Bottom Line Ethics

This week’s theater of the absurd features Goldman Sachs appearing before the Senate Permanent Subcommittee on Investigations. When it comes to watching these two groups face each other, the moral high ground is an anthill.

The reason CEO Lloyd Blankfein and other Goldman employees, including the silver-tongued vice-president Fabrice Tourre, will be at the witness table is because the SEC has filed civil fraud charges over the Abacus 2007-AC1 deal. Goldman marketed the Abacus synthetic collateralized debt obligations to a bond-insurance company and a German bank, and allegedly told the bank that the bond-insurance company had selected the bonds that would be tracked. Instead, Goldman allegedly allowed John Paulson’s hedge fund to have significant input regarding what bonds were included. And Paulson’s bonds were allegedly designed to be lemons that Paulson could strategically bet against, on the other side of the transaction from the bond-insurance company and the German bank. Paulson’s hedge fund made over a billion dollars on the deal; guess who lost the billion? Oops.

I used the word “allegedly” three times in the last paragraph. This is never a good sign. It means that people who seem to have trouble telling the truth are on the loose again. One person who apparently cannot get enough of telling the truth is the above mentioned Tourre, who made a series of unfortunate comments in girlfriend e-mails, including referring to himself as “Fabulous Fab” who was “… standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!” In another note he indicated that he had “…managed to sell a few Abacus bonds to widows and orphans that I ran into at the airport, apparently these Belgians love synthetic ABS CDO2!!!” He also indicated that he was “[n]ot feeling too guilty about this, the real purpose of my job is to make capital markets more efficient and ultimately provide the US consumer with more efficient ways to leverage and finance himself, so there is a humble, noble and ethical reason for my job. … amazing how good I am in convincing myself!!!” I think this is why the word “ironic” made it into the dictionary.

But Goldman has managed to hit the headlines twice, thanks to allegations that a member of their board of directors, Rajat Gupta, provided inside information about Warren Buffett’s intention to invest in Goldman in September 2008. Unfortunately, the alleged beneficiary of the information was Raj Rajaratnam, Gupta’s close friend and former business partner, and head of the very successful Galleon Group hedge fund. Or at least it was successful until Rajaratnam and others were charged in the biggest insider trading probe in decades and the fund collapsed. Mr. Gupta, the former head of consultants McKinsey & Co., has not been indicted, but he will not stand for re-election as a Goldman director. Federal prosecutors in the Galleon case apparently have phone recordings of everything but Mr. Rajaratnam brushing his teeth, including conversations with Mr. Gupta.

So CEO Blankfein gets to appear before Congress and try to explain his e-mail statement that , “Of course we didn’t dodge the mortgage mess. We lost money, then made more than we lost because of shorts.” Uh huh. There are many internal e-mails discussing being on both sides of these deals. These cases are never as cut and dried as Congress wants to make it appear, and bankers are easy to demonize. And it will be helpful for Blankfein and Goldman to have Tourre to point to as a rogue employee, though this may work to Goldman’s disadvantage in the courtroom one day soon.

Apparently, Goldman Sachs is willing to provide full information. The question is whether they are providing it to people who are actually the ones who ought to get it.

My fifteen-year-old son, Nathan, has taken up golf recently. This seems like a relatively healthy balance as a spring sport to complement basketball, which is his primary sport. I also know that it is a great skill to have in the business world, as most rounds of golf involve four or five hours of talking, and 20 minutes of actually hitting the ball. Many deals have been done and relationships forged on the golf course. Unfortunately, every sports headline since he took up golf has been about Tiger Woods. And then, last Sunday, things changed.

Brian Davis is not a household name. He is an outstanding golfer, which is why he plays on the PGA tour. But it would be hard to say that he has been burning it up this year out on the links. Until last week, Davis had played in nine tournaments and finished in the top 40 only once, missing four cuts. The Englishman has never won a PGA event.

