Ivan Boesky’s Choice
In 1985 Ivan Boesky was known as “the king of the arbitragers,” arbitrage being a specialized form of investment in the shares of companies that are the target of takeover offers. He made profits of $40 million in 1981 when Du Pont bought Conoco; $80 million in 1984 when Chevron bought Gulf Oil; and in the same year, $100 million when Texaco acquired Getty Oil. There were some substantial losses too, but not enough to stop Boesky from making Forbes magazine’s list of America’s wealthiest 400 people. His personal fortune was estimated at between $150 and $200 million.1
Boesky had achieved both a formidable reputation and a substantial degree of respectability. His reputation came, in part, from the amount of money that he controlled. “Ivan,” said one colleague, “could get any Chief Executive Officer in the country off the toilet to talk to him at seven o’clock in the morning.”2 But his reputation was also built on the belief that he had brought a new “scientific” approach to investment, based on an elaborate communications system that he claimed was like NASA’s. He was featured not only in business magazines, but also in the New York Times Living section. He wore the best suits, on which a Winston Churchill-style gold watch chain was prominently displayed. He owned a twelve-bedroom Georgian mansion set on 190 acres in Westchester County, outside New York City. He was a notable member of the Republican Party, and some thought he cherished political ambitions. He held positions at the American Ballet Theater and the Metropolitan Museum of Art.
Unlike other arbitragers before him, Boesky sought to publicize the nature of his work and aimed to be recognized as an expert in a specialized area that aided the proper functioning of the market. In 1985 he published a book about arbitrage entitled Merger Mania. The book claims that arbitrage contributes to “a fair, liquid and efficient market” and states that “undue profits are not made: there are no esoteric tricks that enable arbitragers to outwit the system.… Profit opportunities exist only because risk arbitrage serves an important market function.” Merger Mania begins with a touching dedication:
Dedication
My father, my mentor, William H. Boesky (1900–1964), of beloved memory, whose courage brought him to these shores from his native Ykaterinoslav, Russia, in the year 1912. My life has been profoundly influenced by my father’s spirit and strong commitment to the well-being of humanity, and by his emphasis on learning as the most important means to justice, mercy, and righteousness. His life remains an example of returning to the community the benefits he had received through the exercise of God-given talents.
With this inspiration I write this book for all who wish to learn of my specialty, that they may be inspired to believe that confidence in one’s self and determination can allow one to become whatever one may dream. May those who read my book gain some understanding for the opportunity which exists uniquely in this great land.3
In the same year that this autobiography was published, at the height of his success, Boesky entered into an arrangement for obtaining inside information from Dennis Levine. Levine, who was himself earning around $3 million annually in salary and bonuses, worked at Drexel Burnham Lambert, the phenomenally successful Wall Street firm that dominated the “junk bond” market. Since junk bonds were the favored way of raising funds for takeovers, Drexel was involved in almost every major takeover battle, and Levine was privy to information that, in the hands of someone with plenty of capital, could be used to make hundreds of millions of dollars, virtually without risk.
The ethics of this situation are not in dispute. When Boesky was buying shares on the basis of the information Levine gave him, he knew that the shares would rise in price. The shareholders who sold to him did not know that, and hence sold the shares at less than they could have obtained for them later, if they had not sold. If Drexel’s client was someone who wished to take a company over, then that client would have to pay more for the company if the news of the intended takeover leaked out, since Boesky’s purchases would push up the price of the shares. The added cost might mean that the bid to take over the target company would fail; or it might mean that, though the bid succeeded, after the takeover more of the company’s assets would be sold off, to pay for the increased borrowings needed to buy the company at the higher price. Since Drexel, and hence Levine, had obtained the information of the intended takeover in confidence from their clients, for them to disclose it to others who could profit from it, to the disadvantage of their clients, was clearly contrary to all accepted professional ethical standards. Boesky has never suggested that he dissents from these standards or believed that his circumstances justified an exception to them. Boesky also knew that trading in inside information was illegal. Nevertheless, in 1985 he went so far as to formalize the arrangement he had with Levine, agreeing to pay him 5 percent of the profits he made from purchasing shares about which Levine had given him information.
Why did Boesky do it? Why would anyone who has $150 million, has a respected position in society, and—as is evident from the dedication to his book—values at least the appearance of an ethical life that benefits the community as a whole, risk his reputation, his wealth, and his freedom by doing something that is obviously neither legal nor ethical? Granted, Boesky stood to make very large sums of money from his arrangement with Levine. The Securities and Exchange Commission was later to describe several transactions in which Boesky had used information obtained from Levine; his profits on these deals were estimated at $50 million. Given the previous track record of the Securities and Exchange Commission, Boesky could well have thought that his illegal insider trading was likely to go undetected and unprosecuted. So it was reasonable enough for Boesky to believe that the use of inside information would bring him a lot of money with little chance of exposure. Does that mean that it was a wise thing for him to do? In these circumstances, where does wisdom lie? In choosing to enrich himself further, in a manner that he could not justify ethically, Boesky was making a choice between fundamentally different ways of living. I shall call this type of choice an “ultimate choice.” When ethics and self-interest seem to be in conflict, we face an ultimate choice. How are we to choose?
