// BY MARIANNE M. JENNINGS

A November Fortune Magazine cover story featured the traffic stopping headline, “What Were They Smoking?,” as well as photos of Chuck Prince of Citigroup ($9.8 billion loss), Jimmy Cayne of Bear Stearns ($450 million loss), John Mack of Morgan Stanley ($3.7 billion loss) and Stan O’Neal of Merrill Lynch ($7.9 billion loss).

We give the airline dudes a break when they miss their quarterlies because oil prices spiked. And we are willing to hang with Wal-Mart when it overestimates its holiday sales. However, $8 and $10 billion write-downs just months after CEO reassurance claiming “We’re on it,” amidst the subprime meltdown does rattle the Richter credibility scale. To carry the drug metaphor one step further, Cher Horowitz, the Chauncey Gardineresque character of the 1995 movie “Clueless,” has some insight for Wall Street on the difference between understandable and unanticipated setbacks versus ongoing complicity. As Cher so eloquently explained, “It is one thing to spark up a doobie and get laced at parties, but it is quite another to be fried all day.”

The Wall Street Journal’s Holman Jenkins Jr. wrote in his piece “Losing Money Is a Crime,” that we had much ado about nothing because only 7 percent of publicly traded companies are involved in some form of material lawbreaking. Why let a few hundred bad apples sully the reputation of the rest of us? It’s not the criminal conduct that worries us. Mens rea sets a mighty high bar. Prosecutors have labored mightily to convince juries in even the most egregious corporate fraud cases that criminal activity was afoot. The $6,000 shower-curtain man, former Tyco CEO Dennis Kozlowski, got one mistrial on a hold-out juror and may win his appeal because, as the Wall Street Journal also noted in “Free Dennis Kozlowski,” it is not theft when the CEO approves and forgives his own loan packages.

There is no hint of criminal conduct in any of the Merrill, Citi, Bear, et al. problems. But adhering to the law does not mean the corporations are being transparent. Transparency is the foundation of the market’s trust. Without market trust, there will be no investment. Without investment, there is no Wall Street or Journal, for that matter. People do not invest because there is an SEC; they invest because they trust that company numbers are accurate, in both their computation and underlying assumptions. Being technically compliant simply isn’t cutting it any longer; investors are demanding more. Companies must accept that trust and ethical conduct demand more than technical compliance with the law.

The bright side of the write-down debacles is that the cultural flaws that fueled the losses are fixable. One common cultural trait was the iconic CEO that few were willing to question. In the same way that Barry Bonds’ arm circumference told us that something was too good to be true, there were bank employees who knew the numbers weren’t real. Goldman Sachs managed to exit its mortgage exposure, running against the herd, but in time to avoid the multi-billion-dollar losses.

Chuck Prince was handpicked by Sandy Weill to head up Citigroup. Weill steered the ship during the rowdiness of Jack Grubman’s unwavering support for WorldCom, and Prince was Weill’s protégé. Even bizarre rumblings in early 2007 at Citi did not move dissent. Prince had the “money-honey mess” on his hands after he terminated Todd S. Thomson, the head of global investment, with stories about Thomson’s relationship with Maria S. Bartiromo, private jets and conflicts with her role as a CNBC anchor. An ouster, on meager grounds, meant bad news loomed for Citigroup. Thomson was a known dissenter.

Stan O’Neal was an unrelenting “numbers guy” who led Merrill to Long- Term Capital Management, a hedge fund. O’Neal took Merrill from a safe trading house to a leveraged player and expected results. One Merrill executive noted the pressure, “It got to the point where you didn’t want to be in the office on Goldman earnings days.” Merrill employees called operations meetings “staged” and called O’Neal aloof.

A new study shows that when it comes to financial misstatements, employees are the best source for tips.* Neither regulators nor auditors are as likely to find financial missteps as employees are. The antidote for numbers pressure, fear and unwavering deference to icons is a culture in which the employees have the avenues and motivation to disclosure misconduct to those who will respond. This culture requires more than technical compliance with hotlines and anonymous reporting. Those companies with the lightest subprime hits had cultures that encouraged questions, often from the top. Jamie Dimon at J.P. Morgan is known for his ability to hone in on numbers and demand answers. His approach signals employees that results alone are not enough; results must be legitimate. J.P. Morgan wrote down only $339 million.

Wall Street’s best and brightest minds, who also happen to employ financial and computer wizards in droves, want us to believe they made a miscalculation. Given the contrast in companies’ losses and correspondingly different cultures, the mistake theory is not a benign one. A culture that values transparency allows employees to point out mistakes, not just fraud.

What were they smoking? They were so high on their own numbers, as imagined as they were, that clean and sober employees in the companies could not find an avenue for raising a flag. Always question the icon. Give employees a culture that permits dissent, especially when the company has crossed from smoking an occasional doobie to being fried by the subprimes.