Climbing Above the Culture Clash

Frankel attributes the erosion of trust
to a fundamental shift in business
culture that began with the deregulation
frenzy of the 1980s, which was
based on the faulty assumption that
markets can regulate themselves.
“There was a growing hostility toward
the law and a growing admiration
for innovation, regardless of what
that innovation was aimed at,” said
Frankel. “So the business world became
increasingly focused on innovating
loopholes — actions that would be
considered immoral in another climate,
but do not violate the precise letter
of the law. In our current financial
culture, morality is considered stupid:
‘If you have an opportunity to grab
and you don’t, you’re a fool.’”
Over time, even the regulators got
drawn into this culture, adopting an
“everybody’s doing it” attitude, which led
them to overlook minor irregularities.
As a result, understandings of what
constituted actionable dishonesty
became elastic and, as we are now
painfully aware, that elasticity ultimately
stretched beyond the breaking point.
“We have created a culture based on
the belief that ‘Whatever is good for
private persons who hold power over
others is good for the country,’” said
Frankel. “Yet power over others, whether
by the government or by the private
sector, must be balanced. That culture of
‘freedom for power-holders’ is still here.
You don’t create a culture in one day, and
you don’t change a culture in one day.”
Frankel states that private powerholders
are very important to balance
government power. And so is the reverse.
Her prescription for change is to create
a regulatory system that will enable
regulators to know more about the
markets, and then act before the system
is threatened. According to Frankel, the
SEC should shift its resources to teams
of specialized financial examiners who
have the expertise required to catch
dishonest behavior before it becomes
pervasive. The activity of these examiners
should be most intense during times of
rapid growth, when innovative abuses
are more likely to occur, rather than
reacting after major institutions crash.
Frankel recalled that during her year
and a half at the SEC she was struck
by how little the agency knew about
developments in the financial markets,
where the innovations were coming
from and where they were heading.
“The way to change the current
culture is to closely follow what the
market is doing, and find out what the
real problems are,” she explained.
Now in her 80s, Frankel shows no signs
of slowing down. Over the years she
has published more than 60 articles
and book chapters, including two
books in the past two years: a teaching
book on Fiduciary Law and a case law
companion to her prophetic 2006 book,
Trust and Honesty: America’s Business
Culture at a Crossroad. She is currently
at work on a case-based teaching book
on securitization with co-author Mark
Fagan, a short book on con artists and
their victims, a book on the theory of
fiduciary duties for Oxford University
Press, and an article on fiduciary duties
of financial brokers. She is regularly
quoted in the national media.
But Frankel’s proudest accomplishment
of late has been the creation of a
multidisciplinary course that exposes
BU Law students to real ethical
dilemmas in the business world. The
class is designed to show how fraud
and dishonesty evolve, even among
those who don’t necessarily set out to
become con artists. Students study the
unfolding of the Enron and WorldCom
scandals; the fall of accounting giant
E.F. Hutton; and the life of the man
whose name has become synonymous
with large-scale fraud, Charles Ponzi.
Ponzi is a particularly powerful teaching
case because, as Frankel’s students
discover, the legendary swindler actually
started out with a legitimate strategy to
profit legally from unstable exchange
rates between countries. It wasn’t
until his get-rich-quick plan failed
that he developed his now-infamous
pyramid scheme. Frankel uses the case
study to demonstrate that there is no
bright line between a Ponzi scheme
and a legitimate business model.
“American corporations pay dividends
on one hand, while borrowing money
or refinancing to pay those dividends.
It’s a model that is very close to a Ponzi
scheme,” she said. “It’s a slippery slope.
It’s not black and white. Through
our discussions and role plays, the
students begin to understand that.”
Frankel said that student responses to
the course have been overwhelmingly
positive, especially about the realworld
applications it offers. Said
Frankel, “Students wrote that they
valued the course highly because
they learned the relationship between
the law and the outside world in
which they will practice.” •
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