Most of the choices we make in our everyday lives are restricted choices, in that they are made from within a given framework or set of values. Given that I want to keep reasonably fit, I sensibly choose to go for a walk rather than slouch on the sofa with a can of beer, watching football on television. Since you want to do something to help preserve rain forests, you join a coalition to raise public awareness of the continuing destruction of the forests. Another person wants a well-paid and interesting career, so she studies law. In each of these choices, the fundamental values are already assumed, and the choice is a matter of the best means of achieving what is valued. In ultimate choices, however, the fundamental values themselves come to the fore. We are no longer choosing within a framework that assumes that we want only to maximize our own interests, or within a framework that takes it for granted that we are going to do whatever we consider to be best, ethically speaking. Instead, we are choosing between different possible ways of living: the way of living in which self-interest is paramount, or that in which ethics is paramount, or perhaps some trade-off between the two. (I take ethics and self-interest as the two rival viewpoints because they are, in my view, the two strongest contenders. Other possibilities include, for example, living by the rules of etiquette, or living in accordance with one’s own aesthetic standards, treating one’s life as a work of art; but these possibilities are not the subject of this book.)
Ultimate choices take courage. In making restricted choices, our fundamental values form a foundation on which we can stand when we choose. To make an ultimate choice we must put in question the foundations of our lives. In the 1950s, French philosophers like Jean-Paul Sartre saw this kind of choice as an expression of our ultimate freedom. We are free to choose what we are to be, because we have no essential nature, that is, no given purpose outside ourselves. Unlike, say, an apple tree that has come into existence as a result of someone else’s plan, we simply exist, and the rest is up to us. (Hence the name given to this group of thinkers: existentialists.) Sometimes this leads to a sense that we are standing before a moral void. We feel vertigo, and want to get out of that situation as quickly as possible. So we avoid the ultimate choice by carrying on as we were doing before. That seems the simplest and safest thing to do. But we do not really avoid making the ultimate choice in that way. We make it by default, and it may not be safe at all. Perhaps Ivan Boesky continued to do what would make him richer because to do anything else would have involved questioning the foundations of most of his life. He acted as if his essential nature was to make money. But of course it was not: he could have chosen living ethically ahead of moneymaking.
Even if we are ready to face an ultimate choice, however, it is not easy to know how to make it. In more restricted choice situations we know how to get expert advice. There are financial consultants and educational counselors and health care advisers, all ready to tell you about what is the best for your own interests. Many people will be eager to offer you their opinions about what would be the right thing to do, too. But who is the expert here? Suppose that you have the opportunity to sell your car, which you know is about to need major repairs, to a stranger who is too innocent to have the car checked properly. He is pleased with the car’s appearance, and a deal is about to be struck, when he casually asks if the car has any problems. If you say, just as casually, “No, nothing that I know of,” the stranger will buy the car, paying you at least $1,000 more than you would get from anyone who knew the truth. He will never be able to prove that you were lying. You are convinced that it would be wrong to lie to him, but another $1,000 would make your life more comfortable for the next few months. In this situation you don’t see any need to ask anyone for advice about what is in your best interest; nor do you need to ask what it would be right to do. So can you still ask what to do?
Of course you can. Some would say that if you know that it would be wrong to lie about your car, that is the end of the matter; but this is wishful thinking. If we are honest with ourselves, we will admit that, at least sometimes, where self-interest and ethics clash, we choose self-interest, and this is not just a case of being weak-willed or irrational. We are genuinely unsure what it is rational to do, because when the clash is so fundamental, reason seems to have no way of resolving it.
We all face ultimate choices, and with equal intensity, whether our opportunities are to gain, by unethical means, $50 or $50 million. The state of the world in the late twentieth century means that even if we are never tempted at all by unethical ways of making money, we have to decide to what extent we shall live for ourselves, and to what extent for others. There are people who are hungry, malnourished, lacking shelter, or lacking basic health care; and there are voluntary organizations that raise money to help these people. True, the problem is so big that one individual cannot make much impact on it; and no doubt some of the money will be swallowed up in administration, or will get stolen, or for some other reason will not reach the people who need it most. Despite these inevitable problems, the discrepancy between the wealth of the developed world and the poverty of the poorest people in developing countries is so great that if only a small fraction of what you give reaches the people who need it, that fraction will make a far greater difference to the people it reaches than the full amount you give could make to your own life. That you as an individual cannot make an impact on the entire problem seems scarcely relevant, since you can make an impact on the lives of particular families. So will you get involved with one of these organizations? Will you yourself give, not just spare change when a tin is rattled under your nose, but substantial amounts that will reduce your ability to live a luxurious lifestyle?
