would be a great treat that this stage in my career too to have a little a little pencil dust a little Hollywood pixie dust sprinkled on things but I also hope that that will give you some confidence that you know this isn't spinach I'm asking you to read here it's actually pretty exciting and you might actually enjoy it thank you again for your attention I love being you

Channel: University of New England

Views: 57,871

Keywords: Diana Henriques, Business, Ethics, Lecture, Paul D. Merrill, Bernie Madoff, New York Times writer, UNE, University of New England, Angus King

Id: IdcPUsnWYu4

Length: 77min 50sec (4670 seconds)

Published: Wed Apr 18 2012