USA. Man’s Creativity
vs. Original Sin
by Anujeet Sareen
The number of large-scale corporate frauds over the last few years has prompted
some to ask what is going on. Are these just unique, isolated events or are they
symptomatic of something larger? Well, first, let’s be clear on what exactly
happened. Several companies, notably Enron, WorldCom, Tyco, and, more recently,
Parmalat, have all committed acts of fraud. Essentially, what each company did
is as follows. In order to invest in attractive business opportunities, these
companies borrowed money from banks (which is normal and typical of growing businesses).
As those investments were successful and expectations for future success rose,
the companies borrowed even more money to invest further. Eventually, what happened
was that their expectations of profits were too high and the amount of money
they borrowed was too much–that is, the companies were not making enough
money to make the payments on their loans. Normally, companies in this position
will significantly slow down their investment plans and/or sell assets until
they are making enough money to pay back their loans. What these companies did,
however, was play financial games to hide their losses. They created new companies
in foreign countries which they used to borrow even more money from banks. They
created new companies in foreign countries to shift some of their losses.
This would be like an individual who approaches a bank for a loan to purchase
a house. The bank, reviewing the individual’s assets and income, agrees
to give a mortgage loan. As the individual starts to earn more money, he then
purchases a larger home with a larger loan. Over time, he starts to expect that
he will earn more money in the future and so he keeps moving up to a bigger house
(with a bigger mortgage) until the individual comes to a point where he realizes
that he is not going to earn the income he needs to pay for his house. At this
point, he should sell his house and purchase something smaller. Instead, he starts
to borrow money from credit cards to pay the mortgage. Eventually, he uses all
of his credit limits on his credit cards and approaches other credit card companies
for more credit cards. Normally, credit card companies and banks are not going
to lend more money to an individual who is clearly borrowing too much money already.
But in this case, the individual uses a different name to borrow money, thereby
defrauding the banks and credit card companies in question.
I think there are two points to focus on here. The first is that these frauds
occurred in the context of an extraordinary explosion in technological innovation.
The technological advances of the past twenty years were marked by enormous advances
in computing, telecommunications, Internet, and biotechnology.
The point here is that the events that come before the fraud are actually very
good for society (innovation, creativity, technological advances). The energy
of a capitalistic society strongly and positively encourages these advances from
man’s creativity. What the fraud reflects is man’s reaction to the
disappointment that 1) these advances are not as unlimited nor as complete as
his desire for happiness is; and 2) that his destiny is not determined by his
own energies alone.
The other point to mention here has to do with what has been the response of
society. In 2002, Congress passed the Sarbanes-Oxley Act, which makes the CEOs
and CFOs of large companies personally liable for any fraud in their company.
Legislation that seeks to prevent fraud should be lauded. However, the law already
punishes acts of fraud. What this law represents is society’s desire to
prevent man from committing any sin–the very notion that CEOs and CFOs
should be held personally responsible for the fraud committed by any member of
their company (not just their own fraud) is unreasonable.
Even further, the truth of the matter is that what happened with all of these
companies involved an excessive optimism and an inattention to reality by a number
of different parties–banks (who should have scrutinized their borrowers
more closely and who believed all the same hype the companies believed), auditors
(who were not very careful in examining the records of their clients because
they believed the glorious forecasts of profitability), and the companies themselves.
In a secular/Protestant society, unfortunately, the response to these events
is to call for a greater personal responsibility than man can ever hope to meet
It is unclear how much these events will impact the future. Although economies
always advance over the long term, it is also the case that economies cycle around
this trajectory between the highs of optimism and the lows of pessimism. I think,
more importantly, these cases of fraud need to be understood within the tension
between man’s tremendous creativity and his original sin–what happens
to man when he sees creativity as a way to control his own destiny so as to satisfy
his desire for happiness himself.