Exposing Yale’s Sordid Side: “The Inner Ring” by C. S. Lewis

C. S. Lewis aptly describes in one published lecture the nature of a very human game, which is really about how soft power, which is often buttressed by institutional position, works in any human organization. To use Nietzsche’s expression (which Lewis would have hardly appreciated), the dynamics of an inner ring is human, all too human, and thus hardly an extractible part of the human condition. Yet it is much more salient, and arguably even dysfunctional, in just some organizations, especially those that have an elite reputation such as Yale, whose essence, we shall investigate here, might be exclusion even within the university community, such that some vulnerable members are told they are not really members (but that their donations are welcome).

In my essay, “Yale’s Original Sin,” I describe Yale’s culture of inner-exclusion operating within the university, wherein some insiders are relegated by inner-insiders as outsiders. During my stay as an alumnus doing research for a book I was writing, I was astonished to read emails from non-academic employees in which they bluntly stated that I was not a “member of the Yale community” because I was an alum. Unfortunately, and quite tellingly, those explicit statements were just the tip of the iceberg. Much more common, in more sense than one ironically, were the intentional subtle hints given by some faculty, faculty-administrators, and even non-academic employees that I was not worth their time whether in replying to an email message or in conversation. This extended to the faculty culture being averse to allowing alumni (and other scholars, as a courtasy) to audit courses and to that of clerical employees not recognizing alumni in residence for a term as members of the Yale community. This self-serving, arrogant, and deeply mistaken attitude and belief applied in a counter-productive way to charging alumni in residence $4 more than students, faculty, and the non-academic employees themselves, for lunch at the university lunch hall known as Commons. A common mentality to be sure. 

In his lecture entitled, “The Inner Ring,” C. S. Lewis describes the ubiquitous phenomenon that he calls the inner ring of an organization. “I can assure you,” he tells his audience, “that in whatever hospital, inn of court, diocese, school, business, or college you arrive . . . , you will find the Rings—what Tolstoy calls the second or unwritten systems.” In War and Peace, Tolstoy alludes to such an informal yet firmly hierarchical or concentric system: “(S)ide by side with the system of discipline and subordination which were laid down in the Army Regulations, there existed a different and more real system—the system which compelled a tightly laced general with a purple face to wait respectfully for his turn while a mere captain like Prince Andrey chatted with a mere second lieutenant like Boris.” The general is not royalty, and so he deferred to the prince even though the latter was of a lower rank. The general was thus an outsider in the immediate context of the prince’s conversation even though he is very much an insider among military brass.

We mere humans revile being relegated as outsiders; we very much want to be insiders. This is C. S. Lewis’ main point. “My main purpose in this address is simply to convince you that this desire is one of the great permanent mainsprings of human action.” Specifically, he means here “the desire to be inside the local Ring and the terror of being left outside.” This desire and fear can be distinguished from the desire for personal gain and the fear of going homeless out of financial ruin. “And you will be drawn in, if you are drawn in, not by desire for gain or ease, but simply because at that moment, when the cup was so near your lips, you cannot bear to be thrust back again into the cold outer world. It would be so terrible to see the other man’s face—that genial, confidential, delightfully sophisticated face—turn suddenly cold and contemptuous, to know that you had been tried for the Inner Ring and rejected.” In other words, wanting to feel oneself as an insider and to avoid feeling like an outsider are desires that do not necessarily line up with, or reduce to, the desire for political or economic gain.

As with any desire, the desire to be an insider cannot be permanently satiated once achieved. C.S. Lewis wrote, “As long as you are governed by that desire you will never get what you want. You are trying to peel an onion: if you succeed there will be nothing left. . . . Once the first novelty is worn off, the members of this circle will be no more interesting than your old friends.” Or perhaps a ring within that ring will emerge, and you will have a new impediment to feeling like an insider. Even if that is achieved, you would still suffer from the fear that you could become an outsider, for the grounds from relegating you are informal in this secondary system and thus secretive and hardly subject to the moral principle of fairness. C. S. Lewis goes so far as to declare, “Until you conquer the fear of being an outsider, an outsider you will remain.”

