Why Not Allow Bankers to Lie? (If It’s Okay for Lawyers…)

May 3rd, 2010
hat tip:  PhilaLawyer

“[I]t takes two to lie – one to lie and one to listen.” – Homer Simpson, “Colonel Homer” (1992)

Unless you’ve been in a coma, you’ve probably seen some snippet of the Senate grilling of Goldman Sachs’ executives.  I won’t bother characterizing that embarrassment here. My earlier post on Twitter suffices:

The Goldman Senate Hearings. For the non-red light district crowd who’d otherwise never see a prostitute argue with a bookie.

But viewing that awful spectacle – watching a hopelessly out-of-her-depth lifetime government employee like Clare McCaskill attempt to cross examine a guy like Lloyd Blankfein on reconciliation of derivatives – an interesting question hit me.

Insider trading’s rampant, everyone knows that.  A number of economists and policy wonks have suggested in the past the market might be more transparent if we admitted that fact and legalized the practice.  In that same vein of thinking – in light of the obvious fact that humans will always commit frauds, more frequently the more money’s in play – I have to ask… Why not allow bankers to lie to one another?

Look at every disastrous policy or business decision creating the Great Recession and you’ll find a common element: lopsided informational asymmetries. The Goldman case is a perfect example. Paulson and Goldman knew something ACA probably didn’t.  IKB apparently knew nothing, and took what it heard from the other side of the deal as fact.  That or it thought it knew better than everyone else involved, and couldn’t have been more incorrect.

Either way, the reason IKB got taken was a simple lack of due diligence.  The company was lazy with its research – assumed too much based on suspect sources, or simply didn’t analyze enough.  But how do you cure that problem?  We can’t regulate companies to competence, legislate their managers to shrewdness.  Vigilance is only enhanced by a known, increased exposure to risk.  And how better to reach that goal, keep every player on his toes, than allowing everyone to lie?

If every firm involved in the mortgage backed securities mess assumed every other firm was utterly, completely full of shit, the “marks” would have all been raging skeptics.  No one would have accepted the surface valuations. Those Germans would have done their homework. Everyone would have done more homework.  Paulson and Goldman wouldn’t have attempted to hoodwink a buyer the way they did.  The chance of success would be too low.

I know what a lot of you are thinking…  Madness!  This has to be the stupidest goddamned thing you’ve ever written!  (And you’ve written many stupid things!)  We can’t allow dishonesty as a standard business practice – have our markets balanced on millions of people engaged in efforts to defraud one another!

Really?  Are you sure that could never work?  Because that’s exactly how our legal system operates.

I’ve sketched the various forms of “soft lying” lawyers engage in under the banner of “advocacy” numerous times in the past.  This description, a mock obituary for a litigator from a piece called “Witness Preparation,” codifies them best:

[O]bituary writers can’t tell the truth. They can’t say that, among the many things [the litigator] might have been, he was undoubtedly a conniving, manipulative liar. If he wasn’t, he wouldn’t have been successful enough to warrant all that ink. “Lawyer” and “liar” aren’t mere sound-alikes – lying’s what we do. We just don’t call it that. We offer platitudes like “there are three sides to any story – plaintiff’s, defendant’s, and the facts… by fighting, we ferret out the truth.” That’s true, but it also means one side is lying all the time. Our lies, however, are never direct. Nobody counsels his client to bald-faced bullshit – that could cost you your license. We lie by omission, hide facts or hijack the focus, making the other side’s credibility the issue, obscuring the claims against our clients. We warp the language of an agreement into something its simple verbiage could never have intended. Most of us rationalize this by lying to ourselves – suspending disbelief and supporting our client’s most obscene prevarications. I’ve been dressed down several times by partners for merely joking in private that our client was lying.

“The Judge will decide what’s true. You aren’t the Judge. You have a duty to your client. You’re an advocate, and that is all.” Translation: “I know our client is lying. You know he’s lying. But we want his money.”

And those are just rationalizations for the neophytes and service partner shlubs. The big fish don’t need the justifications. They know that the trick to lying effectively is complete self-delusion. First, you have to make the facts your client gives you real in your mind, as though they actually happened exactly the way you’re going to tell them to the jury. Give them a history, some context, a back story. This sounds easy, but as the WMD debacle in Iraq eloquently illustrates, it’s actually hard as hell. The real facts have a pesky habit of surfacing at the worst times, and this causes serious problems. You might mix up your client’s story with the true facts during a hearing or trial. If one real fact sneaks in, the rest have a tendency to flood in through that hole in the dyke. If you start thinking about the truth, your conscience might kick in subconsciously, leaving you a less than zealous advocate.

But how do you bridge the holes in your client’s fantastic story and bury the guilt of abetting his lies? With the second half of that self-delusion – the victim complex. Your client’s been screwed by his opponent before, so even if he’s wrong on this claim, he deserves to hit the bastard for some money. Your client did something wrong, but something we all do from time to time… Why should he lose a fortune due to some bad timing? It’s not lying; you’re righting a wrong – getting even for the aggrieved. And there’s no justice if you lose. Once a lawyer’s made the leap to this pedestal, the actual bullshitting’s easy.