Some consumer products damage the ozone layer, contribute to the greenhouse effect, destroy rain forests, or pollute our rivers and lakes. Others are tested by being put, in concentrated form, into the eyes of conscious rabbits, held immobilized in rows of restraining devices like medieval stocks. There are alternatives to products that are environmentally damaging or are tested in such cruel ways. To find the alternatives can, however, be time-consuming and a nuisance. Will you take the trouble to find them?
We face ethical choices constantly in our personal relationships. We have opportunities to use people and discard them, or to remain loyal to them. We can stand up for what we believe, or make ourselves popular by going along with what the group does. Though the morality of personal relationships is difficult to generalize about because every situation is different, here too we often know what the right thing to do is, but are uncertain about what to do.
There are, no doubt, some people who go through life without considering the ethics of what they are doing. Some of these people are just indifferent to others; some are downright vicious. Yet genuine indifference to ethics of any sort is rare. Mark “Chopper” Read, one of Australia’s nastiest criminals, recently published (from prison) a horrific autobiography, replete with nauseating details of beatings and forms of torture he inflicted on his enemies before killing them. Through all his relish for violence, however, the author shows evident anxiety to assure his readers that his victims were all in some way members of the criminal class who deserved what they got. He wants his readers to be clear that he has nothing but contempt for an Australian mass murderer—now one of Read’s fellow-prisoners—who opened up on passersby with an automatic rifle.4 The psychological need for ethical justification, no matter how weak that justification may be, is remarkably pervasive.
We should each ask ourselves: what place does ethics have in my daily life? In thinking about this question, ask yourself: what do I think of as a good life, in the fullest sense of that term? This is an ultimate question. To ask it is to ask: what kind of a life do I truly admire, and what kind of life do I hope to be able to look back on, when I am older and reflect on how I have lived? Will it be enough to say: “It was fun”? Will I even be able to say truthfully that it was fun? Whatever your position or status, you can ask what—within the limits of what is possible for you—you want to achieve with your life.
The Ring of Gyges
Two and a half thousand years ago, at the dawn of Western philosophical thinking, Socrates had the reputation of being the wisest man in Greece. One day Glaucon, a well-to-do young Athenian, challenged him to answer a question about how we are to live. The challenge is a key element of Plato’s Republic, one of the foundational works in the history of Western philosophy. It is also a classic formulation of an ultimate choice.
According to Plato, Glaucon begins by retelling the story of a shepherd who served the reigning king of Lydia. The shepherd was out with his flock one day when there was a storm and a chasm opened up in the ground. He went down into the chasm and there found a golden ring, which he put on his finger. A few days later, when sitting with some other shepherds, he happened to fiddle with the ring, and to his amazement discovered that when he turned the ring a certain way, he became invisible to his companions. Once he had made this discovery, he arranged to be one of the messengers sent by the shepherds to the king to report on the state of the flocks. Arriving at the palace, he promptly used the ring to seduce the queen, plotted with her against the king, killed him, and so obtained the crown.
Glaucon takes this story as encapsulating a common view of ethics and human nature. The implication of the story is that anyone who had such a ring would abandon all ethical standards—and, what is more, would be quite rational to do so:
… No one, it is thought, would be of such adamantine nature as to abide in justice and have the strength to abstain from theft, and to keep his hands from the goods of others, when it would be in his power to steal anything he wished from the very marketplace with impunity, to enter men’s houses and have intercourse with whom he would, to kill or to set free whomsoever he pleased; in short, to walk among men as a god.… If any man who possessed this power we have described should nevertheless refuse to do anything unjust or to rob his fellows, all who knew of his conduct would think him the most miserable and foolish of men, though they would praise him to each other’s faces, their fear of suffering injustice extorting that deceit from them.5
Glaucon then challenges Socrates to show that this common opinion of ethics is mistaken. Convince us, he and the other participants in the discussion say to Socrates, that there are sound reasons for doing what is right—not just reasons like the fear of getting caught, but reasons that would apply even if we knew we would not be found out. Show us that a wise person who found the ring would, unlike the shepherd, continue to do what is right.
