– James Saft is a Reuters columnist. The opinions expressed are his own –
There has been a lot of talk in Davos about improving business ethics, and mercy knows there is certainly room for that. The past few years, like the end of most booms, have included plenty of fraud, self-dealing, and general all-purpose unethical behaviour.
I think it’s fantastic that business should seek to raise ethical standards. It’s good business, and not before time. I do understand that a lot of what happened was a social phenomenon, and that a change in mores can only help.
But frankly, a new emphasis on ethics is a sideshow, and among some who propose it, a diversionary tactic.
While I agree that mankind is perfectible, as an investor, a citizen and hopefully some day a retiree, I am not willing to bet my future or the future of my children on it.
I want some guarantees.
I want some better safeguards.
And that means no schemes of ethical codes and self-regulation, but schemes of tighter regulation, greater oversight and dire consequences for those who breach them.
The problem is not (just) that people were greedy or self-interested. Greed and self-interest seem to occur pretty regularly, in my experience. It is true that they got a bit more reinforcement in the past decade then usual, and so might have grown, but I really do think we are on a hiding to nothing if we try to solve the problems in the financial markets and economics and avoid future bubbles by more emphasis on ethics. The problem was that the rules under which everyone operated did not do enough to limit and channel greed and self-interest.
I want to make clear too that I’m not singling out bankers here, there was a lot of unseemly behaviour among consumers, house buyers and retail investors too.
But I do think that the financial sector needs to be very careful about how they pitch a new emphasis on ethics. If the intention is to try to minimize regulation, it won’t work and will only exacerbate the backlash they are already facing.
But why do I think I have the right to demand safeguards and guarantees? Well, I, like you, am a taxpayer and a voter and we are ultimately the bag holders for the misadventures of the financial sector. That sector enjoys a government guarantee which has been growing and growing.
Regulation means less leverage, less socialization of risk and privitisation of reward. And yes, I do understand that more regulation and less leverage imply lower growth, but also lower volatility in growth, which we can all agree is expensive.
And among the rewards that the private sector can earn there needs to be a better balance between how those rewards are parcelled out between employees and shareholders. I don’t so much want a much bigger role of the state in deciding who makes what, but I’d like to see better a balance of power between shareholders and employees.
Take for example the trader at a AAA-rated bank (remember them?) who used that rating to borrow cheaply and buy a structured product with a higher yield. He banked his bonus and was still in the money when the trade went bad. He was taking advantage of two groups of people. First the shareholders, who should have gotten more of the benefit of the franchise they fund and second the taxpayers, who ultimately were insuring the whole rodeo.
I don’t expect the trader to suddenly become a saint; I do expect the system to take that into account.
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Also at Davos is Maria Ramos, CEO of Transnet, who raised some important questions about the discussion of ethics and business values:
This is a multi level issue
There is a way to avoid unethical / criminal behaviour in the broad business community including the financial sector which is riddled with sharp practice. The regulators must banish any scheme where the underlying rules and costs are not completely transparent and fail to conform to prescribed set guidelines.
Banish the use of small print in insurance contracts, investment products, consumer sales contracts, etc, and create a situation where what you see is exactly what you get. The words "Conditions Apply" should be discontinued in all advertising. Simplicity must be paramount because most of the people being hurt by these practices are unsophisticated and very easily misled.
At the same time the regulators must look at the more sophisticated "products" like derivatives, ETFs, options,futures, etc, and gauge to what extent they have contributed to the current crisis. If it is felt that abuse of these products is a factor then they should be banned if they cannot be properly controlled. Regulators must ignore the wails of protest from vested interests. Rather allow unscrupulous financial practioners to lose their jobs than create more misery amongst the unwary
While the rules of the game are being changed, there should be global campaign which warns the man in the street and investors to stay away from products and shemes which they do not fully understand.
