The scandal beneath the financial crisis: Getting a view from a moral-cultural mental model

Harvard Journal of Law and Public Policy

Volumn 33, Issue 2, 2010, Pages 735-778

  Jackson, Kevin T ^a,b  

^a FORDHAM UNIVERSITY   (United States)

^b Witherspoon Institute   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 78049298780     PISSN: 01934872     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (160)

1. These assertions, admittedly, are controversial. To those who insist on describing the financial crisis in purely functionalist and scientific terms they may appear absurd. There is no conclusive argument to support the basic contention that a broader mindset offers greater insight into both understanding the phenomenon and developing practical responses that are likely to enhance business success in the broad sense. It is likely that other attempts at analyzing, and proposing solutions to, the financial crisis are even less satisfactory.
2. Although written in the midst of the rise of totalitarian regimes posing a threat to free institutions, the following words sound equally germane to the present global financial crisis: "We are ready to accept almost any explanation of the present crisis of our civilization except one: that the present state of the world may be the result of genuine error on our own part and that the pursuit of some of our most cherished ideals has apparently produced results utterly different from those which we expected." F.A. HAYEK, THE ROAD TO SERFDOM: TEXTS AND DOCUMENTS, 65-66 (Bruce Caldwell ed., Univ. of Chi. Press 2007) (1944).
3. Dependence modeling with the use of copula functions is commonly used in financial risk assessment and actuarial analysis-for instance, in the pricing of collateralized debt obligations (CDOs). A methodology of applying the Gaussian copula to credit derivatives, as formulated by David X. Li, has been cited among factors contributing to the financial crisis. See Felix Salmon, A Formula for Disaster, WIRED, Mar. 2009, at 74, 74-75.
4. For instance, consider the term "global contagion." In the context of economic analysis, the word "contagion" expresses the effect of financial calamities spreading from one institution to another. For example, a run on a bank can expand from a few banks to many others. Similarly, a financial crisis can spread from one country to another, as in the case of currency crises, sovereign defaults, or stock market crashes advancing across borders. Another example of medical jargon is "transfusion." In an online commentary, Boston University's School of Management Dean Louis Lataif stated that "[t]he public is beginning to see bailouts as 'transfusions,' rather than a closing of the wound, and is losing patience with them." Posting of Louis Lataif to The Great Debate, http://blogs.reuters.com/great- debate/ (Mar. 23, 2009, 14:26 EDT).
5. See Editorial, Making it worse; Government should stop using credit card to postpone financial day of reckoning, COLUMBUS DISPATCH, Oct. 16, 2008, at 8A;
6. Angela Charlton & Emma Vandore, Europe puts more on the line for banks than US, USA To DAY.COM, Oct. 13, 2008, http://www.usatoday.com/money/ economy/2008-10-13-2102616413-x.htm.
7. Richard Herring & Susan Wachter, Bubbles in Real Estate Markets (Zell/Lurie Real Estate Ctr., Working Paper No. 402, 2002), available at http://realestate.wharton.upenn.edu/newsletter/bubbles.pdf;
8. Knowledge@Wharton, Hope, Greed and Fear: The Psychology behind the Financial Crisis, http://knowledge.wharton.upenn.edu/article.cfm?articleid=2204 (last visited Jan. 19, 2010).
9. Herring & Wachter, supra note 6.
10. See William B. Rouse & Nancy M. Morris, On Looking Into the Black Box: Prospects and Limits in the Search for Mental Models, 100 PSYCHOL. BULL. 349, 349-63 (1986);
11. Patricia H. Werhane, Exporting Mental Models: Global Capitalism in the 21st Century, 10 Bus. ETHICS Q. 353, 354 (2000).
12. Of course, many other mental models exist and represent important perspectives from which to address the financial crisis. For instance, the mental model of the politician looks for the most expeditious way of getting through public matters. Consider the account of Federal Reserve Chairman Ben Bernanke (both an economist and a politician) in February, 2008: "I expect there will be some failures," but "[a]mong the largest banks, ratios are solid." Fed Chairman: Some Small US Banks May Go Under, CNBC, Feb. 28, 2008, http://www.cnbc.com/id/23390252/. Seven months later, in a dramatic meeting in September, 2008, Bernanke, along with Treasury Secretary Henry Paulson, met with key legislators. In Bernanke's alarming words, "[i]f we don't do this, we may not have an economy on Monday."