The combination of secrecy and informality in an inner ring, or circle, renders unfairness from personal like and dislike especially likely. An official hierarchy, in contrast, operates ideally on the basic of merit, with avenues for appeals. Money in the form of bribes and political power can less ideally come into play in formal hierarchies. So too can friendships. But these more informal means of promotion and demotion are more the currency of inclusion and exclusion in informal hierarchies, such as C. S. Lewis describes. To be rejected for lack of merit is, I submit, easier to take than by unfair means or reasons. The latter is evinced when the decision-makers are hidden from view and thus appeals to them cannot be made. This passage from C. S. Lewis describes the subtle mechanics of an inner ring very well:

“You are never formally and explicitly admitted by anyone. You discover gradually, in almost indefinable ways, that it exists and that you are outside it; and then later, perhaps, that you are inside it. . . . It is not easy, even at a given moment, to say who is inside and who is outside. Some people are obviously in and some are obviously out, but there are always several on the borderline. . . . There are no formal admissions or expulsions. People think they are in it after they have in fact been pushed out of it, or before they have been allowed in: this provides great amusement for those who are really inside. It has no fixed name.”

The subtle messages in the rude behavior from Yale faculty, academic administrators, non-academic employees, and even some students that I describe above and in “Yale’s Original Sin” are the means by which ill-favored Yalies gradually discover that they have already been rendered outsiders. That the realization of having been excluded can occur gradually opens up the outsider to embarrassment, for the insiders relish watching as if the person with a blindfold on is stumbling over furniture. The behavior could be regarded superficially as mere rudeness, so it can be difficult if one is on the receiving end to detect that one is being handed one’s hat on the way out. A person may just stand there, holding one’s hat, wondering why a person just felt the need to deliver the hat even if the other person intended to send the message, you are no longer welcome here but I can’t kick you out of the building. This is precisely the message that people in Yale’s inner rings (and there are more than one) want to send. Bottom line: such people refuse to tolerate even the very presence of a person they don’t like. This includes a person who holds a contrary opinion. The motive, in other words, goes beyond wanting to make sophomoric statements of superiority; the intention is also meant to convey to others that they are outsiders. Whereas gorillas establish superiority and push certain individuals out by physical means, our species is not so forthright and honest (or brave).

In the movie Contact (1997), Haddon, a millionaire, says to Ellie, a young astrophysicist who wants to be chosen to go on a space mission, “The powers that be have been very busy lately, falling over themselves to position themselves for the game of the millennium. Maybe I can help deal you back in.” By this he is referring to being dealt cards in a card game. Ellie takes the hint and replies, “I didn’t realize that I was out,” to which Haddon says, “Maybe not out, but certainly being handed your hat.”  Ellie has no idea that even her boss, in jockeying for position to be chosen as the astronaut, has been working to see to it that Ellie is eliminated from consideration by the inner ring of which the boss is an insider but Ellie is not. She has no access to that circle of power-elites, so she doesn’t even know that she needs to promote or defend herself, or even appeal. From outside the inner ring, its workings are shrouded with mystery, for outsiders are not privy to the phone calls and other conversations that take place within. As C.S. Lewis wrote, “There are no formal admissions or expulsions. People think they are in it after they have in fact been pushed out of it, or before they have been allowed in: this provides great amusement for those who are really inside. It has no fixed name.” Ellie’s boss gets pleasure from dealing her out, especially because this is being done without her knowledge. C. S. Lewis wrote, “It is not easy, even at a given moment, to say who is inside and who is outside. Some people are obviously in and some are obviously out, but there are always several on the borderline.”

