High Crimes, Great Crash Versus Now (Rajat Gupta/Richard Whitney Edition)

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It was stunning when the news first broke that Rajat Gupta, former head of McKinsey, and member of blue chip boards, most notably, Goldman Sachs, Proctor & Gamble, and the Bill and Melinda Gates Foundation, was charged with insider trading. Why would someone who was already rich, and more important, already had the most important commodities can buy, namely status and access, think he needed more?

Gupta has been sentenced to two years in prison, which looks light and was widely seen as a victory for the defense. It’s partly due to the case being assigned to Jed Rakoff, who has a personal war going against Federal sentencing guidelines, particularly for white collar criminals (Gupta’s sentence should have been more like eight years had they been followed.) Felix Salmon attributes it to the insurance policy of Gupta’s considerable charitable giving, which happens to be an avenue for obtaining status and access (McKinsey professionals were encouraged to serve on the boards of not-for-profits as a way of building their rolodexes). I’d hazard it’s due at least in part to the way elites (and Gupta was as elite in the business world as you can get) are subject to different rules than the rest of us. Glenn Greenwald, in his book, With Liberty and Justice for Some, traces the rationalization of shielding criminal conduct at the top level back to the pardon of Richard Nixon.

Gupta is appealing his conviction; Judge Rakoff ordered him to begin his serving his sentence on January 8, which is another bit of a break.

Contrast Gupta’s behavior with that of the highest profile conviction after America’s last financial crisis, Richard Whitney. Just as in the global financial crisis, no one who headed a major financial institution was prosecuted, but at least the Pecora Commission dug into questionable behavior and the 1933 and 1934 securities laws were well crafted, tough-minded reforms.

Whitney was a member of the top financial elite. His brother George was a partner at JP Morgan, then the preeminent bank. Richard Whitney had gone to Groton and Harvard, he belong to many of New York City’s top social clubs, and was governor, and later vice president of the New York Stock Exchange. It was Whitney, with his patrician manner, who was chosen by a group of influential financiers to go to the floor of the exchange and try to halt the market decay by placing some large orders of blue chip stocks at above market prices. The gambit worked for all of a day, but nevertheless enhanced Whitney’s stature.

But Whitney had a staggeringly costly lifestyle, combined with an insufficiently profitable brokerage firm and remarkably poor investment judgment (he again and again bet on what amounted to early stage companies that came a cropper). He began borrowing large amounts from friends and family, and was then forced to start hitting up business colleagues (one story has him asking an acquaintance for $100,000 for a week. Needless to say, the loan was outstanding for a lot longer than that). As described in John Brooks’ Once in Golconda, personal lending was shrouded in a “rigid code of secrecy”; presumably, anyone might fall on a rough patch, and no one wanted a colleague or competitor to suffer from having to borrow, lest they be in the same fix and be stigmatized later. But Whitney was getting loans from so many well placed people that word began seeping out.

To prop up one of the doggy stocks into which he’d sunk way too much money, he needed even more money. And so he took some securities of the New York Yacht Club, of which he was not only treasurer, but also its broker, and used them as collateral for a loan to his firm. This was embezzlement. From Brooks:

Now he had crossed his Rubicon; he knew full well then danger of exposure and scandal was great, and exposure would bring crashing down in ignominy not just his own life, but with it the old Wall Street of gentlemen and class privilege and noblesse oblige whose ethical code, whose justification of its existence, rested squarely on the concept of scared private honor. Richard Whitney in 1936 knew that he and the class he had come to symbolize were living with the bright sword of danger.

Whitney also misappropriated funds from the New York Stock Exchange’s Gratuity Fund as his cash needs continued to mount. His brother and another JP Morgan partner moved in to see about how to resolve his firm with minimal losses, still unaware of the pilferage. As rumors of Whitney’s distress began to leak out, the NYSE decided to subject Whitney’s firm to a new financial questionnaire (ironically, an SEC requirement) ahead of when it had been slotted for review. As a result, the NYSE comptroller uncovered proof of Whitney’s embezzlement.

Whitney’s response?

Readily admitting misconduct, he asked for special consideration – specifically, that the Exchange quietly allow him to sell his membership, then drop all charges against him. On what grounds? Gay wanted to know – and then Whitney made his play. “After all, I’m Richard Whitney,” he said. “I mean the Stock Exchange to millions of people.” Therefore what affected him affected the Stock Exchange – and Wall Street. His exposure as an embezzler – it would make a mockery of the trust in which all stock trading is based; it would be a triumph for the reformist forces in Washington; it would be a bonanza beyond the wildest dreams of the SEC….

The NYSE nevertheless quickly determined to sue him, and criminal indictments quickly followed. Whitney continued to carry himself as the model of the patrician throughout his trial, making sure to take all the blame himself, not seeking to rationalize or defend his actions. He received a 5 year prison sentence and went off manfully to serve it, with 6000 people teeming Grand Central to watch him led in handcuffs to the train to Sing Sing.

There’s a lot that was hateful about the old code; this was an era in which a divorced man could never become a JP Morgan partner because a man who could not manage his wife was deemed unfit to manage another man’s money. Only white men need apply, and the WASPs and the Jews had their separate firms and clubs. But in the case of the dereliction of duty of one of their most visible and esteemed members, they upheld the logic of their standards, even as it considerably weakened their claim to their status and hold on power.

In our day, the misconduct at the top has been far more pervasive, inflicting massive amounts of damage on people at a far remove from the financial markets, yet the question of holding anyone in the financial elite to account is simply not given consideration in a serious way. Gupta isn’t even an exception that proves the rule; the SEC seems capable only of pursuing insider trading, and Gupta was unwise enough to operate in this ambit. But as well connected as he is, he was a consultant, not a banker; his crimes were the result of being a corporate board member, not his former influential role as head of McKinsey. As much as the firm has been in an uncomfortable spotlight as a result of the trial, pretty much no one, and most important, no current clients, see Gupta’s misdeeds as reflecting badly on McKinsey.

But the desire to shield him from punishment, the 400 (!) letters sent on his behalf, are yet another proof of the rot in our social order. Rakoff indicated that sealed documents pointed to a retirement-induced identity crisis and possible alcohol problems. Would those considerations cut much ice with a less famous convict?

The problem isn’t just that this sort of iniquity exists. While the powerful have long been subject to a separate set of rules, in the past, this has been curbed by a perceived need within the elite to make sure that some were punished, both to preserve the appearances of legitimacy and to preserve some level of order in their own ranks. While this devolution is likely to turn out badly for the ruling classes, it will probably be some time before they reap this whirlwind.