I guess I’m not as cynical as you are,” Neil Barofsky, former watchdog for the Department of the Treasury’s Troubled Asset Relief Program and presently the busiest cynic caught up in the government’s entanglement with the banking business, told The Observer.
In a time when everyone seems to be cheating—and most everyone getting away with it—we’d put it to Barofsky that there doesn’t seem to be much percentage in honest behavior. If Wall Street executives, tween idols and journalistic heavyweights are shirking the rules to get ahead, doesn’t it make sense for the commoners to do the same?
It was late July, and Barofsky was promoting the publication of Bailout (Free Press, 2012), his insider account of Washington’s response to the financial crisis. Three days prior, the Federal Reserve Bank of New York had revealed that in April 2008, a Barclays employee called the regulator and explained that the bank was fudging its Libor submissions. “You’d think someone would pick up the phone to the Department of Justice and say, ‘We believe there’s a global conspiracy to fix interest rates,’” Barofsky said. “Clearly no one did that.”
Of course, the Fed’s admission wasn’t a total surprise. In June, Barclays had paid some $450 million to settle charges that it had rigged Libor submissions for the short-term gains of proprietary traders, and at the behest of senior executives to halt a flagging share price.
News that the world’s most powerful regulator stood by as one of the world’s most powerful banks broke the law landed like a punch in the stomach. It wasn’t just Barclays. All summer long, the headlines bled with tales of financial perfidy. At least 10 other banks were under investigation for rigging interbank lending rates, and several had fired employees amid investigations. The founder of an Iowa-based futures broker had “lost track of” $200 million in client funds over the course of 20 years. HSBC had spent the better part of a decade banking to terrorists, drug kingpins and sanctioned nations such as Iran and Cuba.
It wasn’t just banking, either. Seventy students at New York’s Stuyvesant High School caught text-messaging test answers to each other were allowed to retake the test. Journalistic wunderkind Jonah Lehrer had to be caught cheating twice before he lost his gig at The New Yorker.
The Olympics hadn’t even started yet, and everywhere we looked, people and institutions were breaking the rules and getting away with it. At some point, an honest man might get stuck on the notion that there wasn’t any point to good behavior. If everyone else is cheating, don’t people owe it to themselves, and their shareholders, to do the same? Is it possible that playing by the rules means doing a substandard job?
“It’s never that hopeless,” Barofsky argued. But we weren’t so sure.
“The unethical tendency is a human universal,” said Paul Piff, a post-doctoral scholar at the University of California, Berkeley. But not everyone bends and breaks the rules equally.
Piff’s research shows that the rich are more likely to cut off other drivers, or cheat in games of chance, and subjects who identified greed as a positive value were more likely to cheat. But greed isn’t the only factor. Creative people are more likely to cheat, he told us, as are the highly educated.
Unethical behavior seems to be driven by rank—the more status you have, the less dependent you’re likely to be on social relationships—and self-focus. Meanwhile, watching other people cheat changes our understanding of what’s socially acceptable. Successful people are more likely to cheat, increasing the chances that they’ll become still more successful. And, we suppose, increasing the chances that they’ll be surrounded by successful people who are more likely to cheat themselves.
“It’s something called social proof, and it’s one of the strongest forces in society,” said Dan Ariely, a behavioral economist at Duke University and the author of The (Honest) Truth About Dishonesty (Harper, 2012), a book-length work on the motivations for cheating.
Which might explain why it’s so rare to find a lone lawbreaker. If one Libor submitter was rigging rates for traders, it’s only natural that the others would feel entitled to a little bit of Bollinger. If UBS was dabbling in rigging bids on municipal bond investment contracts, as federal prosecutors allege, it’s not hard to imagine (as prosecutors also allege) JPMorgan or Bank of America or GE Capital dipping their toe in the same pool.
Or as Noel Biderman, founder of Ashley Madison, which describes itself as “the most successful website for finding an affair and cheating partners,” told The Observer, “When Kristen Stewart behaves this way, I think it gives greater license to regular people.”
Oh, Kristen. When we heard she was giving up a leading role in the romantic drama Cali after her affair with director Rupert Sanders was exposed by paparazzi, we thought Stewart was the last soul in Hollywood with the capacity for shame. Then we heard rumblings that Stewart’s ex, Robert Pattinson, has had several affairs himself. Was she really contrite, or simply laying in wait for the shoe to drop on her former beau? And in that case, was she moving on from cheating in love to cheating in public relations?
