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Tell the truth

12 August 2015 By Edward Hadas

Tom Hayes gives the impression of being a remarkably honest criminal. The former star trader, who has started a 14-year prison sentence for manipulating the Libor interest rate, explained his actions to prosecutors in careful detail. He admitted to breaking the written rules and his justification – that he believed his bosses and the profit-hungry culture they embodied offered at least tacit approval of his behaviour – is all too plausible. When a man like that explains his ethical state of mind, he is worth listening to.

Hayes did not say that he decided what he was doing was honest and right. Nor did he admit that it was wrong but somehow justified for him, because he was special or because he could get away with it. Rather, he explained that the manipulation of rates was not the ethical issue which concerned him.

What he was worried about was being good in a different sense – as a professional. He succeeded. He was good at his job. As he explained to investigators, “Everyone’s talking about honesty and dishonesty and what did you think and what was your state of mind, but you know what? At the time I didn’t think about any of it. I didn’t think about whether this was right or wrong… people go to work every day… and they do a job. And they don’t sit and think, ‘Is doing my job honest or dishonest?’ They do their job”.

If he had worked in any industry but finance, Hayes would be onto something. Most employees do not spend a lot of time parsing the ethics of their assigned tasks. They leave such hard questions to their bosses or they rely on the standard of the communities in which they work. If anyone is going to worry about great questions of right and wrong, it is the people on the top of the heap.

That upward ethical delegation doesn’t appeal to people who think conscience should be the only guide. Workers should make their own judgments of right and wrong. But the fact is that society, like companies and markets, requires a degree of conformity. People cannot live and work together without some shared moral authority. All groups, from the smallest office to the family of nations, rely on a common understanding of what is right and wrong, acceptable and unacceptable.

Law is one kind of guide to what’s right, but so are accepted customs, like the rules of the market. The latter was where Hayes placed his ethical trust. He was faithful to the customs of the Libor market, which were basically those of a wild poker game. Cheating was tolerated, as long as you did not get caught. However, as a citizen he was also bound to follow the law, which requires honest dealing. Unfortunately for Hayes, his employers ignored the difference between the internal and external standards of virtue.

Hayes broke the law, but he deserves some sympathy. What he did – trust his peers and his bosses to tell him if he was doing something wrong – generally works quite well in successful modern economies.

The behavioural standards of most employers are reasonably close to those of the wider community. It may not seem that way, since the ethical exceptions, from financial skulduggery at Enron to the possible airbag safety cover-up at auto-parts manufacturer Takata, garner so many headlines. However, these examples stand out because they are so rare. In most organisations, fairly ethical standards are the rule.

From farms to factories, in government offices and in large corporations, the behaviour that is expected is, roughly speaking, right and good. The average employee is unlikely to go too far wrong by following orders or by imitating the practices of others in similar positions.

The finance industry has been an unhappy ethical exception, as testified by the large fines paid for various illegal practices. Besides the law-breaking, there also were, and are, many perfectly legal practices which generate high incomes for insiders while leaving customers worse off. Those are at best ethically dubious.

Of course, no one is forced to work in finance. Hayes could have made a good income – while avoiding ethical and legal problems – by deploying his skills in a different career, perhaps computer programming or trading in the wholesale fish market. The freedom of career choice increases the difficulty of cleaning up the financial sector’s ethics. Many of the best potential reformers have simply avoided a business which made them uncomfortable. Others leave when they recognise the scale of the ethical problems.

In addition, many financial professionals who started out with high ethical standards are corrupted by years of doubtful practice, especially when the decision not to ask moral questions comes with such large cash rewards. Money is often powerful enough to dull consciences. If the industry really wants to become more moral, understanding employees’ divided ethical loyalties is the first step – and massive pay reductions are probably the next.


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