roose family economics

Li-bored: Why Some Wall Street Scandals Stick

Which of these scandalized Wall Streeters do you recognize? Photo: Photos: Jerome Favre/Bloomberg via Getty Images, Chip Somodevilla/Getty Images, Facundo Arrizabalaga/AFP/Getty Images and Alex Wong/Getty Images

On a family vacation last week, my Aunt Deborah — a college professor in Ohio who reads the Times, watches TV news, and is in general fairly plugged in to most major world events — asked me about the “interest rate thing.”

She meant the Libor-rigging scandal, which has already forced the resignation of a major Wall Street CEO, sparked front-page stories and regulatory hearings, and led to speculation that it could be global finance’s “tobacco moment.” Aunt Deborah had heard about the Libor scandal, but she, like most people, didn’t understand exactly what Libor was, or how an industrywide scheme to artificially adjust it would affect her life. All she knew: “I heard it could impact our mortgage rates.”

As a member of the Wall Street media industrial complex, I often get similar questions from friends and family members who aren’t immersed in this stuff every day. And I’m sometimes surprised to find out which financial imbroglios register on the general public’s outrage scale, and which are received with a shrug and a meh.

Is there any reason why, for example, the story of JPMorgan’s $5 billion (or $9 billion, or whatever) trading losses stuck in Main Street’s collective craw immediately, while the Libor kerfuffle, which involves more than a dozen banks and an estimated $350 trillion in financial instruments, is just starting to register some four years after it first surfaced? Why the MF Global bankruptcy that took down Jon Corzine seemed to drag on forever, while last year’s UBS rogue trading scandal was over before anyone could learn to pronounce “Kweku Adoboli”? Why Raj Rajaratnam’s conviction last year was huge news, but the conviction of Rajat Gupta — a much bigger fish in the same insider-trading pond — barely cracked the front page?

Part of the answer, I suspect, is timing — which scandals hit during slow news cycles — but there’s got to be more to it. This week, I decided to build an Aunt Deborah Test that could predict whether a financial scandal will reach a critical mass of mainstream awareness. (The idea being that if my Aunt Deborah knows about it, it’s probably a big story.)

The test takes into account all of the obvious variables that bring financial events into the mainstream, like the lump sum dollar value, the scandal’s location, the complexity and obscurity of the wrongdoing, and the stakes involved. Is someone going to jail? Is an august company that everyone knows going to disappear forever? Will the scandal cause a worldwide depression and send everyone scurrying into shelters stocked with canned goods?

There are also the factors that get everyone interested, even if the scandal is small and self-contained. Put another way: Every good story needs a hero or a villain. So any scandal with colorful characters (Hello, Fabulous Fab), evocative nicknames (See: the London Whale), or florid e-mails that confirm Main Street’s existing assumptions about Wall Street’s atavistic greed (“Done … for you big boy“) gets extra points.

So without further ado, I present the Aunt Deborah Test:

Step 1: Take the headline dollar value of the scandal (in billions)

Step 2: Add the number of criminal charges, SEC settlements, and/or executive resignations stemming from the scandal

Step 3: Multiply by the number of well-known companies and high-profile personalities involved (let’s define “high-profile personality,” for these purposes, as an elected official, a Hollywood A-lister, a billionaire, or a C-suite executive at a Fortune 500 company)

Step 4: Add or subtract the following point values:

+5 if the scandal is set in the U.S. or involves an American firm

-10 if it’s set in the Eurozone

+2 for each incriminating e-mail or wiretapped phone transcript dredged up during the investigation

+5 for each endearing nickname (“Big Boy,” “Honey,” “chunky but funky“) given to a player in the scandal

+5 for each Congressional hearing at which red-faced lawmakers yell at a falsely contrite financier or regulator

+10 if the financier wears POTUS cuff links to Capitol Hill

-10 if he wears jorts

+5 if the scandal involves a consumer product that lots of people use every day, like debit cards or porn

-5 if any of the phrases “complex derivative,” “mezzanine tranche,” or “benchmark rate” appear in stories about the scandal

+10 if the scandal could be explained to a fifth-grader

+50 if the scandal involves a fifth-grader

+2 if the principal figure in the scandal has a regular table at The Four Seasons Grill Room

+20 if the principal figure in the scandal has a mistress

+10 if the principal figure in the scandal previously asserted the safety/profitability/legality of the thing that was ultimately revealed to be not at all safe/profitable/legal (See: “tempest in a teapot,” I would die and go to hell if it’s a Ponzi scheme)

+3 if the scandal involves Goldman Sachs

-3 if it involves a Trump

+10 if the scandal stands a reasonable chance of being optioned by Oliver Stone

+10 if poor, downtrodden victims (farmers, foreclosed homeowners, Phil Falcone) are victimized by the scandal

+5 for each deep-breathing exercise Matt Taibbi needs to do after reading about the scandal before his heart rate returns to resting

Looking at several recent scandals, it’s clear that an actual, somewhat predictive Aunt Deborah Test would need to weight certain variables more heavily than I’ve weighted them here. Location clearly matters a lot (Libor is still, despite its reach into the global financial markets, seen as a British thing), as does the existing reputation of the firm involved — which is why Goldman’s CDO scandal was immortalized on Occupy signs, while Citigroup’s CDO scandal (which was actually sort of worse!) barely got noticed.

But on the Aunt Deborah Test as it exists above, it’s safe to say that any score over 100 qualifies as a mass scandal, while anything below 50 probably doesn’t make it outside the financial press. JPMorgan’s London Whale fiasco scores a stop-the-presses 133, while the MF Global implosion gets noticed at 90.6, and the UBS rogue trader scandal fizzes out at 42. (All figures are approximate, and were probably fudged to reflect what I wanted the test to show.)

The Libor scandal has already scored moderately high on the Aunt Deborah Test, since it deals with so much notional money, and since the investigation could draw in as many as fifteen banks.

What’s holding it back from penetrating more fully is comprehensibility. If the mass media figures out a way to explain in plain English what Liborgate is and why it matters to ordinary people — which it’s beginning to do — the issue might well become a bona fide public crisis.

With all of this in mind, an unsolicited piece of advice for Libor scandal participants: If my Aunt Deborah starts asking me about the interbank lending market, it’s time to batten down the hatches.