13. Joe Nocera, 36 Hours of Alarm and Action as Crisis Spiraled, N.Y. TIMES, Oct. 2, 2008, at A1. The purpose of this depiction was political expediency-to pressure Congress into approving a $700 billion emergency bailout. The rhetoric worked. Within a month, on October 3, 2008, the Emergency Economic Stabilization Act created the Troubled Asset Relief Program (TARP). Pub. L. No. 110-343, 122 Stat. 3765 (2008). The fatal limitation of the politician's mental model is that it is ill-equipped to capture any sense of the common good. Narrow special interests are stronger and more vocal, and there is a paralyzing lack of consensus regarding national priorities. Politicians normally operate on a confrontational basis, as reflected in the opposition of labor versus management, business versus government, and environmentalism versus economic growth. Political rhetoric is characteristically framed in terms of "battles" and "wins or loses," as if a win for one group is always a loss for another. Special interest groups, such as the American Medical Association, the National Rifle Association, the National Education Association, feminists, pro-choice groups, and pro-life groups, gather to push for their narrow objectives. The problem, then, in the context of the financial crisis, is that the discourse of contemporary politicians based on expediency and confrontation tends to foster poor communication, distrust, and cynicism at a time when listening, cooperation, and compromise would be more conducive to moral leadership.
14. See, e.g., Eugene A. Ludwig, Act 3 of Crisis Is Over. Get Set for Act 4, AM. BANKER, Dec. 18, 2009, at 9;
15. Robert J. Samuelson, Economists undone by their ignorance of history, TORONTO STAR, July 15, 2009, at A19.
16. See Kevin G. Hall, Not another red-estate crisis: Commercial mortgages next?, MCCLATCHY, Apr. 30, 2009.
17. The intersection of Main and Wall, GLOBE & MAIL (Canada), Oct. 1, 2008, at A20.
18. See Nick Onnembo, U.S. financial system: Can it collapse?, TELEGRAM & GAZETTE (Mass.), June 13, 2008, at 8.
19. See William Poole, Causes and Consequences of the Financial Crisis of 2007-2008, 33 HARV. J.L. & PUB. POL'Y 422, 426 (2010).
20. PAUL KRUGMAN, THE RETURN OF DEPRESSION ECONOMICS 158 (2009).
21. Kenneth Howe, A year on, and Lehman fallout still being felt around the world, S. CHINA MORNING POST, Sept. 14, 2009, at 1.
22. Alan Greenspan, We need a better cushion against risk, FIN. TIMES, Mar. 27, 2009, at 11.
23. Rick Newman, The Private Sector Gets Another Chance, U.S.NEWS.COM, NOV. 2, 2009, http://www.usnews.com/money/blogs/flowchart/2009/11/02/the-private- sector-gets-another-chance.
24. Tom Petruno, Mortgage Forgiveness May Be Next, L.A. TIMES, June 27,2009, at B1.
25. See Irwin Stelzer, Weak Housing Threatens to Slow Economy, SUN. TIMES (London), Mar. 25, 2007, at B4.
26. Peter S. Goodman, Taking the pulse of an America that has always Felt Lucky: Populist anger amid crisis may sharpen appetite for more regulatory oversight, INT'L HERALD TRIB., Sept. 21, 2009, at 18.
27. Vikram Khanna, Sub-prime: six lessons, and counting, BUS. TIMES SING., Mar. 7, 2008.
28. Andrea Fuller, House Backs Limits on Pay To Executives, N.Y. TIMES, Aug. 1, 2009, at B1.
29. Richard Northedge, Make banking boring to avoid boom and bust, INDEP. ON SUNDAY (London), Mar. 15, 2009, at 82;
30. see also, KRUGMAN, supra note 15, at 163.
31. Irwin Stelzer, If a bank is too big tofdl, it must be broken up: None of the planned banking reforms protects the financial system, DAILY TELEGRAPH (London), July 29, 2009, at 19.
32. David Prosser, The question Obama can't quite face, INDEP. (London), Sept. 15, 2009, at 34.
33. David Ignatius, Editorial, The View From the Eye of the Storm, WASH. POST, July 18, 2008, at A17.
34. Boyd Erman, Europe, U.S. at odds over bank capital ratios; Split emerges over how much more is needed; European banks could be less competitive, GLOBE & MAIL (Canada), Sept. 24, 2009, at B4.