You might say that’s cynical.  Most litigators with the capacity to honestly assess their trade would offer a different descriptive: Accurate.  Call it whatever you like, “advocacy” is a form of spinning, misrepresentation by omission, and both are, well, lying. Unswayed? For context’s sake, consider some of our nation’s most illustrious litigators and trial lawyers, and a few stories about their work:

Bill Lerach: The dean of shareholder class action “strike” suits.  Served two years in federal prison as part of a plea agreement arising from an investigation his firm for alleged payment of illegal kickbacks to ‘professional’ class action plaintiffs.

The Pinnacle Corp. Billing Fraud Investigation: Associate at multinational law firm took partner to state ethics board for fabricating 450 hours of work in a mere two month span.

Dick Scruggs: Mississippi trial lawyer famous for collecting billion dollar tobacco litigation fee.  Serving seven year sentence in federal prison for wire fraud and bribery related to an attempt to bribe a Mississippi judge.

The Ross Survey on Billing Fraud: Barely more than half of attorneys responding believed bill padding was unethical; nearly one third have engaged in it.

The Texas Asbestos and Silica Disease “Expert” Controversy: Judge finds thousands of reports submitted by experts on behalf of plaintiffs to have been fraudulent, fabricated by doctors paid in excess of a million dollars by mass tort lawyers.

The Lehman Bankruptcy Billing Controversy: Pay Czar Kenneth Feinberg compelled to rein in counsel running up $730 million in fees in less than two years.

A comprehensive list of sleazy practices common in the industry, on both the plaintiff and defense sides, would go on for days.  You get the picture.

But I haven’t come to bury Caesar.  I’ve come to offer litigators and trial lawyers as examplars – to ask if what’s acceptable for them shouldn’t also be so among bankers.  If an “adversarial system” where opponents spin and misrepresent facts to unsophisticated jurors is a credible enough structure through which to find truth in an architecture where our liberty and property can be forfeit, why can’t a couple of equally sophisticated finance professionals bullshit one another?  If justice emerges from attorneys weaseling one another in the litigation process, wouldn’t the most informed trades result from two parties openly trying to deceive each other, suspicious as lawyers, vetting every element of the opponent’s proposition?

Why do we preclude that in finance? Is it because the money the bankers are dealing with is so much greater than what’s at issue in the legal business?

Wall Street compensation pool (2009): $130 billion

Amount Fed earned on repayment of loans made to big banks and mortgage backed securities purchases (2009): $46.1 billion

Economic costs of tort litigation (2008): $254.7 billion

Legal fees paid to 100 biggest U.S firms (2009): $74 billion

No. Can’t be that.

Is it possible the reason is emotional, or worse, political?  Perhaps attorneys get a unique pass because, unlike bankers, who have to buy the government’s cooperation, lawyers directly control the legislative and regulatory processes?  (Need I cite figures comparing the number of JDs and MBAs working in the federal government?  Didn’t think so.)

Maybe it’s as simple as party.  Democrats love lawyers.  Can’t get enough of them.  “We need to embrace complexity!”  That was our law professor-cum-President’s charge. No problem in the world that can’t be solved with a new volume of rules. And no better source of campaign funding than the industry that makes its living navigating the effluent stream of them Washington widens every day. And Lord, do populists on the Left love their attorneys. Robin Hoods for the working man! The little guy’s only chance against the monstrous, heartless corporations! And we are in populist times, with the Left, as always, playing for emotional votes… demanding economic “fairness,” whatever that is.

Populists, however, are exceedingly simple creatures.  They worship notions like consistency, howl at the suggestion of hypocrisy. If you let them run the asylum, some might soon start asking, “When we’re done fixing health care, and cleaning up all these banks, should we clean up the Court system, too? Reform the legal industry people have been complaining about for decades?” They might ask the Democratic Congress to kill its golden goose.

Of course, that’s never going to happen. Neither party would ever give up the contributions it gets from lawyers. But in a better world – an intellectually honest, logical one – that lawyers are allowed to deceive while finance workers may not should at least give the banks some leverage, an argument against absurd regulation.  If the legal system decides matters involving our core, essential rights, and the process through which it finds truth is an admitted competition of lies, why hold something as amoral as finance – trades among the most sophisticated of institutional investors, no less – to a higher standard?

Why should Goldman be flayed for pulling the wool over a bank’s eyes the exact same way “Philadelphia Lawyers” pull it over juries’ every day?  And if the answer’s something incoherent – “Because that’s just ‘the way it is,’ and lawyers are different than bankers” – then perhaps the Left-leaning populists backing Democrats should rethink their allegiance. In the sort of republic they favor, where fairness would be paramount, consistency the highest grace, how can a party, Congress, or Administration root out thieves and degenerates on Wall Street without first cleaning the rats out of its own basement?

That or just let the bankers lie, too.  Either approach would be more credible.

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