Almost a year into the subprime crisis, we still haven’t seen any major reforms. The Enron and WorldCom scandals six years ago, by contrast, prompted sweeping reforms in Congress and on Wall Street. Why the difference?
I increasingly think the most important difference is the lack of a clear villain– a person and company that serve as a posterchild for everything that is wrong and needs to be fixed with American finance.
America’s most important corporate regulation has always been passed (or so I argued in a book called “Icarus in the Boardroom”) in response to scandals that are identified with particular individuals, starting with the 1873 collapse of Jay Cooke, a Philadelphia banker who failed when his railroad, the Northern Pacific, failed; continuing with Samuel Insull (a utility magnate) and Ivar Krueger (the “Swedish Match King”), whose 1932 failures inspired the federal securities laws and other New Deal reforms; and with Enron’s Ken Lay and WorldCom’s Bernie Ebbers, whose misbehavior gave us our most recent major corporate reforms. With the subprime crisis, no individual or company stands out in the same way. Perhaps Angelo Mozilo of Countrywide comes closest; but he’s simply no Samuel Insull or Ken Lay.
This same point can be made in a slightly different way. Americans tend to divide their business crises into two categories: they’re viewed as scandals when there’s a clear villain, but as a common disaster when no in particular seems to be to blame. A great deal of dubious behavior went into the subprime crisis, but so far Americans seem to view it more as a common disaster like a hurricane or tornado, than as a scandal. If this remains the case, we may see some kind of bailout (the usual response to a common disaster), but we aren’t likely to see any important systemic reform, say, of the bankruptcy laws or of our financial regulation. Only if a flesh and blood villain emerges is subprime likely to be seen as a true scandal, and to inspire more extensive reform.