During the autumn of 2007—the exact apex of the financial bubble, as the Dow topped 14,000 points, CDO issuances maxed out and housing prices crested—I had the fortune/misfortune to oversee what might be the largest survey of financial traders ever. The results speak directly to why yesterday’s conviction of hedge fund billionaire Raj Rajaratnam matters so much.
In polling more than 2,500 professional traders for Trader Monthly magazine, we got all sorts of bubble-era answers: 63 percent loathed Eliot Spitzer above all others, 61 percent thought Goldman Sachs should pay its employees as much as it wants, 55 percent found Jim Cramer “an annoying blowhard,” and so on.
But we also posed a series of questions that go to the heart of Wall Street culture. If you could parlay insider information into a $10 million score, we asked, but stood a 50 percent risk of getting caught, would you? Just 7 percent would take the chance. If the risk was adjusted down to 10 percent, the lawbreakers jumped to 28 percent. And if the risk was zero? A full 58 percent said they would break the law and steal (that’s what insider trading is).
Put another way, one well within the margin of error: a majority on Wall Street are thieves—if nobody’s looking. “It can’t be that wrong,” explained one of the respondents, a short-term equities trader at Madison Trading, “if I can’t get caught.”
That’s why the Rajaratnam conviction—on all 14 counts, which could result in 25 years in prison—and U.S. Attorney Preet Bharara’s other 46 insider-trading prosecutions ( 36 of which have resulted in convictions or guilty pleas) isn’t the sideshow many observers make it out to be.
The poll shows that a majority on Wall Street are thieves—if nobody’s looking.
True, insider trading had virtually nothing to do with the financial crisis of 2008. And true, no one of note has been prosecuted, much less convicted, for his or her role in said meltdown.
But Wall Street, as the poll showed, devolves into anarchy without a credible deterrent for rule-breakers. For all their millions and billions, Rajaratnam et al remain Darwin’s children. Their craft boils down to one-on-one combat, with each trade generating a winner and a loser. And Darwinism rewards cheaters: just ask the children of the caveman who clubbed his neighbor and took his family’s food.
In that same 2007 survey, 11 percent of traders admitted to us that they took the ADD drug Adderall with the goal of gaining a professional advantage—the trading version of performance—enhancing drugs in baseball, subbing alertness for strength.
But baseball offers an optimistic case study, too. Ten years ago, when the player’s union stubbornly resisted any sort of steroid testing, consensus estimates suggest that a majority of the offensive players juiced . And why wouldn’t they consider it? As 58 percent of traders calculated, millions were at stake, with no chance of getting caught. The tragedy is that, in protecting its cheaters, the union effectively forced hundreds of otherwise honest players to make a choice: play dirty (and perhaps die early) and keep up, or play honestly and fall behind.
Once random testing was put in place five years ago, however, steroid use plummeted into the single-digits—mirroring the hardcore 7 percent in the trader survey who would cheat even with the 50-50 chance they’d get caught. Different game, same math.
What Wall Street’s new sheriff has done in aggressively pursuing Rajaratnam and the dozens of other cases is create, through prosecutorial zeal, a Wall Street version of random steroid testing.
That’s important. While each individual trade is an amoral act, the collective societal benefit of those acts is immense: Traders create the liquidity that serves as capitalism’s lifeblood of capitalism. Thus, Rajaratnam’s conviction, backed by formidable evidence, should go down as a great day for any of us who cherishes a fair system and free markets.
Randall Lane is editor at large at The Daily Beast. The former editor in chief of Trader Monthly, Dealmaker and P.O.V. magazines, and the former Washington bureau chief of Forbes, he is the author of The Zeroes: My Misadventures in the Decade Wall Street Went Insane.