COLUMN: “Swindle & Fraud” – America’s great tradition, from Lapham’s Quarterly

June 16, 2015

It is easy to fall into the belief that we are living in special times; that greed, avarice, fraud, and swindle are at new heights; that bankers are worse than they’ve ever been; that public trust in them is at historic lows. Nearly every day we learn of yet another major fine imposed on a bank for some wrongdoing, all this while the leaders of finance lament the burdensome rules they must now work under.
Pity them, and pity us, but life has always been that way, or at least that is the lesson drawn in reading the latest edition of Lapham’s Quarterly “Swindle & Fraud.” We are reminded that humans have a long history of behaving badly, and efforts to change that reality have usually run aground. Deception, lies, fraud and confidence tricksters are part of our fabric, whether in business or finance, on a New York street corner, Barnum’s circus, or ancient Greece.

Lapham’s Quarterly is a literary publication devoted to specific themes; past issues have included Eros, Food, and Celebrity, to name only a few. The journal takes on us on whirlwind tour in “Swindle & Fraud” of writers, journalists, historians and others who have shed light on the deceptive side of human nature. From Athens we are treated to a conversation between Socrates and Glaucon taken from Plato’s The Republic in which the two discuss the idea of a “noble falsehood,” a myth or fiction that binds a nation or society together. The notion that politicians often have to resort to falsehoods in order to achieve the necessary ends and harmony of society is one that has been debated endlessly by philosophers right up until the present.

Lewis Lapham, editor of Lapham’s Quarterly , and former editor of Harper’s magazine, provides us with an anecdote to illustrate the point in his introductory essay, “Paper Moons.” During the 1980s, both Lapham and then New York Senator Patrick Moynihan were asked to appear on the same news radio talk show. Awaiting their turn in the studio’s green room, Lapham paints the scene:

“Moynihan ran through the long list of subjects on which he was presumed to be reliably informed – education, health care, foreign policy, highway construction, the multiplication of cancer cells. He didn’t bother to restrain his incredulous laughter. No senator could possibly know what he or she was expected to know, he said, but one was obliged to keep up appearances. Let the people understand how little their rulers know, and they might become frightened. When we talk of politics, he said, think of ‘a fourth-grade Christmas play. The little boy comes onstage wearing a crown of paper stars and saying that he’s the north wind.’ The thought pleased him, and when he was called into the studio knowing himself to be leaking sawdust at every pore, he paused in the doorway to strike a pose, adjust his expression from smiling to solemn, glance back over his shoulder to say, ‘Enter the north wind.'”

When it comes to banking and finance, today’s notion of “too-big-to-fail” was very much alive and well in 1933, when newspaperman Damon Runyon, best known for his short stories and portraits of Broadway and New York City during the Prohibition era, takes us inside the trial of J. Pierpont Morgan. The powerful banker was put on trial in for tax evasion, with the lead prosecutor the son of Italian immigrants, Ferdinand Pecora. Runyon describes the courtroom:

“There sit the great J. Pierpont Morgan, proud overlord of the financial world, and his faithful henchmen, all damp with perspiration – the great Morgan who admits he pays Great Britain income taxes in the same years he pays nothing to the United States.

“And there the swarthy investigator Ferdinand Pecora, son of Italian immigrant parents, patiently beats his way through the weird jungle of high finance until the twisting trails around him are alive with all manner of strange things in the form of disclosures that will astound this nation.

“Somewhere, close at hand, the dark-browed Pecora believes, lies the lair of the most powerful influences on the public and commercial life of the United States that have existed in all its history, but as he presses on you will read (and perhaps weep), as he shows today how scores of distinguished citizens were ‘preferred clients’ of the House of Morgan.”

Bankers who see U.S. law as an inconvenience? Engaged in the “weird jungle of high finance” that exerts “powerful influences on the public and commercial life of the United States?” Now, what does that remind us of? Somehow, an image of Elizabeth Warren begins to form, pounding her fist on the table.