Interesting, C. S. Lewis must have known that the question of whether the phenomenon of the inner ring, even manifesting in a seminary, is evil was being asked. If, as I strongly suspect, exclusionary comments and actions are deliberately done at least in part to emotionally hurt other people, even just out of dislike, the question of whether such insiders are de facto evil is relevant. C. S Lewis focuses his answer at the level of the ring, but with implications for its inhabitants.  “I am not going to say that the existence of Inner Rings is an Evil. It is certainly unavoidable. There must be confidential discussions: and it is not only a bad thing, it is (in itself) a good thing, that personal friendship should grow up between those who work together.” But this is just one side of the coin, or ring. Lewis admits that the “genuine Inner Ring exists for exclusion. There’d be no fun if there were no outsiders. The invisible line would have no meaning unless most people were on the wrong side of it. Exclusion is no accident; it is the essence.” These last two sentences may aptly describe the dark side of Yale. This is not to say that the essence of Yale is exclusively exclusion, for that would imply that no other source of worth, in this case, academic, exists in the organization. Even so, exclusion is an excessive, or hypertrophic instinctual urge in many people there, especially in those who work there.

Lewis claims that the anguish in being reckoned as an outsider is a strong human motivating force in wanting to be counted as insiders. But if a group, or its inner ring, is filled with rude, petty elitists, wouldn't a normal person feel some solace and even self-esteem in being an outsider? I suppose whether this is one's own choice or that of the "members" of a ring makes a difference here. Nevertheless, Nietzsche wrote that the healthy should not visit the sick in hospital lest the healthy catch something. In Christianity, Paul warns about hanging out with fools. Depending on the group, a person might very well relish being an outsider, even if not by choice. Some rings have bad odors. 

A question posed by C. S. Lewis seems relevant: “I must not ask whether you have derived actual pleasure from the loneliness and humiliation of the outsiders after you, yourself were in: whether you have talked to fellow members of the Ring in the presence of outsiders simply in order that the outsiders might envy; whether the means whereby, in your days of probation, you propitiated the Inner Ring, were always wholly admirable. I will ask only one question—and it is, of course, a rhetorical question which expects no answer. In the whole of your life as you now remember it, has the desire to be on the right side of that invisible line ever prompted you to any act or word on which, in the cold small hours of a wakeful night, you can look back with satisfaction? If so, your case is more fortunate than most.” From this, I surmise that Lewis reckoned that such people are bad, and even malicious, but not evil, because what he was describing was human nature itself.

In Augustine’s theology, we are all subject to original sin. Proverbially, we are all sons and daughters of Adam and Eve. Evil, it seems to me, cannot simply be human nature itself, but, rather, an extreme in enjoying human suffering. But even this definition is problematic, for sociopathy is a psychological illness rather than a religious phenomenon. Evil is a distinctly religious term. I think the problem is psychological where exclusion is allowed to fill in a void to become the essence of an organization. Taken to the extreme, exclusion as substance or the raison d’etre of an organization and thus being its very essence snuffs out other possible substances and thus must ultimately collapse. Relatedly, M. Scott Peck writes in People of the Lie that it is a sense of inner emptiness that lies at the core of malignant narcissism. Perhaps that is responsible for the dysfunctional organizational culture of inner-exclusion from within that has plagued Yale.

Investment Bank Dinners with Corporate Executives and Hedge Fund Managers: The General Public Not Admitted

The Case Study:

“One day in early March [2011], the phone lines of hedge-fund traders around London and New York suddenly lit up. A stock that many of them had placed hefty bets on—Pride International Inc., an energy company in the process of being sold to a rival—was falling. The traders had no idea why. They soon figured it out: J.P. Morgan Chase & Co. had hosted a meeting that day between a handful of hedge-fund traders and executives from a company that was considered a prime candidate to start a bidding war for Pride. One of those executives had indicated they weren't likely to make a bid.”