On Sunday he made an 18-foot birdie putt on the final hole of the Verizon Heritage Classic to force a playoff with Jim Furyk, a veteran with 14 tour victories. On the first playoff hole, Davis’s approach shot hit the green and then caromed into a hazard. In hitting out of the hazard, he thought he saw a reed move in his backswing, a violation of the “loose impediment” rule that results in a two-stroke penalty. He was not certain, however, and called an official over to review the situation. Slow motion replays indicated movement, and the tournament was over.

I have already seen cynical blog posts saying that he had to call it on himself because there were cameras all around. I have also seen comments that the rule is stupid, and they got the rule wrong, and he won $615,000 anyway. But a golfer who respects the game makes that decision to self-report in the moment, without consulting with anybody else, and with almost no time to calculate the consequences. Unfortunately, hindsight provides steroid-level growth for cynicism.

What the world observed on Sunday was the beauty of self-regulation, something largely forgotten in business today. The accounting profession was “self-regulated” for most of my career. The SEC was there to punish egregious behavior, but for the most part CPAs punished each other and tried to root out those who were involved in unethical behavior. There were periodic scandals that led to calls for reform. But CPAs generally were seen as a restraining force reining in the worst impulses of the marketplace.

This is no longer the case. Too often, CPAs have colluded with clients or at least been fraud enablers. At the center of almost every financial scandal is the CFO, almost always a CPA—Andy Fastow of Enron, Mark Swartz of Tyco International, and Scott Sullivan of WorldCom, to name a few. They were the best and the brightest, and they did their very best to bring the profession crashing down.

But they were not real CPAs. They could not have cared less about the public interest, or people’s pension plans, or the hopes and dreams that parents had for their children. They only cared about themselves. And, as I have written elsewhere, we would have been better off without them. Because they could not control themselves, because they were not self-regulated, Congress gave the accounting profession the gift of full outside regulation in the form of Sarbanes-Oxley and the PCAOB.

What we saw in Brian Davis Sunday were the habits and the conscience of a self-regulated man. It was not an accident that he did what he did, and I am confident it was not the first time he had ever told the truth when it was difficult, and expensive, to do so. Brian Davis is a real golfer.

Not everyone is a real golfer, as my son has discovered in his first year playing tournaments. He has been a witness to rampant cheating, tournament after tournament. We are raising up new Andy Fastows on today’s high school golf courses. Kill the conscience, and you kill the habits that go with it.

And not everyone is a real CPA. Some people would rather get rich than tell the truth. There is evidence that this is true on the PGA tour, and I know that it is true in my profession. We used to be a self-regulated profession. But, then, we used to deserve it.

Note: I actually wrote this several years ago, but the interactions on the blog, some comments in class, and a personal encounter prompted me to share it here.

I strained to hear his voice over the din of traffic a few feet behind him. But, in reality, I already knew what he was saying, because I have heard ministers of various denominations say it before. We were down to the things that have to be said when there is nothing else left to be said. While a small group looked on, we buried Michael Saturday in the last row of the cemetery.

In a high school class that included an Olympic gold medallist and number one NBA draft choice, a Miss USA, and two long-time NFL players, Michael was the only “sure thing” I knew. Admired by every girl under five-foot-five, a polished communicator at seventeen, a scholar-athlete with a ready laugh, the world unfolded before him thirty years ago. He was headed to Notre Dame to make his mark and to follow his destiny. All of us who knew him were aware that great success was inevitable.

Because this was so clear to us, we spent that last year of high school consumed with jealousy. My buddy and I made it our mission to make sure that Michael remained humble, so we began referring to him as “Marvelous Mike,” a moniker that remained in people’s memories even as we said goodbye this weekend. We devised a series of glamorous dates that could be had with Michael and advertised ourselves as “Marvelous Mike’s Dating Service.” We set as our goal to embarrass Michael in ways that would keep him within reach of our mortality.

I moved on with my life, but my buddy turned out to be Michael’s most trusted friend through the years. Each was best man in the other’s wedding, and Ed made sure to keep close ties with Michael wherever he went.

Michael had many successes and some failures as well. The scorebook is perhaps not all that important to the story. He was about to start a great opportunity when they found him in his L. A. apartment, the victim of a heart attack. I do not know the whole story of his life, and I have no need to. I sensed a trace of sadness about it that pervaded the conversations of those more intimately acquainted with the details.