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Wow…if that’s true then why even fight it…maybe we should just take up our arms and this world should be run by someone who would take care of the under privileged…this is pretty unbelievable if you ask me. Get rid of the people who want to take their work to that level and get rid of them entirely. It’s pretty unbelievable when you leave the world to the folks that are only concerned with advancing their career and don’t care about who they run over or to what extent the data they are providing may affect a certain country, in hat case Louis. Look where we are at right now…the “brilliant” folks at Wall Street, London…worldwide who want to advance their countries and have no care about anyone else in their world…we should just start over. Bring in new people…that wont be influenced by this kind of crap. We are at their knees right now unless we come together…the G20…our Governments…they need to put a stop to this. This incompetency needs to stop before we are all looking at each other thinking ….what now…once the entire world collapses and we are at war. Stop the protectionism….we are so wrong, the U.S., for trying to put that into legislation…all it is going to do is bring the rest of the nations against us. Lets solve these problems here first…there is a fix and then move to global cooperation, not protectionism.
When the IMF decides to assist a country, it dispatches a “mission” of economists. These economists frequently lack extensive experience in the country; they are more likely to have firsthand knowledge of its five-star hotels than of the villages that dot its countryside. They work hard, poring over numbers deep into the night. But their task is impossible. In a period of days or, at most, weeks, they are charged with developing a coherent program sensitive to the needs of the country. Needless to say, a little number-crunching rarely provides adequate insights into the development strategy for an entire nation. Even worse, the number-crunching isn’t always that good. The mathematical models the IMF uses are frequently flawed or out-of-date. Critics accuse the institution of taking a cookie-cutter approach to economics, and they’re right. Country teams have been known to compose draft reports before visiting. I heard stories of one unfortunate incident when team members copied large parts of the text for one country’s report and transferred them wholesale to another. They might have gotten away with it, except the “search and replace” function on the word processor didn’t work properly, leaving the original country’s name in a few places.
Nice discussion about ethics, however one should realize what the practical situation : in most countries the experience shows that no major project contract is signed without some party , either in company or government is gratified with some benefit. It is not an apologetic discussion that will right this, only if companies are prepared to forgo revenue change will come, we all should look out for the volontairs, which in practice are in short supply
I’ve spoken my piece regarding ethics…All I can say at this point is that the unethical will be found out eventually, they can’t run or hide what they’ve done forever. All I can say is it’s a shame that it has to go this far before people start speaking up about unethical behavior.
Well, ethics is just self-interest in its Sunday Best clothes, isn’t it? I seem to recall James Saft lives in London - this weekend, thanks to a industrial dispute in the building industry our TV screens have been full of a slanging match between those people who reckon that protectionism is ethical while free trade is unethical, and those who believe the exact opposite. They can’t both be right.
Regulation allows to write down a set of agreed rules. Enforcement allows us to implement them. We could do with more regulation, and we also could do with a whole lot more enforcement (think about all those rogue traders, or the rating agencies, or some of the more hair-raising mortgage scams).
The long-term problem is that there’s a whole sub-industry of highly paid, highly motivated people inventing new financial instruments which skirt around any existing regulations. So a proper solution requires both regulation and enforcement to be much faster moving than they are at the moment. Sadly for my desires for instant fame, I’ve no idea how we might achieve that….
The work of Oliver Williamson et al outlines the contractual approaches to curbing short sighted, ill informed, opportunistic and selfish folk, such as most of us; i.e. working with what we’ve got.
But there is a broader ethical issue. To develop ethics, the consequences of wrong doing need to be experienced. Otherwise it’s just hot air.
The U.S. has been on the greatest credit binge in history, and most of the money has been wasted. On a planet where 30,000 kids a day die of easily preventable sickness, maybe there should be some consequences - ethically speaking?
Gregory’s Bank of England Special Liquidity Scheme
http://bankofenglandsspecialliquiditysch eme.blogspot.com/
Asking our goverment to regulate business is like asking Jesse James to regulate Billy The Kid.
Ethics is in fact the root of regulation. In one sense you’re correct that ethics without regulation would have little value. But ethics is at the core of the issue. Regulators were more concerned about maintaining the IMAGE of regulation while not actually doing the work. Say what you want but the Madoffs of the world don’t do business under a watchful eye.
Regulation alone is also not the answer. You can make a regulatory system as stringent as you want but it will only achieve one of two results. The more complex the rules the easier they become to circumvent. If the rules are too restrictive they will choke the life out of the market.
But one could use the letter of the law as an outline which establishes an example of violation. And then compare the INTENT of the law against the outcome the actions in question. The idea is to get rid of ambiguous distinctions.
