When Heejin and I visited Portugal, we learned about the massive 9.0 earthquake that lasted for almost six minutes and devastated Lisbon in 1755. People fled to the river and coast to escape the destruction only to be hit by several massive tsunamis. The parts of the city that were not crushed by the earthquake or engulfed by tsunamis were then consumed by fire. It was total destruction on a scale the world had never seen.
After the earthquake, authorities had to find somebody to blame. They settled primarily on witches and set about hunting down innocent women and burning them at the stake, which served to only exacerbate the terror.
And sure enough – no more major earthquakes occurred. I am sure all those witch-burning authorities went to their graves convinced that they prevented another earthquake.
I was reminded of this story yesterday when a friend said he wished more people had gone to jail after the 2008 meltdown (something I hear often), when Congress unleashed a sea of regulators to go after bad guys in something akin to a witch hunt.
The problem was that most of the wealthy bad guys got away unscathed, and all the low-level bad guys had been pushed out of the business already by new licensing requirements and changes in the business overall.
What ended up happening is a lot of mostly innocent people had to spend an enormous amount of time and money defending themselves against all kinds of allegations. The abuse on the part of some regulators was so bad in fact that our long-time compliance attorney retired b/c it made his job so miserable.
There were lots of causes behind the meltdown, including bad government policy, overreach on the part of Fannie and Freddie, excessively low rates, greedy bankers, affordable housing goals, negligent rating agencies, and unscrupulous loan officers, among other things. But there was no one person or sector to blame.
I am sure the post-meltdown regulators will go to their graves thinking that they prevented the next meltdown just like the Portuguese witch burners. But they probably didn’t, and they probably burned a lot of innocent people as well.
My broader point is this: we are seeing and will see a lot more scandals and financial crises. But calls for investigations, justice and retribution often turn into witch hunts, which I witnessed first-hand after the meltdown.
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