Notes on a ‘Scandal!’

The Museum of American Finance held its opening reception for the new exhibit “Scandal!” last night. The exhibit takes visitors through the greatest American financial scandals, starting with the very first in 1792 all the way up to Bernie Madoff. Mark Hodak, the guest curator for the show, spoke in front of the guests and told us, “Every rule has an antecedent that is often scandal.” Hodak, who teaches corporate governance at NYU’s Stern School of Business, feels that, “The history of scandal is a vehicle to learn why things are the way they are.”

I caught up with Hodak after his speech and asked him whether the SEC’s fraud case against Goldman Sachs is likely to end up in his exhibit in ten years. While he cautioned that “the door is way open as to whether Goldman did something illegal,” when we look back at financial reform ten years from now, “You can peg the clauses [of the bill] to scandals linked with Lehman and Bear Stearns” (both part of the exhibit). The Sarbanes-Oxley Act, for example, is the “step child” of Enron and WorldCom–legislation that set new or enhanced standards for corporate accounting, he said.

Meanwhile, the exhibit brings to mind the Pecora Commission of the 1930s, which investigated the causes of the crash in 1929 and eventually uncovered a variety of abuses in the financial sector that led to reforms to protect the public. I asked Hodak what he thought of a modern-day Pecora Commission, and he responded, “[Democratic Representative] Barney Frank would love to be Pecora, but it’s not going to happen.” The cross-examination of Goldman Sachs CEO Lloyd Blankfein is as close as we will get, along with the already-established Financial Crisis Inquiry Commission. We’ll just have to wait and see if we “get the same smoking guns,” he added.

There are other parts of the exhibit that ring true with what’s going on today. The Panic of 1792, the first financial scandal in the US, was created by a man named William Duer, who attempted to corner the market in government bonds and shares in banks with millions he borrowed from the rich and poor alike. When it was discovered that he didn’t have the money to pay back his creditors, a panic ensued, leading to a crash.

In response, the New York State legislature enacted a law against public trading. This eventually led to a private association of traders that later became the New York Stock Exchange. Duer himself later died in debtor’s prison. Which begs the question: where is our protective legislation? Where is our debtor’s prison?

Alexander Hamilton, as America’s first Treasury Secretary, also stepped into the situation and injected capital into the markets, after which they recovered quickly. The exhibit displays a quote from him that could easily be uttered in today’s climate: “Tis time, there should be a separation between honest Men & knaves, between respectable Stockbrokers … and mere unprincipled gamblers.”

Something else I learned at the exhibit: one of our founding fathers, Thomas Jefferson, felt trading in securities markets was detrimental to the public good. So perhaps bank regulation is not so anti-American after all.

Other examples of just rewards in the exhibit include the Sarbanes-Oxley Act; Bernard Ebbers, the CEO of WorldCom, serving 25 years in prison for conspiracy, securities fraud, and filing false statements with regulators after it was discovered he cooked the books; and Tino De Angelis, the architect of the Salad Oil Scandal that fooled inspectors into thinking he had more oil in his vats by letting it rest on top of water, spending 7 years in jail.