The problem with finance
I was unceremoniously kicked out of my last job in finance early in 2004. It was a career turning point for me after 24 years as an equity analyst at eight firms – brokers and investment managers – in both the United States and Europe. I took shelter in financial journalism. Much has changed in the money business since then. But reading about the behaviour that has led to a litany of huge fines, I fear that too much remained the same, at least until very recently.
Over the years, I probably went to several dozen sessions dedicated to ethics. There was almost always something surreal about these corporate exercises. The instructors, usually either earnest junior human resources people or weary senior executives going through the motions, would explain how we should put our clients first, how reputation was everything and how we should always remember that we had a responsibility to society.
We sometimes filled out worksheets and often gave little speeches to show that we were “on board” or role-played ethically challenging situations. But as I recall, none of the participants actually thought that these sessions had any bearing on our real professional lives. Well, I did work for one firm that was dedicated to solid principles of client service. But it held none of these sessions – and was failing. It was taken over and gutted shortly after I left.
The problem was not my co-workers’ ill will or poor character. It was that the standards of success for our businesses were impossibly distant from what was good for our clients.
When I was selling research to fund managers, we were acutely aware that we were being paid – quite well – to ignore the overwhelming evidence that extensive trading generally hurts long-term performance. Even a minimal amount of intellectual honesty would have undermined our business model, which was to encourage clients to buy and sell securities as often as possible.
When I worked as a client, we did take note of another basic finding of financial research: in the short term, managers generally suffer more than they gain from running portfolios which are very different from the overall market. So we took very small bets. However, we also knew that our own clients, the consultants and advisers who helped individuals and pension funds manage assets, would fire us if we sat still. To comfort them, and ourselves, we engaged in the pretence that we made, and acted on, bold analyses.
The ethical subversions which have cost banks and their shareholders so much, the collusion and self-dealing, were genuinely frowned on in my parts of the financial world. However, the wide gap between our practices and our clients’ true interests was so inherent in our business proposition that I can easily imagine how such behaviour seemed perfectly appropriate to practitioners elsewhere in the firms.
Indeed, I remember chatting with a derivatives product designer during a group-wide event early in the 1990s. He explained that profits and success in his part of the firm came from contriving products which were too complicated for clients to evaluate, allowing us to control the pricing.
I suggested there was something cynical and even anti-social about this approach, and he said something to the effect that “if the clients are stupid enough to buy something they don’t understand, who are we to stand in their way?” I asked him about the virtuous qualities of derivatives: risk-sharing and risk-moderating. He replied, roughly, “well, we have to say something like that, but we all know that the point is speculation.”
When his turn came to talk at a sharing session, he praised the economic value of derivatives and explained how our firm made a point of anticipating and responding to clients’ desires. He clearly considered a modicum of mendacity to be part of his job description. His bosses may even have half-believed these claims.
I have every reason to think my experience was typical. The extensive migration between firms pretty much guaranteed a homogenous approach. Besides, our behaviour was simply realistic. There was a basic contradiction between the economic purposes of financial institutions, allocating capital and sharing risks, and the way they increased their revenue. This contradiction almost ensured that some people would engage in conduct which would eventually be seen as unethical or illegal, no matter how many training sessions they attended and how many codes they signed up to.
How much has changed in the decade since I left finance? The crisis, the fines and the tidal wave of additional regulation have undoubtedly helped reduce abuses, and I have no doubt that there are many more training sessions. But it takes a long time to change a faulty culture, especially one that makes economic sense for the people inside it.