35. See Reforming America's financial system, INT'L HERALD TRIB., Sept. 15, 2009, at 6.
36. Of course, not all economists, management theorists, and legal experts operate with the mental models herein diagnosed.
37. See THOMAS S. KUHN, THE STRUCTURE OF SCIENTIFIC REVOLUTIONS 175 (2d ed. 1970). Professor Kuhn uses the term "paradigm" to explain how fields of knowledge are based upon shared systems of belief that are defined by a common vocabulary and a set of accepted problems and agreed-upon solutions. Thus, on the one hand, a paradigm defines a community of belief; on the other hand, communities of belief do not exist but for the shared beliefs, acknowledged problems, and recognized solutions that constitute a paradigm. Although Professor Kuhn's book was aimed at the history of changes in the physical or "hard" sciences, John Kenneth Galbraith articulated a similar idea that is closer to the context of the present discussion: "The first requirement for an understanding of contemporary economic and social life is a clear view of the relation between events and the ideas which interpret them."
38. JOHN KENNETH GALBRAITH, THE AFFLUENT SOCIETY 6 (4th ed. 1984).
39. Interestingly, Wilhelm Röpke makes a similar observation: "A few months before the beginning of the greatest economic crisis in history, in the spring of 1929, the most distinguished American economists were talking about the happily secure equilibrium of an economy running in top gear." WILHELM RÖPKE, A HUMANE ECONOMY 250-51 (1960). One magazine article stated that economist Nouriel Roubini had presaged the economic downturn as far back as September of 2006, but added that the field of economics is not well equipped to foretell a recession.
40. Stephen Mihm, Dr. Doom, N.Y. TIMES, Aug. 17, 2008 (Magazine), at 26;
41. see also, Emma Brockes, He Told Us So, GUARDIAN (London), Jan. 24, 2009, at 24. For other accounts of experts providing signals of an impending crisis,
42. see Recession in America, ECONOMIST, Nov. 17, 2007, at 385,
43. and Kabir Chibber, Goldman Sees Subprime Cutting $2 Trillion in Lending, BLOOMBERG, Nov. 16, 2007, http://www.bloomberg.com/apps/news?pid- newsarchive&sid=aXHulkIznCr0/.
44. See, e.g., Frank Rich, Op-Ed., The Other Plot to Wreck America, N.Y. TIMES, Jan. 10, 2010, at WK10.
45. This critique of the mathematization of economics has been advanced by such thinkers as Friedrich Hayek, Robert Heilbroner, and John Maynard Keynes.
46. See R. Edward Freeman & David Newkirk, Business as a Human Enterprise: Implications for Education, in RETHINKING BUSINESS MANAGEMENT: EXAMINING THE FOUNDATIONS OF BUSINESS EDUCATION, 131, 139-43 (Samuel Gregg & James R. Stoner, Jr. eds., 2008).
47. See, e.g., PAUL ANTHONY SAMUELSON, FOUNDATIONS OF ECONOMIC ANALYSIS 5-6 (1947).
48. As Röpke puts it: "When one tries to read an economic journal nowadays, often enough one wonders whether one has not inadvertently picked up a journal of chemistry or hydraulics." RÖPKE, supra note 32, at 247.
49. As Nobel Prize economist Myron Scholes stated, "[t]here are models, and there are those who use the models," referring to the distinction between "ivory tower" economists who concoct models and financial engineers who apply the models to the actual business world. Efficiency and beyond, ECONOMIST, July 18, 2009, at 368. Of course, a number of economists who embrace the efficient markets hypothesis posit some modifications to it as a consequence of their readiness to accept findings from other fields of study, such as psychology, in an effort to account for seemingly irrational economic behavior on the part of both individuals and institutions. See id.
50. RÖPKE, supra note 32, at 247.
51. Id.
52. See Freeman & Newkirk, supra note 35, at 138.
53. RAKESH KHURANA, FROM HIGHER AIMS TO HIRED HANDS: THE SOCIAL TRANSFORMATION OF AMERICAN BUSINESS SCHOOLS AND THE UNFULFILLED PROMISE OF MANAGEMENT AS A PROFESSION (2007).