That, at any rate, is how Plato described the scene. According to Plato, Socrates convinced Glaucon and the other Athenians present that, whatever profit injustice may seem to bring, only those who act rightly are really happy. Unfortunately, few modern readers are persuaded by the long and complicated account that Socrates gives of the links between acting rightly, having a proper harmony between the elements of one’s nature, and being happy. It all seems too theoretical, too contrived, and the dialogue becomes one-sided. There are obvious objections that we would like to see put to Socrates, but after the initial presentation of the challenge, Glaucon’s critical faculties seem to have deserted him, and he meekly accepts every argument Socrates puts to him.
Ivan Boesky had, in the information he received from Dennis Levine, a kind of magic ring—something that could make him as close to a king as one can get in the republican, wealth-oriented United States. As it turned out, the ring had a flaw: Boesky was not invisible when he wanted to be. But was that Boesky’s only mistake, the only reason why he should not have obtained and used Levine’s information? The challenge that Boesky’s opportunity poses to us is a modern-day version of the challenge that Glaucon put to Socrates. Can we give a better answer?
One “answer” that is really no answer at all is to ignore the challenge. Many people do. They live and die unreflectively, without ever having asked themselves what their goals are, and why they are doing what they do. If you are totally satisfied with the life you are now living, and quite sure that it is the life you want to lead, there is no need to read further. What is to come may only unsettle you. Until you have put to yourselves the questions that Socrates faced, however, you have not chosen how you live.
Ethics and Self-Interest
More personal doubts about ethics remain. To live ethically, we assume, will be hard work, uncomfortable, self-sacrificing, and generally unrewarding. We see ethics as at odds with self-interest: we assume that those who make fortunes from insider trading ignore ethics but are successfully following self-interest (as long as they don’t get caught). We do the same ourselves when we take a job that pays more than another, even though it means that we are helping to manufacture or promote a product that does no good at all or actually makes people sick. On the other hand, those who pass up opportunities to rise in their career because of ethical “scruples” about the nature of the work, or who give away their wealth to good causes, are thought to be sacrificing their own interests in order to obey the dictates of ethics. Worse still, we may regard them as suckers, missing out on all the fun they could be having, while others take advantage of their futile generosity.
This current orthodoxy about self-interest and ethics paints a picture of ethics as something external to us, even as hostile to our own interests. We picture ourselves as constantly torn between the drive to advance our self-interest and the fear of being caught doing something which others will condemn, and for which we will be punished. This picture has been entrenched in many of the most influential ways of thinking in our culture. It is to be found in traditional religious ideas that promise reward or threaten punishment for good and bad behavior, but put this reward or punishment in another realm and so make it external to life in this world. It is to be found, too, in the idea that human beings are situated at the midpoint between heaven and earth, sharing in the spiritual realm of the angels but trapped also by our brutish bodily nature in this world of the beasts. The German philosopher Immanuel Kant picked up the same idea when he portrayed us as moral beings only in so far as we subordinate our natural physical desires to the commands of universal reason that we perceive through our capacity for reason. It is easy to see a link between this idea and Freud’s vision of our lives as rent by the conflict between id and superego.
The same assumption of conflict between ethics and self-interest lies at the root of much modern economics. It is propagated in popular presentations of sociobiology applied to human nature. Books like Robert J. Ringer’s Looking Out for #1, which was on the New York Times best-seller list for an entire year and is still selling steadily, tell millions of readers that to put the happiness of anyone else ahead of your own is “to pervert the laws of Nature.”6 Television, in both its programs and its commercials, conveys materialist images of success that lack ethical content. As Todd Gitlin wrote in his study of American television, Inside Prime Time:
… prime time gives us people preoccupied with personal ambition. If not utterly consumed by ambition and the fear of ending up as losers, these characters take both the ambition and the fear for granted. If not surrounded by middle-class arrays of consumer goods, they themselves are glamorous incarnations of desire. The happiness they long for is private, not public; they make few demands on society as a whole, and even when troubled they seem content with the existing institutional order. Personal ambition and consumerism are the driving forces in their lives. The sumptuous and brightly lit settings of most series amount to advertisements for a consumption-centered version of the good life, and this doesn’t even take into consideration the incessant commercials, which convey the idea that human aspirations for liberty, pleasure, accomplishment, and status can be fulfilled in the realm of consumption.7
The message is coming over strongly, but something is wrong. Today the assertion that life is meaningless no longer comes from existentialist philosophers who treat it as a shocking discovery; it comes from bored adolescents, for whom it is a truism. Perhaps it is the central place of self-interest, and the way in which we conceive of our own interest, that is to blame here. The pursuit of self-interest, as standardly conceived, is a life without any meaning beyond our own pleasure or individual satisfaction. Such a life is often a self-defeating enterprise. The ancients knew of the “paradox of hedonism,” according to which the more explicitly we pursue our desire for pleasure, the more elusive we will find its satisfaction. There is no reason to believe that human nature has changed so dramatically as to render this ancient wisdom inapplicable.