In fact, I felt welcome in the conversations because the days we spent together were actually days in his life pervaded with laughter. I could remember triple dating with Michael and his twin brother in a Volkswagen beetle (what were we thinking?). I recall flying across the grounds of an elementary school in that same Bug, and winning the city soccer championship. I was a co-conspirator in a boondoggle that allowed him to go on a French club trip, even though the required “two years of French” he had taken were in first and second grade. The hardest I ever saw Michael laugh was when I accidentally won a competition on that trip, despite the fact that I had answered the multiple choice test randomly before I ever heard the questions.

In some sense that accidental success characterizes my life. Who knew that I would find Christ and my wife within a year of each other, and that both would shape the track of my entire life? I have had heartache, but the blessings I have experienced have been so overwhelming as to defy logic.

As I listened this weekend, I sensed that the same could not be said about Michael. He had surely had blessings, but his search for peace was ongoing. It turned out that success and happiness in this life are never guaranteed.

Before I left the cemetery, I made sure that I had said “I love you” to two people who should have heard it long ago. And I said an “I’m sorry” that was almost thirty years overdue.

But there was nothing left to say to Michael. I could not tell him that the only “sure things” are on the other side of death, of a hope both sure and secure. I could not tell him that trials come with a purpose, to draw us toward the only One who guarantees real success. I could not even tell him that I loved him.

As I walked away into a gray November afternoon, the only thing I could say was goodbye to a sure thing.

I have been reading a very interesting book by philosopher Daryl Koehn on thinking and acting ethically in a world of unintended consequences. She refers to unintended consequences as a “live dragon” based on J. R. R. Tolkien’s warning, “It does not do to leave a live dragon out of your calculations, if you live near him.”

And yet unintended consequences are left out of our moral calculations all the time. As an auditor, I find it humorous to watch the Congressional Budget Office trying to predict the impact of Congressional bills, most recently the health care bill. Since the CBO is constrained to use a certain set of assumptions, and since those assumptions are largely known to Congressional staff, key provisions of bills are structured so that they will pass muster under CBO provisions. But these estimates almost never represent reality, largely because they do not take into account the changes in behavior that will rationally take place once a law is implemented.

Koehn divides unintended consequences into those that are foreseeable and those that are unforeseeable. Many states that are going bankrupt are magically discovering that public employee pensions are having a huge impact on their deficits. It is not just that these pensions are generous, but that the provisions are set up so that the annuity received in retirement is based on the last few years’ average salary. Predictably, public servants are working almost impossibly high levels of overtime in their last few years, pumping their retirement payments sometimes above what their actual annual salaries were. This is a perfectly predictable unintended consequence of structuring pension plans this way.

Other consequences are not so easy to predict. Koehn gives the example of mosquito nets that were donated to Zambia to reduce the spread of malaria. Instead, villagers sowed the nets together to make large fishing nets, resulting in overfishing that will likely lead to longer-term hunger for Zambians.

When we make ethical decisions, it is tempting to think short-term, and to constrain our minds in terms of potential unintended consequences. There are several reasons for this. First, short-term consequences are the most available to us mentally; they are the easiest to picture. Second, we may actually be able to picture some short-term unintended consequences that we could include in our calculation; this is less likely to be true for long-term unintended consequences. Third, short-term calculations are the easiest to do, and they are the most likely part of the total calculation to be accurate.

I have experienced unintended consequences of my own decisions. I have sometimes made decisions for noble reasons and had a string of bad outcomes as a result. Of course, I can learn and benefit from these outcomes, but it does not necessarily follow that a well intended decision will result in good outcomes. And, in my life, that has led to disappointment.

Someone I know recently decided to leave his wife and change the course of his life dramatically. Besides the expected outcomes of a decision like that, that family’s life is raining unintended consequences, and likely will for many years to come.

I would be interested to know what you think on this issue. Have you experienced unintended consequences that have dramatically impacted your life? Is my friend responsible for all the unintended consequences resulting from his decision?