54. Id. at 176-92.
55. Pablo Triana, Why Business Schools Are to Blame for the Crisis, July 13, 2009, Bus. WK. ONLINE, http://www.businessweek.com/bschools/content/jul2009/ bs20090713-635092.htm.
56. See JOHN R. BOATRIGHT, ETHICS IN FINANCE 176 (1999);
57. R.H. Coase, The Nature of the Firm, 4 ECONOMICA 388, 391-93 (1937).
58. Kelley Holland, Is It Time to Retrain B-Schools?, N.Y. TIMES, Mar. 15, 2009, at BU1.
59. But see Christopher Avery, Judith A. Chevalier & Scott Schaefer, Why Do Managers Undertake Acquisitions? An Analysis of Internal and External Rewards for Acquisitiveness, 14 J.L. ECON. & ORG. 24, 24 (1998) (arguing that executives pursue prestige in the business community rather than extra compensation).
60. Sumantra Ghoshal, Bad Management Theories Are Destroying Good Management Practices, 4 ACAD. MGMT. LEARNING & EDUC. 75, 75 (2005) (citations omitted).
61. JOHN ROLFE & PETER TROOB, MONKEY BUSINESS: SWINGING THROUGH THE WALL STREET JUNGLE 8-9 (2000).
62. George Anders, Business Schools Forgetting Missions?, WALL ST. J., Sept. 26, 2007, at A2.
63. See MILTON FRIEDMAN, CAPITALISM AND FREEDOM 133-34 (1962).
64. See BUSINESS AS A HUMANITY (Thomas J. Donaldson & R. Edward Freeman eds., 1994).
65. Edward J. O'Boyle, Person: An Economic Agent for the Electronic Age, 34 INT'L J. Soc. ECON. 472, 478 (2007). Throughout the history of Western civilization, one repeatedly finds business ventures embodying humanitarian endeavors. Monasteries dating back to the Middle Ages were, in effect, incipient institutions of economic activity, in which ora (culture) and labora (work) were coupled. Likewise, as far back as the fifteenth century, the Franciscans had established the Montes Pietatis, precursors of modern banks, which grew up not directly seeking profit, but instead trying to battle usury and provide the impoverished with new beginnings in the wake of economic hardship. The nineteenth century also provided for a merging of economic and humanitarian objectives as the bulk of European welfare establishments and hospitals emerged out of spiritual associations.
66. Luigino Bruni & Amelia J. Uelmen, Religious Values and Corporate Decision Making: The Economy of Communion Project, 11 FORDHAM J. CORP. &FIN. L. 645, 657-58 (2006).
67. A good deal of emerging research indicates that donors themselves experience a tremendous amount of benefit from giving. Indeed, economists and psychologists have found that charitable giving makes people healthier, happier, and even more financially successful. Giving is, in and of itself, a source of value for those who donate to charity. See ARTHUR C. BROOKS, WHO REALLY CARES: THE SURPRISING TRUTH ABOUT COMPASSIONATE CONSERVATISM (2006);
68. STEPHEN POST & JILL NEIMARK, WHY GOOD THINGS HAPPEN TO GOOD PEOPLE (2007).
69. See SAMUEL GREGG, THE COMMERCIAL SOCIETY: FOUNDATIONS AND CHALLENGES IN A GLOBAL AGE 9 (2007).
70. See id. at 3.
71. See, e.g., Vikas Bajaj, Senate Questioning on Mortgages Put Regulators on the Defensive, N.Y. TIMES, Mar. 23, 2007, at C4.
72. Politically driven post-crisis legislation must be avoided, BANKER, Apr. 7, 2008, http://www.thebanker.com/news/fullstory.php/aid/5663/Politically- driven-post-crisis-legislation-must-be-avoided.html.
73. For Michael Novak, the innovative spirit becomes the hallmark of capitalism. Criticizing Max Weber who holds "economic rationality" to be the essence of capitalism, and drawing from Hayek, Schumpeter, Kirzner, and others, Novak states that: The heart of capitalism... lies in discovery, innovation, and invention. Its fundamental activity is insight into what needs to be done to provide a new good or service. The distinctive materials of capitalism are not numbers already assembled for calculation by the logic of the past. On the contrary, its distinctive materials are new possibilities glimpsed by surprise through enterprising imagination.