For example, credit default swaps (CDS). A CDS is supposed to work like an insurance policy that pays debt if the company under it’s protection is unable to do so. But if it were called insurance it would have to be regulated so it was called a SWAP.
So even though it looks like a duck and quacks like a duck, wall street called it a “gofer”. And that was good enough for the regulators. There’s an example of the ethical fault on the side of government. Wall Street’s ethical fault was of course, creating this kind of crap in first place. They knew what they were doing and skirted around the rules. And now it’s time to pay up.
Ethics must be actively used in the creation and interpretation of the law. Ethics is principles based. Law is technical. Therefore use the principles of honest fair value exchange. And craft laws that reflect this. Fairness and value are subjective, and so the country as a whole must be on the same ethical page if this is work properly.
Ethics is implicit to the process of fulfilling obligations. In a society in which financial obligations arise through contracts between creditors and debtors, it is assumed that each party is operating on an ethical platform. Trust and honesty are pivotal to the fulfillment of obligations.
Mr. Saft’s analysis should incorporate the role of ethics in Government and the State. After all, the financial system has got us to this point under the scrutiny of the eye of regulators who failed to uncover untoward activities.
I have had a personal shocking experience of the level of ethical degeneracy that seems to have taken place at the highest echelons of the UK government. On March 23rd 2008 , I sent an email to the HM Treasury and proposed the idea that became the Special Liquidity Scheme. Instead of acknowledging me for this, Mr King, the Governor of the Bank of England took credit for it by saying that he worked it out on his home computer ‘around Easter’.
See my blog for the emails and responses I received from the HM Treasury, Prime Ministers Office and Bank of England.
History indicates that some collapses in civilization have been preceded by ethical and moral decay. The near collapse of the global financial system is reflective of this principle. Greed and dishonesty preceding the fall.
God will see justice imposed on those that make a mockery of His Kingdom and we should all realise that temporary material gain and honours of of no use in the eternity hereafter.
As Mr. Saft correctly pointed out, we should take Human Nature as an independent variable. There is nothing that can change or even slightly alter our basic animal instincts in the short to medium run. So, this is clearly an issue of regulation adjustment and regulation cohesion. It is about raising awareness to the victims and the perpetrator of the consequences of their actions. There is not much that regulation can do directly. The behavior of investors and bankers CAN change if expectations are adjusted. Let’s not be so pessimistic about this financial mayhem. It is not about strict and broad regulation. It is about clear and easy to enforce one.
D. Georgiou
Mr. Saft, I agree that the focus on the ethical problems is one of several diversions from examination of the real problems. I fear that, because we have declared an economic emergency, examination of defecit spending and the increasing concentration of political and economic power at the federal level will remain off limits until too late. The discussion process and actions we are seeing reminds me a lot of what happened after Bush declared we were at war against terrorism.
I watched (reluctantly). Who is this Maria Ramos? Her lack of understanding of the relationship between the Normative Discourse (values) and the Empirical Discourse (that what we can measure), is scary… and strengthens your argument that we cannot rely on self-regulation and business-defined ethics alone to repair the situation. Values cannot be measured (that is first year university stuff).
I fear that enterprises have existed in a value-free zone for so long, that they would not know how to find the way back to the ‘path’ on their own. They need help.
The values that work best are those that are prescribed authoratively… aka policies, practices, procedures, laws, regulations, etc. This should be a global prescription and enforced on every continent. Our recovery should be based on this.
And we’d better get to work - before the next credit-crunch hits us.
Prudential regulations and ethics aside, what about ethics in government; specifically the giving of large political donations for favorable outcomes to the donor later on. Such practices interfere with free market practices and skew prices for the benefit of interested parties [ both government and investors ] at the expense of the private consumer. This particularly occurs when property developers, lenders, owners of the media and government become inseparably intertwined in manipulating the equilibrium price of a once perfect market. In a large way it is these economic players who have also exasperated the current economic malaise with their immoral actions. Ethics equates to greater transparency in governments and with investors and more importantly, their relationship.
