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May 13, 2013

Is There No One to Blame?

By Astitva Chopra '14  |  may, 2013, Issue 1
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Astitva Chopra tackles some of the ethical dilemmas from the recent financial crisis.


I remember hearing this question repeatedly on various news channels in the wake of the 2008 financial crisis. The answer to me was obvious. Of course there are people to blame and they will bear serious consequences for their reckless greed and for their role in bringing the world to the brink of an economic catastrophe. Well, I am embarrassed by how naïve I was.

On April 18, I attended a talk by Sean Berkowitz, a visiting attorney from the Department of Justice who specializes in prosecuting white-collar crime. The talk was a revelation as to why no one has been prosecuted in the aftermath of the crisis. Sean spoke in detail about how it is very difficult to prove criminal intent on the part of the bankers and other top executives of Wall Street whose decisions and actions led to the collapse. Civil prosecution is already improbable because of the statute of limitations and without the establishment of malicious intent, it is impossible to conduct any criminal prosecution as well.

The legal system requires prosecutors to prove beyond reasonable doubt that these executives were planning to commit fraud. That, according to various experts, is almost impossible. It was not like these bankers were rubbing their hands and plotting and scheming about destroying the financial system. They were only being greedy, which is, in fact, a virtue in the prevailing socio-economic system. They were probably delusional in their risk estimation but that is not a crime. Everyone in the world of financial arbitrage has to be a little bit delusional. It's called your "risk appetite."

While the seminar was interesting and also made a lot of sense to me, I still cannot wrap my head around this difficulty to prosecute. I like to think in metaphors and this is how I would frame my dilemma:

Imagine that a new kind of airplane is invented which is 80 percent more fuel-efficient than existing planes. The airlines industry is delighted and they start buying these planes by the hundreds. Air-travel becomes incredibly cheap and air-traffic increases by several orders of magnitude over just a few years. All business cargo is also transported in planes and the entire global travel and transport system becomes existentially dependent on these airlines. Everyone agrees this is good - capitalism at its best.

Now suppose, there is a fatal flaw in the engines of these new planes. Although the risk of catastrophic failure is considered very remote, the internal quality departments of these airlines and external watchdogs have made their CEOs aware of this flaw. As it turns out, there is no regulation requiring these companies to disclose these risks and the flaw is ignored. The top executives at these airlines are minting money at this point and without any government oversight they are free to neglect these risks and continue the unabated growth of the industry.

And then disaster strikes. The flaw kicks in, resulting in massive engine failures for these planes. Thousands of people lose their lives in mid-air accidents while the entire global business supply chain comes to a standstill leading to an economic meltdown. All air-traffic is brought to a halt and the government has to step in to restore order.

Would it be difficult to prosecute the perpetrators of this hypothetical disaster as well? And where exactly would the blame lie? With the plane manufacturers (mortgage originators), the quality teams (the rating agencies) or the airlines (banks) which consistently ignored the red flags? More importantly, wouldn't there be a more thorough investigation of the systemic issues that enabled this kind of risk-taking in the first place or would we dismiss this as another inadvertent side-effect of the "efficient" market and set ourselves up for another disaster?

Last Updated 5/13/13
Last Updated 5/13/13