74. MICHAEL NOVAK, THE CATHOLIC ETHIC AND THE SPIRIT OF CAPITALISM 10 (1993).
75. Steven Malanga, Whatever Happened to the Work Ethic?, 19 CITY J. 36, 36-45 (2009). The existence of easy credit, along with the belief that home prices would keep on appreciating, persuaded legions of subprime borrowers to assume adjustable-rate mortgages. The financial institutions that offered these products lured homebuyers with below market interest rates for pre-established terms, followed by market interest rates for the rest of the mortgage's term. Unable to afford increased payments at the end of the initial grace period, many borrowers attempted to refinance. But refinancing proved difficult as housing prices started to drop across the United States. Borrowers found themselves incapable of avoiding heftier monthly payments by refinancing and started to default.
76. Patrice Hill, Treasury seeks to stem second wave of foreclosures, WASH. TIMES, Feb. 13, 2008, at A1;
77. Kathleen M. Howley, Plummeting home values sinking American dream, DETROIT FREE PRESS, NOV. 22, 2009, at 2.
78. Malanga, supra note 60, at 36-45.
79. See Khanna, supra note 22.
80. See id. (arguing that credit agencies failed in their role as "gatekeepers" to the financial system).
81. See. Charles R. Schwab, Restore the Uptick Rule, Restore Confidence, WALL ST. J., Dec. 9, 2008, at A17 (describing the harm caused by "manipulative short sellers").
82. Press Release, U.S. Dep't of the Treasury, Statement by Treasury Secretary Timothy Geithner on Compensation (June 10, 2009), available at http://www.treas.gov/press/releases/tg163.htm.
83. A recent study found that it is "quite easy for a hedge fund manager to 'fake' high performance over an extended period of time without getting caught." Dean P. Foster & H. Peyton Young, Hedge Fund Wizards, ECONOMISTS' VOICE, Feb. 2008, at 1, 1. Hedge fund managers sometimes make risky speculative moves by investing in transactions that may yield higher-than-average returns because of the minute yet real risk that the whole venture may blow up. Id. This kind of arrangement, dubbed a "Taleb distribution," has a strong likelihood of producing moderate gains and only a slight chance of resulting in huge losses in a given period.
84. Martin Wolf, Why today's hedge fund industry may not survive, FIN. TIMES, Mar. 19, 2008, at 15.
85. Thus, even if the probability of suffering a large loss is one in ten, the fund manager might stand ready to assume the risk because, after all, his own money is not on the line, and he is likely to pull down a tidy profit for years to come. For instance, although the manager will likely be ousted should that onechance-in-ten risk occur, the investment might nevertheless produce sufficiently large returns for the fund manger to get large returns, reap a "2 and 20" commission, and satisfy his clients along the way. To his clients, the fund manager will seem to have immense talent. The problem is that his clients have no way of suspecting that the manager is basically gambling their money away. See Thomas Donaldson, Hedge Fund Ethics, 18 Bus. ETHICS Q. 405, 409 (2008).
86. In a recent editorial Professor Michael Jacobs describes how failures related to board oversight, executive rewards, and agency costs, which contributed to the financial meltdown, were not even on the radar screens of America's business schools. In his words, "[m]ost B-schools paper over the topic [of corporate governance] by requiring first-year students to take a compulsory ethics class, which is necessary, but not sufficient. Michael Jacobs, How Business Schools Have Failed Business, WALL ST. J., Apr. 24, 2009, at A13. Jacobs continues his critique by posing two rhetorical questions: "Would Bernie Madoff have acted differently if he had aced his ethics final? Could we have avoided most of the economic problems we now face if we had a generation of business leaders who were trained in designing compensation systems that promote long-term value?" Id.
87. For a detailed explanation of why the attitude "if it's legal, then it's morally okay" is insufficient, particularly in the intensively regulated field of finance, see BOATRIGHT, supra note 45, at 9-10.
88. There is probably no better exposition of the moral relativism that pervades our age than the one given by Alasdair MacIntyre. He shows how contemporary moral fragmentation, in the form of emotivist and utilitarian culture, is connected to the loss of Aristotelian ethics together with the inability of the Enlightenment to supply any suitable substitution for it. See ALASDAIR MACINTYRE, AFTER VIRTUE: A STUDY IN MORAL THEORY 22-59 (1981).
