Three principles for a new Wall Street

October 19, 2011

By Don Tapscott
The view expressed here are his own.

Protesters set up the “Occupy Wall Street” base camp in New York a month ago because the location epitomizes the economic forces that control the U.S. and global economies. As one sign read: “This is not a recession. It’s a robbery.” To many it feels like just that. The financial services industry is in desperate need of reform. Many bankers have behaved as secretive corporate titans serving only their own interests, and insist the devastating consequences are not their fault. They are failing to fulfill their obligations to society—in some cases, even to shareholders–and a growing number of critics view the day-to-day behavior of the financial services industry as unacceptable. If the industry doesn’t initiate reform from within then it will eventually have more extreme reform imposed from outside.

In 2008, the routine gambles of Wall Street almost brought down global capitalism and yet, so far, nothing fundamentally has changed. Restoring long-term confidence in the financial services industry requires more than individual banks changing their behavior or even governments intervening with new rules. The industry needs a new modus operandi, where all of the key players (banks, insurers, investment brokers, rating agencies and regulators) adopt the three facets of collaboration: integrity, transparency, and embracing the commons.

Integrity. Trust is the expectation that the other party will act with integrity – be honest, considerate, and abide by its commitments. To re-establish trust, the financial services industry needs to have integrity as part of its DNA. But the cavalier manner in which many banking executives violated integrity was stunning. For example they sold sub-prime mortgages to people who could never make the payments; bundled them into securities and convinced rating agencies to classify them as AAA, and insurance companies to insure them.  They then sold these to unsuspecting investors. They violated all the values of Integrity. Everyone in the process suffered and the global economy was sent into a tailspin.

The 2008 meltdown and the Euro crises we face today illustrate how interconnected our world has become. Organizations must be much more aware of what is going on around them. It’s important to know the behavior of others and the potential impacts of the actions of distant third parties. If there is anything Wall Street should have learned from the mess they created it was that business cannot succeed in a world that is failing.

In everything from motivating employees, negotiating with partners, disclosing financial information, or explaining the environmental impacts of a new factory, companies and other organizations must tell the truth, be considerate of the interests of others, and be willing to be held accountable for delivering against their commitments.

Companies need to act with integrity – not just to secure a healthy business environment, but for their own sustainability and competitive advantage.  Increasingly, firms that exhibit ethical values and candor have discovered that they can build trust with customers, employees, shareholders and business partners. This makes them more competitive and profitable.

Transparency. One of the reasons companies have to have integrity is that they operate in an unprecedented, hyper-transparent world. Customers use the Internet to help evaluate the true worth of products. Employees share formerly secret information about corporate strategy, management and challenges. To collaborate effectively, companies share intimate knowledge with one another. And in a world of instant communications, whistleblowers, inquisitive media, and Google, citizens and communities routinely put firms under the microscope. So if corporations are going to be naked – and they really have no choice in the matter – they had better be buff.

But the financial services industry has a history of being opaque and secretive. One Goldman Sachs executive told me off the record: “We’re a very private company. The less people know about us and pay attention to us, the better.” In commenting on the U.S. government fraud charges against Goldman, Roger Martin, dean of the Rotman School of Management at the University of Toronto said, “Sadly for Goldman, transparency is not an attractive option. The better Goldman does in explaining exactly what its business is, the more outraged regulators and the public will be.”

If Wall Street had been fully transparent during the past decade, the sub-prime debacle would not have occurred. In the future, investors, rating agencies and insurance companies should be able to ‘fly over’ and ‘drill down’ into securities such as Collateralized Debt Obligations and analyse the underlying assets. With full data, they could readily assess the payment history, and correlate information such as employment histories, property values, location, neighborhood pricings, delinquency patterns, and so on. Potential investors will quickly realize the CDOs’ junk status and refuse to buy. Since banks wouldn’t be able to offload sub-prime mortgages, they wouldn’t create them in the first place. The industry needs to resolve, immediately, that it understands that sunlight is the best disinfectant.

