Q&A with Jane E. Hughes

Jane E. Hughes is the co-author, with Scott B. MacDonald, of Separating Fools from Their Money: A History of American Financial Scandals, now available in an updated second edition. Their other work includes New Tigers and Old Elephants. Hughes is a director at Social Finance US, and she teaches at Boston College.

Q: Why did you decide to write a book about financial scandals?

A: Scott and I have worked together on a number of books in the past, and this book was floating around in our minds. With our book about the 1990s financial crises, we would talk about how there’s nothing new under the sun, there’s so much that echoed past crises.

I was on the faculty of Brandeis, and now I’m an adjunct professor at Boston College. I teach students about the Latin American debt crisis, the Asian financial crisis—it’s remarkable how consistent the themes are, how consistent the actors are, how consistent the mistakes made are.

Scott’s academic background is as a historian, and he said, It’s not just that the ‘80s and ‘90s are consistent, it goes all the way back in time; it reminds me of Teapot Dome. We said, We should write a book about it!

Q: How did you pick the scandals to focus on?

A: They’re somewhat arbitrary…There are a number of scandals we didn’t include. We included scandals that really affected the financial world beyond the people who lost money. The original Ponzi scheme was over pretty quickly, and it didn’t spread, whereas Bernie Madoff did.

The other lens we applied was that we thought about the size. Is this big enough? Does it have a transformational effect? Michael Milken did, for better or worse.

Q: You focus in particular on three periods: the Gilded Age, the Roaring Twenties, and the past several decades. What about those periods lent themselves to financial scandal?

A: The easy answer would be that [the earlier periods were] before the Depression, before the SEC regulations were put in place. That wouldn’t be my answer; I don’t believe regulation is the answer to all problems. The SEC comes out worse than Bernie Madoff. I don’t think new regulations are [always] a fix.

What [these periods] have in common is too much money chasing too few good deals. That tends to be the time when things go bad in the financial markets. People were investing in things they shouldn’t be…The fact that there’s a lot of money sloshing around in search of an investment is more a factor in that era than a lack of regulation.

Q: How did you research this book, and how do the two of you collaborate on your work?

A: Scott and I are like an old married couple. We’ve been working together for more than 20 years; we work very well together. He’s more a historian and I’m more a financial market person.

We have different academic backgrounds, which was good for this book. He worked for government, and I did not; he worked for hedge funds, and I did not. We both worked for major investment and commercial banks. I have been in academia, and now I’m with Social Finance, an investment firm.

Both of us love to write, and we’re both good writers, which doesn’t always happen! I was a French literature major, undergrad. We both like to write in a way that’s not academic, for a reader who’s in an airport, and looks at the rack of books, and thinks, this might be interesting to read on the plane—rather than a very heavy tome.

We generally divide up the chapters by who has the most expertise. He was the first writer on some of the earlier chapters, and I was on the later. It’s a very iterative process; we go back and forth a number of times.

One of the reasons why we’re like an old married couple is that neither of us has any ego involved at this point. We don’t take offense. We’re very honest with each other.

Q: What surprised you most in the course of your research?

A: The first thing that surprised me with the first edition, and I shouldn’t have been surprised—I was astonished by the consistency over centuries of the contributing factors to financial scandals. I didn’t know a lot about William Duer, or about Teapot Dome. As I started reading through Scott’s research, I thought you could put this in 1999 and have Enron and Tyco. It was astonishing to me.

Another thing, in writing the second edition—my favorite chapter was the Madoff chapter. I put a lot of time and energy into it. What astonished me there was the weakness of the SEC and the other regulatory organizations.

When I came to the end of the work on Madoff, I thought he was a sociopath with no conscience, but the real villain was the SEC. They were given a path to [state] that this guy was a crook….I saw the same thing with Enron and WorldCom, but nowhere did it strike me so much as with Bernie Madoff.

The third thing is that it’s surprising what is legal. My students will look at me with round eyes, and say, But that’s legal?...

Q: What do you predict looking ahead when it comes to financial scandals? Will this pattern of scandals continue?

A: I absolutely predict that this pattern will continue for the foreseeable future—my lifetime, and maybe my grandchildren’s. I see nothing in the system that will change this.

Since 2000, we’ve had three massive crises in the United States: 9/11, Hurricane Katrina, and the banking and financial crisis. If you look at the systems that deal with these things, especially with banking and finance, what has changed?

The crises are [happening] more often and more closely spaced together. We are in an era of more and more scandals. The Sarbanes-Oxley and Dodd-Frank [legislation]—I have no confidence that either one will be a game-changer. I do believe the pattern will continue forever and ever.

In the first edition, we had a chapter on Eliot Spitzer, which we’ve taken out. I hoped he could be a game-changer, but he crashed and burned. Preet Bharara [the U.S. attorney for the Southern District of New York] has indicted more insider traders that at any other point I can recall, but I have a sense he’s just hitting the tip of the iceberg.

Q: Are you working on another book?

A: We are in discussion about a second edition of our international banking textbook, which is now 12 years old. It’s still fairly widely used around the world, but it’s outdated. It’s a big project, but we’d love to do it. There’s no chapter on microfinance, on socially responsible banking. There are whole sectors missing.

Q: Anything else we should know?

A: [The book is] a little depressing. It’s interesting to read through and see how much things have not changed, but it’s depressing. But I have a strong belief that as we understand the history, we can change the future. It’s important for us to understand the scandals [of the past].

--Interview with Deborah Kalb