89. See, e.g., Joe W. (Chip) Pitts III, Corporate Social Responsibility: Current Status and Future Evolution, 6 RUTGERS J.L. &PUB. POL'Y 334, 374 (2009).
90. Enron's mission statement listed the following values: respect, integrity, communication, and excellence. In addition, it proclaimed that all business dealings were to be "open and fair." Chris Penttila, Missed Mission: Watch Out! If your mission statement is a joke, Enron may be the punchline, ENTREPRENEUR, May 2002, at 73, 73. Almost all Fortune 500 companies have a mission statement. Within the text of nearly every mission statement there appears some statement of the firm's commitment to moral values. Yet it is evident that legions of senior executives behave contrary to such pronouncements. For discussion of how misalignment of formal and informal messages sent out by firms to their employees poses challenges for developing ethical corporate culture,
91. see LINDA KLEBE TREVIÑO & KATHERINE A. NELSON, MANAGING BUSINESS ETHICS (4th ed. 2007).
92. See Edwin M. Epstein, The Good Company: Rhetoric or Reality? Corporate Social Responsibility and Business Ethics Redux, 44 AM. BUS. L.J. 207, 212-14 (2007).
93. For a more detailed look at such tendencies to over-regulate the business world, see CATHERINE CRIER, THE CASE AGAINST LAWYERS (2002);
94. PHILIP K. HOWARD, THE DEATH OF COMMON SENSE: HOW LAW IS SUFFOCATING AMERICA (1994).
95. ARISTOTLE, THE NICOMACHEAN ETHICS (Hugh Tredennick ed., J.A.K. Thomson trans., Penguin Books 2004).
96. Id. at 15-16.
97. Id. at 267-71.
98. Id. at 42.
99. Id. at 43-44.
100. Id. at 43-46.
101. See Jared D. Harris & Philip Bromiley, Incentives to Cheat: The Influence of Executive Compensation and Firm Performance on Financial Misrepresentation, 18 ORG. SCI. 350 (2007);
102. Jared D. Harris, What's Wrong With Executive Compensation?, 85 J. Bus. ETHICS 147 (2009).
103. Aristotle notes that this trait can be found in a certain class of people: [Some] go to excess in receiving by taking anything from anybody; for instance, those who follow illiberal occupations, like ponces and all people of that kind; and moneylenders who make small loans at a high rate of interest; for all these receive more than is right, and not from the right sources. Their common characteristic is obviously their sordid avarice, because they all put up with a bad reputation for the sake of gain-and a small gain at that. I say this because we do not call illiberal those who wrongly take large sums from wrong sources, e.g. despots who sack cities and plunder temples-they are more properly called wicked and impious and unjust. But the cardsharper and the clothesstealer belong to the illiberal class, because they are sordidly avaricious: it is for gain that both types follow their profession and submit to a bad reputation, the one accepting the severest risks for the sake of their pilferings, the other profiting at the expense of their friends, to whom they ought to give; so both are sordidly avaricious, because they want to make gain from a wrong source. All such ways of obtaining money are illiberal. ARISTOTLE, supra note 74, at 88 (section numbers and internal markings omitted).
104. CATECHISM OF THE CATHOLIC CHURCH ¶¶ 355-384;
105. SECOND VATICAN ECUMENICAL COUNCIL, DECLARATION ON RELIGIOUS FREEDOM, Dignitatis Humanae ¶¶ 2, 9 (Dec. 7, 1965);
106. SECOND VATICAN ECUMENICAL COUNCIL, PASTORAL CONSTITUTION ON THE CHURCH IN THE MODERN WORLD, Gaudium et Spes ¶¶ 12-24 (Dec. 7, 1965) [hereinafter Gaudium et Spes];
107. SECOND VATICAN ECUMENICAL COUNCIL, DECLARATION ON THE RELATIONSHIP OF THE CHURCH TO NONCHRISTIAN RELIGIONS, Nostra Aetate (Oct. 28, 1965);
108. Pope Pius XII, Encyclical Letter, Humani Generis (Aug. 12, 1950);
109. Pope John Paul II, Encyclical Letter, Redemptor Hominis (Mar. 4 1979);
110. Pope John Paul II, Encyclical Letter, Veritatis Splendor (Aug. 6, 1993). All referenced documents are available on the Vatican website.