Embracing the Commons. Wall Street reform requires restructuring of the industry. Wall Street companies need to overcome their obsession with proprietary ownership of their intellectual property and learn to share certain information. For example, the banks currently have upwards of a trillion dollars of “toxic assets” on their balance sheets. Since no one knows the true value, the assets have created so-called “zombie banks” that won’t lend money to entrepreneurs. Because 80 percent of new jobs come from companies 5-years-old or less, the inability of startups to borrow money is a huge impediment to job creation.

How can the banks value these assets, dispose of them and get back to normal? They should be sharing the information – essentially placing risk management in a commons. Think risk management Linux style, which is completely feasible and affordable in a digitized world. For instance, the Open Models Valuation Company is using the web to create a global community of experts dedicated to establishing credible valuation and risk assessments for credit securities and contracts such as CDOs and other derivatives.

Craig Heimark, an industry veteran and one of the founders of Open Models, likens it to the scientific peer-review process: “In the scientific world when people publish something, they don’t just publish their results, but also the steps in the process, their methods and assumptions so that they can be vetted by others.”

Exposing complex financial instruments to the vetting of thousands of experts could help restore trust in banks, kick-start venture capital, unfreeze the paralysis of lending markets and lay the foundation for a new and stronger financial service industry.

The paramount role of banks is not to create shareholder value and enrich their executives. They exist to provide a safe place for people and organizations to store their money and get credit. They exist to execute myriad transactions, make capital markets and are central to our economy. We charter them with a license to operate so that they can perform these functions, but the recent repeated crises show they have violated their pact with society.

One of the most popular signs in the Occupy movement is “Nationalize the Banks.” If Wall Street does not adopt these three principles and change its core modus operandi, it risks having its license revoked.

PHOTO: A bronze sculpture of the New York Stock Exchange Bull is seen at the Museum of American Finance in New York October 2, 2008. REUTERS/Shannon Stapleton

13 comments

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Well said, thank you. Now will anyone act or simply hear?

Posted by OFA7 | Report as abusive

This could not be any more inspiringly honest, transparent and honoring of the commons, sir, just as you prescribe. Thank you.

Posted by marimba | Report as abusive

The article is an appeal for self-reform and reasonableness, which is ironic because the wealthy understand neither of these principles.

The ONLY real solution is to force an updated version of the Glass-Steagal Act of 1933 on them, AND to begin enforcing the present criminal and civil laws against fraud, for both banks AND individuals who commit these crimes.

These “cavalier” acts by the banks/individuals are not simply violations of “integrity,” or of the “public trust” as the article states, but acts of FRAUD so egregious it literally reeks with the contempt which the wealthy feel towards the law.

From this aspect, the charges leveled of a “lack of confidence” by the American people in their government and future IS an accurate statement — BUT it is also an accurate assessment.

A good start in restoring public trust in the financial system would be to start trying and convicting those who have committed fraud already. People NEED to see that the wealthy are not beyond the law.

When there is no “downside” to human behavior, there are no limits on how egregious that behavior will become.

Posted by Gordon2352 | Report as abusive

Those accustomed to secrecy and a free hand in what they do will never WILLINGLY relinquish those personal advantages.

Those unaccountable in the past will not act accountably in the future unless they perceive it is in their personal self interest to do so.

What is done cannot be undone, yet it is a betrayal of faith by the White House and Congress that the banks were bailed out with taxpayer money with no “strings” attached. The bank supervisors under whom the real estate bubble inflated and related toxic investments sold to the public without meaningful disclosure are criminals that have yet to be clearly identified, charged, dismissed and appropriately punished.

Do your JOB, Washington!