Perhaps not quite, but it called to mind Philip Hindes, the British cyclist who told reporters in London that he crashed intentionally in the Olympic team sprint event, to take advantage of a rule that allowed his team to restart the race. It may have been poor sportsmanship, but Hindes’ intentional crash fell within the rules, and the Brits eventually claimed Olympic gold.
The four women’s badminton teams that tanked their way through preliminary matches in hopes of gaining a clearer path to the podium were less successful in their attempt to skirt the spirit of the competition. But Algerian distance runner Taoufik Makhloufi managed a bit of rule-skirting that the British cyclist might applaud: He was disqualified at the London Games for walking off the track in the middle of an 800-meters heat, in a suspected ploy to conserve energy for another event. Two days later, Makhloufi was a gold medalist in the 1,500 meters.
“What we’ve seen is clear gray areas and big rewards,” said David Callahan, co-founder of the think tank Demos and the author of The Cheating Culture: Why More Americans Are Doing Wrong to Get Ahead (Houghton Mifflin Harcourt, 2004). A few hundredths of a second can be the difference between first and second, but “there’s an enormous difference between gold and silver when it comes to endorsements,” Callahan said.
What’s true in sports is true in school or finance. In a study published by the whistleblower practice at law firm Labaton Sucharow last month, 30 percent of 500 financial services pros surveyed said that bonus considerations increased the pressure to behave unethically. The Stuyvesant High students who had to take a state Regents exam a second time after they were implicated in a scheme to share answers by text message were competing for places at the nation’s top colleges.
“Some people feel that if they don’t cheat they put themselves at a competitive disadvantage.” Danny Solomon, who graduated from Stuyvesant this year, said in an e-mail. “For some, integrity be damned, drastic action is justified.”
Cheating, of course, is not all upside. Fareed Zakaria, for instance, was caught borrowing heavily from a New Yorker story on gun control, and was suspended from Time and CNN.
“The first thing is, if we are getting caught, this is bad for us,” Ariely said. “The second is that we are creating a tremendous downside for society, and this can come back to haunt us. Think about living in a world where you can’t trust anybody.”
“If other people are cheating, it may serve me well to do the same,” Piff said. “That may be in the short term.” However, he was quick to add, “When groups start to upset the status quo by violating the norms, people become more and more alienated, cooperation decreases and the group disintegrates.”
To former New York Gov. Eliot Spitzer, who resigned in 2008 after it was learned that he had dalliances with prostitutes, it’s a matter of making the penalties uncomfortable enough to prevent further lapses.
“What I struggle with now is that we have no effective remedies,” he said. “You want to do something big and dramatic, but the draconian penalty is rarely seen as appropriate.”
Jordan Thomas, head of Labaton Sucharow’s whistleblower practice, thought new rules could help. “If people aren’t fearful, they stop thinking with their ethical self,” Thomas said. “Those people have more to fear, because of the whistleblowers and whistleblower lawsuits that are likely to come.”
“It’s never that hopeless,” Barofsky said. “The people can speak up and compel politicians to break up the banks and break up the regulatory structure. It may not happen until the next financial crisis hits.
“By the way, I think the next one will be more devastating, because of some of the things we did the first time around.”
For his part, Barofsky has eschewed cheating. In the first chapter of Bailout, Barofsky goes for drinks with Herb Allison, a former chief operating officer of Merrill Lynch, at the time an advisor to the U.S. Treasury. The story goes that Allison warned Barofsky that bashing the administration over TARP was a sure way to ruin a career. It didn’t have to be that way: “Well, is it an appointment you might be looking for?” Barofsky says Allison asked. “Something else in government? A judgeship?”
Barofsky didn’t bite, and has settled for the less prestigious career path of law professor and book author. Not long ago, we noticed that Jonah Lehrer’s Imagine (Houghton Mifflin Harcourt, 2012) had popped up as No. 13 on The New York Times best-seller list for the week of Aug. 12, even though the work had been discredited. That burned, but there was a solace: Bailout was No. 9. So maybe there is hope for the honest man.
Then again, regulators recently announced that they were ending investigations into whether Goldman Sachs misled investors in a $1.3 billion mortgage deal without filing charges. Maybe Barofsky should have taken that judgeship.