111. IMMANUEL KANT, THE MORAL LAW: KANT'S GROUNDWORK OF THE METAPHYSIC OF MORALS 95-96 (H.J. Paton trans., 1961) (1785).
112. Mark Brown, Countrywide Wasn 't Really on Your Side; Mortgage Crisis Comes Down to Plain Old Consumer Fraud, CHI. SUN TIMES, June 26, 2008, at 8.
113. David Novak, Natural Law, Human Dignity, and the Protection of Human Property, in PROFIT, PRUDENCE AND VIRTUE 42, 47, 51-52 (Samuel Gregg & James Stoner eds., 2009).
114. See MICHAEL NOVAK, FREE PERSONS AND THE COMMON GOOD 175-88 (1989).
115. Vatican II defined the common good similarly as "the sum of those conditions of the social life whereby men, families and associations more adequately and readily may attain their own perfection." Gaudium et Spes, supra note 82, ¶ 74.
116. I have elsewhere provided an analysis of how such a notion of authenticity and self-actualization applies to a variety of the moral dilemmas one confronts in the world of business, drawing upon the existentialist philosophy of Jean-Paul Sartre. See Kevin T. Jackson, Towards Authenticity: Taking a Sartrean Perspective on Business Ethics, 58 J. BUS. ETHICS 307 (2005).
117. Pope John Paul II, Encyclical Letter, Centesimus Annus ¶ 17 (May 1, 1991).
118. The reference to "proper proportion" refers us back to Aristotle's idea of virtue as a mean between extremes. ARISTOTLE, supra note 74, at 39-42.
119. See Harold James, Op-Ed., A Financial Crisis Letting Us Unmask Deceit; But Whose Deceit?, DAILY STAR (Lebanon), June 8, 2009, http://www.dailystar.com/ lb/article.asp?edition-ID=10&article-ID-102752&categ-ID=5.
120. WALL STREET (20th Century Fox 1987).
121. See Robert H. Bork, Thomas More for Our Season, FIRST THINGS, June/July 1999, at 17, 17.
122. See id. at 17-18.
123. See THORSTEIN VEBLEN, THE THEORY OF BUSINESS ENTERPRISE 41-42 (1904).
124. See id. at 27-29 (comparing a businessman whose "end is pecuniary gain" to a "speculator in grain futures").
125. VICTOR NIEDERHOFFER, THE EDUCATION OF A SPECULATOR 327-34 (1997).
126. Id. at Back Cover.
127. In general, "flipping" refers to the practice of buying an asset and quickly reselling it for profit. Although flipping can apply to any asset, the term most often refers to real estate and initial public offerings.
128. The phrase was coined by HCL Finance to designate one of its financial products. Edward Chancellor, Ponzi Nation, INSTITUTIONAL INVESTOR, Feb. 2007, at 56. The phrase is a play on words on two levels: first, as an acronym; second, as a signal that NINJA loans frequently end up in default, with the borrower vanishing into thin air like a ninja.
129. Darrin W. Snyder Belousek, Greenspan's Folly: The Demise of the Cult of Self Interest, AMERICA, Mar. 30-Apr. 6, 2009, at 10, 10-12.
130. Snyder Belousek is restating Ayn Rand's philosophy of egoism as expressed in AYN RAND, THE VIRTUE OF SELFISHNESS: A NEW CONCEPT OF EGOISM (1964).
131. Snyder, supra note 101, at 12.
132. Id.
133. Letter from Benjamin Franklin to Abbots Chalet & Arnaud (Apr. 17, 1787), in 11 THE WORKS OF BENJAMIN FRANKLIN 318 (John Bigelow ed., The Knickerbocker Press 1904).
134. See JOHN FINNIS, AQUINAS: MORAL, POLITICAL, AND LEGAL THEORY 266-74 (1998);
135. JOHN FINNIS, NATURAL LAW AND NATURAL RIGHTS 281-90 (1980).
136. See ADAM SMITH, AN INQUIRY INTO THE NATURE AND CAUSES OF THE WEALTH OF NATIONS 456 (R.H. Campbell & Andrew S. Skinner eds., Oxford Clarendon Press 1976) (1776).
