The Corruption Thing

Portfolio’s new issue contains an interesting piece by Gary Weiss comparing the problems on Wall Street with the extensive corruption in police forces thirty years ago.

The press has been too loath to state the obvious: What happened on Wall Street (and is still happening) was corruption, plain and simple. Corruption in the form of exorbitant pay systems that encouraged excessive risk-taking, in how the Street manipulated its incestuous relationship with the ratings agencies to have them do its bidding, and in the push for ever-more junk mortgage product that it could make huge fees off of and then unload to others. Not to mention the Bernie Madoffs.

Weiss writes that:

Like financial crime is now, police corruption was then everywhere: systemic, pervasive, and difficult to uproot.

And that:

Until recent years, systemic corruption was a persistent issue for police forces nationwide, with cops taking payoffs from drug dealers and gamblers. The corruption was organized and institutional. It seemed so ingrained that it could not possibly be fixed. But it was—in the cities that chose to address it.

Those cities approached their corrupt police forces not as a collection of “bad apples” but as organizations that had gone off the rails. Sherman calls those forces “deviant,” in that they bypass social norms and laws “in order to achieve societally legitimate organizational goals”—bending the rules, in other words, but doing so with decent intentions.

That’s about as good a clinical diagnosis of the problem on Wall Street as one can find. Think about the scandals of the past year—the buildup of leverage, subprime paper, questionable accounting—that doomed major Wall Street firms. Their goal was to achieve profits and bonuses, legitimate aims that our society encourages. But their means deviated from social norms: By disregarding the fundamental principles of risk management, or by ignoring the stretched finances of well-intentioned homeowners trying to buy a bigger house than they could afford, these companies endangered not only themselves but the financial system as a whole.

And Weiss points out that corruption like this thrives when the watchdogs are sleeping. He points to the SEC, of course, but I would also throw much of the press in there.

Police corruption thrives when the watchdogs—the municipal government and the senior police officials—are indifferent or ineffective. Antar says the parallels with the Securities and Exchange Commission are compelling. The failures of its enforcement staff, starved for resources under chairman Christopher Cox, mirror the inability in past years to confront police corruption.

And he gets a great quote from John Bogle, the legendary founder of Vanguard Investments and perhaps the little-guy shareholder’s best friend in the market:

“Not to draw an analogy that’s going to make me even less popular than I am,” Bogle says archly, “but the similarity between police corruption and stock-market corruption is drug dealers with unlimited money to spend. They can make their own law.”

Weiss writes that the SEC is set up to punish crimes, not anticipate them. That needs to change, though I’d quibble with his assertion that punishment isn’t effective. I think if more people were punished, it would have a chastening effect on the culture.

Still, he’s right that the emphasis must shift more toward preventing corruption from happening in the first place. That can only happen with smart, effective—and stiff— regulation. We can’t accept multi-trillion-dollar taxpayer bailouts of people who got rich and left us holding the bag as the price we pay for free-market capitalism.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.