Frank Partnoy's Complaint
Infectious Greed
A Leading Critic of the Excesses That Led to Enron and Other Recent Financial Scandals Provides an Exclusive Interview with Financial Engineering News, and Discusses His Soon to be Published Book "Infectious Greed: How Deceit and Risk Corrupted the Financial Market ".
Editor’s Note: Professor Frank Partnoy has made a name for himself as a keen observer and commentator on current issues and trends in the financial markets. His testimony before the U.S. Senate Committee on Governmental Affairs one year ago about the Enron debacle (see Financial Engineering News, June/July, 2002 for the full text of his testimony) was described by many as the most insightful and descriptive analysis of what happened, why, and how changes were needed to avoid future Enron’s. During the latter half of 2002, he worked on and completed a new book titled “Infectious Greed: How Deceit and Risk Corrupted the Financial Markets” to be published by Henry Holt in March, 2003. His previous books include “F.I.A.S.C.O. The Inside Story of a Wall Street Trader”. This interview with Financial Engineering News was conducted on December 9, 2002.
Finnegan: Let’s begin by talking about your new book which is about to go on sale. Can you give our readers an overview of it?
Partnoy: Sure. The title is Infectious Greed. A recent comment by Alan Greenspan gave me a title. We were trying to come up with a pithy title that would combine both the notion of greed in the market and all of the nefarious behavior that has been uncovered at various companies; we also were looking for a metaphor of a virus spreading through financial markets. My wife came up with the title Market Pox, but I wasn’t sure that would sell very many copies. When Alan Greenspan used the term “infectious greed” in testimony before Congress, we decided to use that phrase as our main title; the subtitle is How Deceit and Risk Corrupted the Financial Market. The book looks back fifteen years and traces the major changes in markets, laws, and the culture of finance in order to try to understand how we got to Enron, WorldCom, Global Crossing and all the other financial failures and scandals that have come to the public’s attention over the past 3 years. The book is my attempt to try to connect the dots of the various major events over the last fifteen years leading up to the current wave of financial scandals.
Finnegan: So the book actually provides a much broader perspective than just Enron?
Partnoy: Right. It started out as trying to understand Enron at a time when a number of other people were also writing Enron books. And I soon realized that while Enron is very interesting story, ultimately the real story is going to take several years to write, after the criminal cases are concluded. So these books that are coming out now will not be able to get into the important detail because the witnesses are all embargoed, and a lot of the documents are still confidential. So I tried to expand the scope of what the book would cover, and it was actually my agent and publisher’s idea to attempt to explain how we got here as part of the Enron story. And the more I started thinking about it, the more I became interested how, in order to understand Enron, you have to go back a decade or more to get perspective.
Finnegan: If I go back to testimony you gave before the U.S. Senate, I remember there were three major themes you talked about: One was failure of “the gatekeepers”- the auditors and credit rating agencies among others- for a variety of reasons; the second one was unregulated use of new financial derivatives; and the third was criminal behavior on the part of individuals. Are these themes also discussed in your new book?
Partnoy: Yes, these are some of the major themes in the book. The book tries to tell broader story, and from more of a narrative perspective than my testimony did. My testimony was a bit dry.
Finnegan: In other words, the book doesn’t get into the details of mis-marking forward curves like your Enron testimony did? Our readers of Financial Engineering News loved that.
Partnoy: Well, there’s plenty of discussion of forward curves, so your readers will be excited about that. But there also is an attempt to understand the people, and how it is that the behavior of human beings in the financial markets and at companies whose stock traded in the markets changed over the time. One of the major drivers of this change was- and is- financial innovation. Prior to the early 1980’s, most people didn’t even use calculators on Wall Street; they didn’t have computers; if there was a Radio Shack TRS 80 on someone’s desk, he or she was considered to be a “rocket scientist”. The Black Scholes formulas were there but very few people, especially at banks understood them. Traders on the auction exchanges knew how to use the formula, but most investment bankers didn’t. Investment bankers were English majors and philosophy majors, not MBA’s. Occasionally English majors on Wall Street got MBA’s, although this wasn’t common. More often, daddy knew someone, so you got the job that way. It was a very different culture. So one of the major themes of my book is how financial innovation forced that culture to change and resulted in banks hiring a completely different breed of individual: Financially sophisticated, mathematically literate people who could do the sophisticated finance. It wasn’t enough to be an English major having gone to the right schools and having the proper family and social connections. You had to have the technical and financial skills. And, by the way, this is when MBA programs also changed. They became and are now much more financially sophisticated than they were prior to the early 1980’s....
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This, I feel, will become the most important development in all of capitalist market history. No one knows where this rapidly advancing market will go, what its consequences will be, or how huge it will grow? Large enough to engulf capitalism? It's anyone's guess!
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