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