“The prospect of a bidding war had lifted Pride's shares above where they likely would have traded in the absence of a potential interloper. . . . At the March 8 lunch, though, as the traders munched on scallops and fish, Seadrill vice president and board member Tor Olav Trøim splashed cold water on the idea of a bid. He recalls telling traders that the company's Feb. 24 statement was ‘not normally what you would say if you were interested in bidding yourself. His intended message, according to one person familiar with the matter, is that Seadrill was "very unlikely’ to launch a competing offer for Pride. The information was market-moving, traders say. In the hours after the lunch, some traders wagered that the odds of a bidding war had declined. Seadrill's shares rose more than 1% as it was viewed as less likely to pursue a costly acquisition. Pride's shares fell by about 0.5% in the minutes before markets closed.”

“The moves may seem small, but they were significant for ‘merger arbitrage’ traders, who make short-term bets on deal stocks. In the case of the Ensco-Pride deal, the movements translated into a sudden 64% spike in the deal's ‘spread.’ That arcane measure reflects the difference between a target company's stock price and the per-share value of the acquirer's offer. The spread is closely watched by hedge funds that focus on merger arbitrage, which stand to gain or lose large sums based on the spread's movement. As the shares moved, anxious investors bombarded Seadrill's investor-relations office with phone calls, trying to figure out whether the company had issued new guidance about its appetite for bidding on Pride, according to a person familiar with the matter. Company officials responded that they hadn't released any new information. . . . Trøim says Seadrill executives regularly meet with large and small investors and that it is appropriate to help them understand the company's strategy. ‘We cannot see that we in any way have crossed any lines for giving privileged information,’ he says.”

The Issues:

“Hedge funds are a big business for banks. U.S. and European hedge funds last year shelled out a total of about $3.7 billion in brokerage commissions to banks for equity trades, according to research firm Greenwich Associates. . . . Investment banks vie for business from elite hedge funds by offering traders at those funds special access to senior deal makers and corporate executives at dinners and other gatherings. The traders sometimes pick up valuable nuggets of information that aren't available to other investors, according to people who have attended such gatherings.”

“Representatives of the banks say their investment bankers aren't permitted to discuss material nonpublic information, and that the meetings serve a legitimate business purpose. In addition to helping the banks win trading business, the get-togethers allow the bankers and corporate executives to cultivate relationships with the hedge funds, the banks say. The funds often are major shareholders in multiple companies and frequently help determine the outcome of key corporate events that are subject to shareholder approval, such as mergers and acquisitions.”

“Amid intensified scrutiny of insider trading, the U.S. Securities and Exchange Commission recently warned some banks that they need to be careful that such meetings don't result in the improper exchange of privileged information, according to people familiar with the matter.”

“Under insider-trading laws, it is generally illegal to buy or sell securities based on ‘material,’ or significant, information that isn't publicly available. Securities lawyers say the appropriateness of the meetings banks set up with hedge-fund traders depends on whether such information changes hands and is subsequently traded upon.”

“It is unclear how often useful trading information is disseminated in the meetings. The meetings appear to have made some banks nervous. . . . ‘It made me congenitally nervous,’ said a banker who until recently worked at a top Wall Street investment bank. ‘It certainly should be on [regulators'] radar.’ . . . Goldman Sachs Group Inc.'s compliance department [in 2010] barred its brokers from arranging dinner meetings between Goldman's bankers and outside hedge-fund traders, say people familiar with the matter. Bank of America's investment-banking arm, Bank of America Merrill Lynch, [in 2011] cut down on the gatherings after the SEC expressed concern, although it still allows them in some circumstances, according to people familiar with the matter. Many banks nevertheless continue to hold closed-door meetings with hedge funds on a regular basis, according to traders, bankers and other industry officials. Banks try to differentiate themselves from rivals by dangling access to key players—coveted by hedge funds, for which incremental bits of information can be extremely valuable. The banks also set up lunches and other ‘corporate access’ meetings that give the traders the chance to grill top corporate executives about pending deals and other matters. Such opportunities are rarely available to individuals and other small investors.”