And then we have a short story by H.G. Wells, who in an 1885 raises the thorny question of what constitutes legitimate trading. An uncle tries to entice his nephew, George, to join a new enterprise selling a tonic that is supposed to reinvigorate people. In the course of showing him the factory and the ingredients used to make the product, the nephew grows skeptical:

“I’d like to know what sort of trading isn’t a swindle in its way. Everybody who does a large advertised trading is selling something common on the strength of saying it’s uncommon. . . You don’t mean to say you think doing this stuff up in bottles and swearing it’s the quintessence of strength and making poor devils buy it at that, is straight?”

His uncle, trying to defend his integrity and the ethics of selling “Tono-Bungay” to the masses, falls back on the importance of trade to the wider economy:

“Tell me a solitary trade nowadays that hasn’t to be – emphatic. It’s the modern way! Everybody understand it – everybody allows for it . . . I grant you Tono-Bungay may be – notquite so good a find for the world as Peruvian bark, but the point is, George – it makes trade ! And the world lives on trade. Commerce!”

A breakfast chat

When I sat down with Lewis Lapham over breakfast a few weeks ago, I asked what inspired him to devote an edition of the Quarterly to swindle and fraud. Hesitating for a moment, the 80-year-old editor peered up from his fried eggs and sausage and replied with a sly grin: “Well, isn’t it a great American tradition?”

When he was editor of Harper’s from 1974—with a brief interruption—to 2006, Lapham was a keen observer of American politics and history, and attracted writers such as Christopher Hitchens, Tom Wolfe and David Foster Wallace, and allowed them to write in their own voice and offer readers their own discovered truths.

History has been an enduring passion of Lapham’s with the belief that societies more often than not fail to recognize their repeated internal failings, whether in politics, business, war or finance, and fall prey to the same misjudgments and poor decisions of prior generations. In an interview with The Smithsonian magazine in 2012, Lapham described his personal philosophy and motivation behind the Quarterly :

“We learn from each other, right? I think that the value is in the force of the imagination and the power of expression. I mean…the hope of social or political change stems from language that induces a change of heart. That’s the power of words and that’s a different power than the power of the Internet. And I’m trying to turn people on to those powers and it’s in language.”

During our breakfast discussion we covered a wide range of topics, one of which was the tremendous size of today’s financial firms. Lapham’s father, Lewis A. Lapham, was once vice chairman of the Bankers Trust Company in the 1970s, where he earned $150,000 per year. Lapham, astonished by the compensation now earned by bank chief executives, asked how such dramatic change came about. My only reply in trying to understand the multi-million dollar pay packages for some CEOs was to point to the assets on the balance sheets of today’s mega-sized institutions compared with those during his father’s day.

We also discussed the issue of size and complexity. While vigorously denying any expertise in finance, he said, “I think when you reach a certain size you are bound to fail,” adding that the complexity that evolves for any organization as it grows ever larger can sow the seeds of its own downfall.

He then recommended a book, “ Immoderate Greatness – Why Civilizations Fail ,” by William Ophuls. The short read – only 69 pages – might tell us more about our human condition than most volumes on the subject of societal decline, and in it there is a chapter on complexity, in which Ophuls cites the work of Joseph Tainter, an American anthropologist and historian:

“For the past 12,000 years human societies have seemed almost inexorably to grow more complex. For the most part this has been successful: complexity confers advantages, and one of the reason for our success as a species has been our ability to increase rapidly the complexity of our behavior.”

Yet, as Ophuls then points out society can’t seem to stand still. “Indeed, simply maintaining the attained level of complexity in infrastructure, in regulation, and in expertise begins to consume more and more resources – human resources, capital resources, material resources – meaning that the society has to run harder and harder just to stay in the same place. Moreover, problems that were once separate begin to coalesce into a ‘problematique,’ a nexus of problems that mutually aggravate each other.”

Might there be lessons here not only for modern day bankers, but also regulators? In seeking to cover every crevice and close every loophole in order to curb the creative, and at times, deceptive instincts of bankers, aren’t we adding to a complex web of rules that only makes the system more fragile?

If asked, I suspect Mr. Lapham might well agree.

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