You are an American. You do not understand what is coming in Europe because you never read Karl Marx, San Simone, Engels or Weber; and do not grasp that Adam Smith and co. are less relevant to European thought on economics than a dead fish. As the USA model of Neo-liberalism crashes and burns–all US banks are currently insolvent– in the near future Democratic-socialism will march ever forward and destroy your influence on the civilized European world. Asia never really followed the game plan and that’s why they are winning the industrial ponzi scheme. The Chinese are Neo-mandarins and the Russians Neo-tsarists. Americans are bankrupt Reaganite fools.
YES! America is a back water of obsolete bankruptcy–just watch what unfolds!
R. Nemo.
Maria Ramos is CEO of Transnet, a Government Parastatal (See Utube above). She is effectively employed by a government whose first choice for the next President of South Africa is facing criminal charges for alleged fraud and corruption. In the context of this blog it is encouraging to hear her personal views on values and behaviour
This is a multi level issue
There is a way to avoid unethical / criminal behaviour in the broad business community including the financial sector which is riddled with sharp practice. The regulators must banish any scheme where the underlying rules and costs are not completely transparent and fail to conform to prescribed set guidelines.
Banish the use of small print in insurance contracts, investment products, consumer sales contracts, etc, and create a situation where what you see is exactly what you get. The words “Conditions Apply” should be discontinued in all advertising. Simplicity must be paramount because most of the people being hurt by these practices are unsophisticated and very easily misled.
At the same time the regulators must look at the more sophisticated “products” like derivatives, ETFs, options,futures, etc, and gauge to what extent they have contributed to the current crisis. If it is felt that abuse of these products is a factor then they should be banned if they cannot be properly controlled. Regulators must ignore the wails of protest from vested interests. Rather allow unscrupulous financial practioners to lose their jobs than create more misery amongst the unwary
While the rules of the game are being changed, there should be global campaign which warns the man in the street and investors to stay away from products and shemes which they do not fully understand.
You give up too easily, Mr. Saft. We have plenty of ethics and plenty of regulation; what we lack is backbone. We have all we need to start arresting fraudsters by the trainload. From the lowliest liar to the almightiest master of the universe, we need to be rediscovering the meaning of law that was so conspicuously trampled during the Bush/Cheney/Rumsfeld years. What I don’t get is why no pundits are screaming for their hides? Accessories before and after the fact? Complicity? Guilty conscience? Or maybe the rule of law is simply dead. If so, then welcome to the era of gangster capitalism if it has not already arrived!!
In Australia we have quite strong prudential regulations.These have saved our financial system from the carnage of the first wave of the financial tsunami, as to how we are going to get on in the next 12 months is another question.
The talk of free markets and business ethics is only a front for greed then panic, when inevitably you start selling or borrowing money on “securities” that you cannot identify their real value or even their origin.
Regulation is a must as it is the only way to quantify a market and idrntify the securities and derivatives that trade within this market. As well how these securities and derivatives are traded needs identification. It does not prevent trading just creates order and accountability to the process. A free market never exists, it is influenced by a myriad of factors internal and external that influence and corrupt “free” to the extent that free becomes an euphimism. Worst of all those who have no say in the process are the ones who are sacrificed at the altar of the free market.
Governments are obliged to regulate. In the process of unravelling the mess, they have to pour vast amounts of money into the system to prevent collapse. Tax payers then are burdened with the cost- social and economic- for generations. It is irresponsible to all concerned that the process has no checks and balances. This is a global issue as no member of the world community escapes the cosequences. One countries regulation does not insulate it from the flow on of anothers failure to do regulate.
Ethics are an excuse for not doing what has to be done.
You’re right on, Mr. Saft. Relying on an ethical code alone just won’t cut it. Humans are the most prolific predators ever to evolve on the planet and many don’t mind what happens to the prey so long as they don’t have to personally witness the results. Others don’t care one way or the other.
History is replete with rulers who have murdered millions in the name of righteousness and colonialism is a good example. Label the indigenous peoples as “savages” and kill them to save them. I mention that because when we allow the wealth to pile up at the top in the name of “free” markets and capitalism (as opposed to that often invoked label of “socialism,”) many people die if for no other reason than lack of health care.
I’m certainly not for all-out socialism but we definitely need to straighten up our house and that will require new rules and regulations.