Analysis:

To keep participants within the world of business from speaking with each other in closer terms than are available to the general public strikes me as utterly fanciful and doomed to failure—especially if a profit relationship is involved. Intimating a company’s strategy alone can proffer hints of information not available to the public and yet useful for trading. Are the courts to become embroiled in interpreting every nuance at every meeting in which investment bankers bring together corporations and hedge funds so they may behave as though in public? Policing such meetings is at best an uphill battle, and more realistically like trying to keep the rising tide back from one’s sand castles. It is the castles that are artificial, not the water presumably to be held back by them.

In terms of prohibiting insider-trading more generally, what is really being reputiated or denied is the concentric nature of the respective circles of family, friendships and finally the general public identified by Cicero in his theory of justice wherein caritas naturalis (natural love) is limited to the circle of amicitia (friendship). It is just by nature that friends share a love that does not hold in the wider public. This theory of justice is more restricted than the caritas universalis (universal love)—extending even to strangers—preached by Augustine. That loving strangers is difficult while loving one's friends is easy attests to the qualitiative differences between the concentric circles that inform Cicero's theory of justice, which insider-trading laws contravene.

In any social context, friends are not going to behave as though all they know of each other is what the general public knows. Just as it is natural that people closer will exchange more information than people in the wider public, it is also natural for the latter to envy those who are closer except when they themselves are in close relation with their own friends and colleagues. Enforcing publically-available information on business practitioners having mutual dealings is to conflate the widest circle with narrower circles. It is to pretend that caritas naturalis seu amicitia simply does not exist—that everything is universal rather than natural love being of friendship.

Fueling resentment of insider-trading may be our natural distaste for exclusion. As a student at Yale, I felt exclusion when my political party in the Yale Political Union invited me and the other new members to a Friday night party in a room in the clock tower. The chairman told me that we would all be initiated into the party’s secret society because the party owned it; we were members of the party, after all. In actuality, only a few members—those who had new leadership positions in the party—were tapped by the older leadership; the rest of us were invited so there would be an excluded element heightening the feeling of inclusion. My resentment was a function of my illusion (facilitated by the chairman) that an inner circle would treat a wider circle as equivalent.

As much as I detest the “insider/outsider” diremption, I must admit that it is a part of the human social condition. As social animals, we naturally find ourselves in relations wherein some people are closer to us than others. We fool ourselves if we presume that people who are closer will somehow open their relations up to a wider circle as if there were no narrower circle. Some of us, however, relish exacerbating the natural distances by excluding others solely for the pleasure of being cruel. For example, I grew up in a family that broke up into two camps, both of which relished excluding a family member. Even though the betrayal in such exclusion was unnatural, I must admit that narrower and wider circles naturally develop as human beings interact.

To pretend that there is only a general public is to deny the human condition in its social setting. Insider-trading law may be predicated by a denial of relationships that go beyond the general public.

Furthermore, the “harm” from insider trading is largely one of opportunity cost, as the benefits obtained by insiders are not shared by the general public. In contrast, the harm from fraud is felt by the victims, who are outsiders. In a wider sense, the systemic risk of the failure of a financial system is shared by the general public. Legislation and enforcement ought to take into account the difference between an opportunity cost and direct harm.

Therefore, for the SEC to put resources into insider-trading at the expense of going after banks and other companies that evince systemic risk is something more than misplaced priorities. In terms of punishment, to treat a business practitioner who benefits financially from information overheard from a CEO as though he or she committed fraud by lying to investors or murdered someone is to conflate categories of different degrees of harm.

Lastly, human behavior is such that it cannot be totally regulated. Nor can human nature itself manifested socially be remade as though there were just a general public without caritas naturalis seu amicitia. Business practitioners cannot be held back from exchanging information that is not available to the general public. Like jelly in a hand, the harder you squeeze it the less of it you will have within your grip. The illusion of micro-managing regulation to every facet of business ignores this principle, which is based in human nature rather than artifice.

Source:

David Enrich and Dana Cimilluca, “Banks Woo Funds with Private Peeks,” The Wall Street Journal, May 16, 2011.