137. For an extended analysis of Smith's argument for the necessity of beneficence to a well-functioning marketplace, see RYAN PATRICK HANLEY, ADAM SMITH AND THE CHARACTER OF VIRTUE (2009).
138. ADAM SMITH, THE THEORY OF MORAL SENTIMENTS (D.D. Raphael & A.L. Macfie eds., Oxford Univ. Press 1976) (1759).
139. Id. at 184-85 ("The rich... consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants ....").
140. F.A. HAYEK, THE FATAL CONCEIT: THE ERRORS OF SOCIALISM 102 (W.W. Bartley III ed., Univ. of Chi. Press 1988).
141. Id. at 73.
142. See id. at 84
143. Id. at 83.
144. Id. at 7 ("The main point of my argument is ... that the conflict between, on one hand, advocates of the spontaneous extended human order created by a competitive market, and on the other hand those who demand a deliberate arrangement of human interaction by central authority based on collective command over available resources is due to a factual error by the latter about how knowledge of these resources is and can be generated and utilised."); see also HAYEK, supra note 2.
145. HAYEK, supra note 110, at 84-85.
146. See FRANCIS FUKUYAMA, TRUST: THE SOCIAL VIRTUES AND THE CREATION OF PROSPERITY (1995).
147. See Kevin T. Jackson, Global Corporate Governance: Soft Law and Reputational Accountability, 35 BROOK. J. INT'L L. 41 (2010).
148. See, e.g., VALERIE P. HANS, BUSINESS ON TRIAL: THE CIVIL JURY AND CORPORATE RESPONSIBILITY 120-21 (2000).
149. See LYNN SHARP PAINE, VALUE SHIFT: WHY COMPANIES MUST MERGE SOCIAL AND FINANCIAL IMPERATIVES TO ACHIEVE SUPERIOR PERFORMANCE 112 (2003).
150. The concept of reputational capital refers to the intangible long-term strategic assets of a businessman or a business organization. Reputational capital is a hybrid of economic values and moral values. See RONALD J. ALSOP, THE 18 IMMUTABLE LAWS OF CORPORATE REPUTATION: CREATING, PROTECTING, AND REPAIRING YOUR MOST VALUABLE ASSET (2004);
151. GRAHAME DOWLING, CREATING CORPORATE REPUTATIONS: IDENTITY, IMAGE, AND PERFORMANCE (2001);
152. CHARLES J. FOMBRUN & CEES B.M. VAN RIEL, FAME & FORTUNE: HOW SUCCESSFUL COMPANIES BUILD WINNING REPUTATIONS (2004);
153. CHARLES J. FOMBRUN, REPUTATION: REALIZING VALUE FOR THE CORPORATE IMAGE (1996);
154. KEVIN T. JACKSON, BUILDING REPUTATIONAL CAPITAL: STRATEGIES FOR INTEGRITY AND FAIR PLAY THAT IMPROVE THE BOTTOM LINE (2004); PAINE, supra note 119.
155. The concept of social capital refers to intangible assets encompassing features such as personal aptitudes, social cohesion, and competency in problemsolving- traits that are entrenched in and conveyed by cultures. See DEMOCRACIES IN FLUX: THE EVOLUTION OF SOCIAL CAPITAL IN CONTEMPORARY SOCIETY (Robert D. Putnam ed., 2002). Francis Fukuyama, one of the earliest scholars of social capital, notes "the improbable power of culture in the making of economic society." FUKUYAMA, supra note 116, at 1. Fukuyama further explains that the notion of social capital "has to do with people's ability to associate with each other," which is vital "not only to economic life but to virtually every other aspect of social existence as well." Id. at 10.
156. In the United States, the legal roots of the shareholder-centered view extend back to the landmark case of Dodge v. Ford Motor Co., in which the Michigan Supreme Court held that a business corporation is organized primarily for the profit of the stockholders, rather than for the good of the community or its employees. 170 N.W. 668, 684 (Mich. 1919) ("A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the non-distribution of profits among stockholders in order to devote them to other purposes.").
157. See generally Jackson, supra note 117.
158. FUKUYAMA, supra note 116, at 26.
159. Id.
160. See Jackson, supra note 117, at 49-50.