By ANDREW ROSS SORKIN
Ethics. Values. Integrity.
Wall Street firms spend a lot of time using
those catchwords when talking about developing the right culture. Bank chief
executives often discuss how much effort they devote to instilling a sense of
integrity at their institutions. The firms all have painstakingly written codes
of conduct, boasting, “Our integrity and reputation depend on our ability to do
the right thing, even when it’s not the easy thing,” as JPMorgan Chase’s says,
or, “No financial incentive or opportunity — regardless of the bottom line —
justifies a departure from our values,” as Goldman Sachs says.
And yet a new report on industry insiders
about ethical conduct, to be released on Tuesday, disturbingly suggests that
Wall Street’s high-minded words may largely still be lip service.
Of 250 industry insiders from dozens of
financial companies who responded to questions — traders, portfolio managers,
investment bankers, hedge fund professionals, financial analysts, investment
advisers, among others — 23 percent said that “they had observed or had
firsthand knowledge of wrongdoing in the workplace.”
If that’s not attention-grabbing enough,
consider this: 24 percent said they would “engage in insider trading to make
$10 million if they could get away with it.”
As we approach the fifth anniversary of the
onset of the financial crisis this September, it appears memories are shorter
than ever. If the report is accurate, the insidious culture of greed is back —
or maybe it never left.
The questions were posed last month by the law
firm Labaton Sucharow at the behest of one of its partners, Jordan A. Thomas, a
former assistant director and assistant chief litigation counsel in the
enforcement division of the Securities and Exchange Commission. The results are
a telling reminder of the continued challenges the industry faces, challenges
that appear endemic.
While the results may not be scientific, they
are stark. For example, 26 percent of respondents said they “believed the
compensation plans or bonus structures in place at their companies incentivize
employees to compromise ethical standards or violate the law.”
There is a view that the ethical problems come
from the very top: 17 percent said they expected “their leaders were likely to
look the other way if they suspected a top performer engaged in insider
trading.” It gets even more troubling: “15 percent doubted that their
leadership, upon learning of a top performer’s crime, would report it to the authorities.”
There is nothing acceptable about these
responses.
Wall Street has a very real problem, whether
the leaders of the industry want to believe it or not.
It is often said that it is unfair to paint an
entire industry with a broad brush, and it is. There are clearly good people
out there doing good work. A large majority falls in that category. But the
numbers presented in the report reflect an unsettling reality that there may be
more than just a few bad apples in the industry, too. It should be considered a
red flag when insiders say this: “28 percent of respondents felt that the
financial services industry does not put the interests of clients first.”
Perhaps oddly, the problem is most pronounced
among the youngest employees in finance, the next generation of leadership on
Wall Street.
Remember the question about whether an
executive would commit insider trading for $10 million if there were no
repercussions? Well, if you parse the numbers by seniority in the industry,
respondents with under 10 years of experience were even more likely to break
the law: 38 percent said they would commit insider trading for $10 million if
they wouldn’t be caught.
That result is particularly striking since I
would have expected the next generation of financiers to be the most interested
in helping to build a new, anti-Gordon Gekko culture on Wall Street.
Virtually every top M.B.A. program in the
country now teaches ethics classes, many of them required. In 2008, a coalition
of students started the MBA Oath, a voluntary pledge among students to “create
value responsibly and ethically.” So far, more than 6,000 students have signed
the pledge.
And yet, the report and other anecdotal
evidence suggest that whatever is being done both in the classroom and on the
job is not enough. According to a controversial study called “Economics
Education and Greed” that was published in 2011 by professors at Harvard and
Northwestern, an education in economics surprisingly may be making the problem
worse.
“The results show that economics education is
consistently associated with positive attitudes towards greed,” the authors
wrote. “The uncontested dominance of self-interest maximization as the primary
(if not sole) logic of exchange, in business schools and corporate settings
alike, may lead people to be more tolerant of what other people see as morally
reprehensible.”
The problem is compounded by a trait shared by
everyone, no matter their industry. “People predict that they will behave more
ethically than they actually do,” according to a 2007 study led by Ann E.
Tenbrunsel, a professor at Notre Dame. “They then believe they behaved
ethically when they didn’t. It is no surprise, then, that most individuals
erroneously believe they are more ethical than the majority of their peers.”
That may help explain why, in the Labaton
Sucharow report, 52 percent said they “believed it was likely that their
competitors have engaged in illegal or unethical activity in order to be
successful.”
It may also explain why 89 percent of
respondents “indicated a willingness to report wrongdoing” yet so few do.
As part of the Dodd-Frank financial overhaul
law, the S.E.C. developed a $500 million whistle-blower program that pays 10 to
30 percent of penalties collected to the whistle-blower. The fund still has
some $450 million in it, despite recent remarks by Stephen L. Cohen, associate
director of the S.E.C.’s enforcement division, that we should expect bigger
payouts soon. Mr. Thomas of Labaton Sucharow helped develop the whistle-blower
program when he was at the S.E.C., and he now represents whistle-blowers.
“We are seeing a culture of silence,” he said.
“There’s an unwillingness to come forward.”
Greed, for far too many, is still good,
apparently. There’s still much work to be done before the catchwords become the
culture.
RINK RATS NOTE: This is Week #1
of our Summer Vacation. We thank Mr. Andrew Ross Sorkin for his blog DEALBook
from the New York Times for being our guest blogger this week.
Next week: Week 2 of our summer vacation,
Suzanne Rico is our guest blogger.
Until Next Monday, Adios!
Jackson, MI
August 5, 2013
#IV-16, 173
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