Posted by OneOfTheSheep | Report as abusive

Extremely well stated, Professor Tapscott. And … it ain’t never gonna happen. Not voluntarily. Unfortunately, the deceit, self-aggrandizement and sense of entitlement was not limited to the financial industry. Rather, it was necessarily infectious, as the only method to reliably and consistently move the levers of public policy to favor this regime was to co-opt the policymakers. The financial industry also has partners and allies in its errant ways, and the cultures and motivations of those other industries are interlocking, and mutually reinforcing. Thus, we can point our fingers in a dozen different directions, and hit the mark: Big Pharma (the sick care industry); the Drug War (the arrest and incarceration industry); the Military-Industrial Complex; Energy; etc.

But at the crux of all this is the ability of these players to manipulate, form and obfuscate public policy to meet their ends. This is the structure that needs to be dismantled. It will not happen by asking them nicely.

Posted by BowMtnSpirit | Report as abusive

Good thoughts. As an academic, you’re directionally correct, but off the mark / don’t really understand where to focus practically. This article describes a key specific reform recommended by an ibanker that I think you would agree with. In my opinion, this is exactly what we should do for financial reform immediately: “The Rise of American Investment Banking, the Decline of British Gentlemanly Capitalism, and the Global Financial Crisis”: http://jackworthington.wordpress.com/201 0/04/22/the-rise-of-american-investment- banking-the-death-of-gentlemanly-capital ism-and-the-global-financial-crisis/

Posted by sarkozyrocks | Report as abusive

Investment banks should be completely separated from retail banks. Then they can play however they like.

Posted by FBreughel1 | Report as abusive

Nice Op-Ed piece…. To bad it falls on deaf ears. The idea of Wall Street, banks, rating agencies, investment brokers and insurers cleaning up their act sounds nice, but it’ll never happen. Money is power, and power corrupts absolutely, and has since the beginning of time.
The only way to reign these crooks in, is regulation, and regulators that cannot be bought. I’m talking meaningful, but not crippling regulation that allows for innovation in the financial sector, but keeps its finger on the pulse 24/7. A return to separation of banking and investment functions is a good place to start.

Posted by edgyinchina | Report as abusive

I think Wall Street is just the canary in the coal mine…..

the housing bubble was an attempt to move, and make money, when Americans had actually already lost the purchasing power, necessary to buy a home.

Moving jobs to China, was a big part of that.

‘Technology’ and ‘Productivity’ is still a big part of that.

All or most businesses have the same modus operandi, concentrate all proceeds and give them to the owners………that’s business.

Posted by Robertla | Report as abusive

Corporations must DIE

After a life span of 50 years. Like never restarting a Monopoly game. New players don’t have a chance. Corporations must DIE; with 1% accruing to the People each year. At the end of that lifetime; sell it off lock stock and barrel; extinguishing copyrights, patents; everything. Otherwise we will forever be enslaved by the filthy rich.

Posted by bloggerswamp | Report as abusive

It doesn’t have to fall on deaf ears. That is what is driving so many people to the streets. The more people who demand accountability in the market — truly demand it — the stronger the call will be. Time and effort and a steep hill do not equal “deaf ears” or hopelessness.

Posted by benjrog | Report as abusive

A beautifully crafted article by Shoshana Zuboff describing the unspeakable suffering unleashed by the ‘banality of evil’ of those we entrusted with our economic welfare is worth a read. It ends with;

That in the crisis of 2009 the mounting evidence of fraud, conflicts of interest, indifference to suffering, repudiation of responsibility, and systemic absence of individual moral judgement produced an administrative economic massacre of such proportion that it constitutes an economic crime against humanity.

Note: The author is famous in the ‘social, p2p world’ after writing a book called The Support Economy (2003/4) with co-author Jim Maxmin. Amongst other things, the book foretells the failure of managerial capitalism (or the end of command-and-control) and a shift to collaborative capitalism. Rather prescient given where we are right now.

Posted by lfbenjamin | Report as abusive

Wall Street won’t change until it all collapses. Just a bunch of made up numbers moving made up money.

Posted by AlejandroS | Report as abusive