Morality on Wall Street

Eddie Braverman's picture
Rank: The Pro | 21,141

Is there a place for morality on Wall Street any more? Niall Ferguson doesn't think so, at least since Siegmund Warburg died in 1982. Ferguson believes that regulation won't clean up the Street but that bankers need to be taught morals. For those who don't know, Siegmund Warburg founded investment bank S.G. Warburg & Co. after WWII and ran the firm through the 1970's. The firm was eventually sold to UBS in the mid-90's, and Warburg was famous for "relationship banking".

Right now, Wall Street seems pretty far away from Warburg's ideal of high moral standards and ethics. Bank CEO's openly joke about the culture of greed, with Blankfein's "doing God's work" comment and John Mack's admission that, "We cannot control ourselves." These are the guys at the top. What I'm curious about is where morality fits into the lower levels of banking. Is it possible to work in the culture of greed and still consider yourself a "moral" person?

I'll go first. I will be the first to admit that when I got started, all I thought about was the money. Well, that's not exactly true. I also fancied myself something of a market wizard, so I pictured myself shepherding huge sums of money and capriciously micromanaging every aspect of my unfortunate underlings' lives. So there was a burgeoning God complex to go with my greed.

I certainly wouldn't say I was a "moral" person, but neither was I "immoral". It would be more accurate to say that I was "amoral". I didn't go out of my way to screw anybody (with a few notable exceptions), but I did make a number of client-related decisions based on how much money I would make. That said, we had an advantage back then over bankers and traders today: we actually made more money when our clients made money. It enabled us to harness our greed for moral purposes, if you will.

Today, with the structure of management fees, 2 & 20, and the various other fee-generating machinations of the banks, clients no longer have to make money for bankers to reap huge bonuses. Back in the day, if your clients lost their collective asses you had a terrible year, and maybe even got fired. Today, hedge funds can drop by 50% in a year and even close up shop, but the manager is still going to rake 2% (or more in a lot of cases) of the AUM.

Banks today routinely short the same assets they're recommending their clients purchase, they front-run their clients' orders, and they blatantly (and proudly) mislead ratings agencies and long-term customers just to make a buck. As Ferguson says, the guiding principle is no longer "Are we doing the right thing?" but "Can we get away with this?"

So I'm curious about how you guys square it with yourselves. Do you tell yourself that you're just a tiny cog in a giant machine, that you're just following orders? Or are you more like I was and just don't really think about it, trying to maximize your personal return? Is morality even a consideration in finance? And how do you feel about the characterization of bankers as sleazy lowlifes? Has any of this made any of you consider another career?

Comments (22)

Jul 7, 2010

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Jul 7, 2010

this past year had me thinking alot about this, concerning my future. I only just completed my sophomore year at Fordham, and halfway through the year became involved with a group called FairTradeFairTrade(they needed a graphic designer, and i do that on the side), and for next year im officially on the team. The groups all about delivering fair wages to african artisans and using profits to structure microcredit loans to small businesses in impoverished areas to improve the economy/living conditions on a micro scale.

I had never even though about things like this, and doing all the research/backround work for the team really has me looking at myself(my future, not with the team)and saying, is it all about profit$$$$ or should i be trying to make a social change?

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Jul 7, 2010

There is no such thing as morality on wall street....

There never was and there never will be!

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Jul 7, 2010

A recent write-up in the NYTimes blog, which comments on Wall Street's morality by way of Goldman

But the byproduct of this very effective, Goldman-centric political strategy, is that the larger issue of the dramatic deterioration of Wall Street's mores and ethics over the past 40 years has been all but obscured, as has a robust debate about how to change Wall Street's behavior in the future to prevent a recurrence of the events that led to the 2008 financial crisis. Unfortunately, nothing in the 2,319-page Dodd-Frank bill addresses the dramatic change in Wall Street's culture away from taking prudent risks with its own partners' capital toward a culture that rewards bankers and traders for taking risks with other people's money. This ethic is pervasive across Wall Street, and not just at Goldman Sachs, which as the last major Wall Street firm to go public -- in 1999 -- retains more of a partnership mentality than do its brethren.

http://opinionator.blogs.nytimes.com/2010/07/06/le...
I have read a few posts here and there tackling the partnership to public shift and the deterioration of morals and I'm slowly shifting to that camp's reasoning... M. Lewis addresses it as well in The Big Short.

Jul 7, 2010

Ken Costa of Lazard (formerly of UBS and Warburg) is a big Christian - not that it weighs in, necessarily, on the whole morality issue.

He authored a book called God at Work which talks about a balanced approach to M&A and banking. I've not read it personally but my brother says it's a fantastic read.

Bb.

Jul 7, 2010

Funny you mentioned front running. We had a MD from the Energy Trading desk at a top BB co-teach a trading class in grad school. He basically brags to our class that he front runs all the trades that are recommended to institutional clients. Everyone just stared at each other wondering if he really said that or if it was just the hallucinigenic effects of the potent mixture of adderall and caffeine warping our brains.

How prevalent is this tactic on the street?

Jul 7, 2010

First, don't fuck your company/clients/country and when you have $$$ put it towards causes or goals you believe in.

Anyway, all this crap about Wall St being too greedy makes me wonder how many outsiders aren't just as bad. Nobody complains when they get the house/car they can't afford but when reality kicks in, it's someone else's fault.

I don't believe Enron or a host of other scams had anything to do with derivatives or trading

We have unions and special interest groups lobbying or "bribing" political officials

Recently, it cam to light that everyone's favorite Supreme Court nominee committed fraud

We don't even need guys like Blago to illustrate the rampant corruption of political officials

And how many contractors/plumbers/electricians do dangerous sub-standard work? (Mike Holmes fan)

All I'm saying is that there are a lot of immoral people on Wall St but they are no worse than everyone else. If anything it's a fair cross section of humanity.

Jul 7, 2010

^^^ I think that's the kind of moral relativism that Ferguson is talking about. Don't measure Wall Street against others who may or may not be as bad or worse, but endeavor to guide Wall Street by moral principles. Not saying I agree or disagree, but it's this kind of thinking that has taken banking from a respected profession to the societal doldrums it currently inhabits.

As for committing ill-gotten gains to a worthy cause, you're only doing that to assuage your guilt (not you specifically, Victor252, but you know what I mean).

I'm reminded of something a director told me early on in my career. He pulled me into his office one day and said, "Do you want to know why it is that you're making such good money but you're still broke every payday? It's because you know subconsciously that you don't deserve to be making this kind of money because you're taking all these shortcuts, and your mind is telling you to spend every penny before someone takes it from you."

I hated that guy, but he was right.

Jul 7, 2010

No, that's not what I'm saying at all.

Even though finance is the business of money, you shouldn't screw over clients/markets/companies.
There shouldn't be "ill gotten gains" because financiers should have some basic moral guidelines.

What I'm saying is that this isn't a Wall St problem, it's a human problem.

We have home inspectors to watch out for crappy contractors and other forms of regulation. However, we still have the problems that some people are scammers. This is part of the normal human condition.

I look at other more altruistic avenues like the World Bank and IMF but they actually seems to have a negative effect on prosperity in poor countries and development. Their workers get suckered into giving out loans to countries that can't repay and prop up corrupt and abusive regimes.

The one saving factor about Wall St greed is that it's honest and open. Nobody really thinks we're out to cure poverty in Nigeria, everyone with a brain knows we're in it for profit.

I think people on the street need to take to heart some basic ethical guidelines like we have in the CFA program (or something like it) and endeavor to live up to those. However from reading Blong131's post, I say affect positive social change once you have money and experience. Look at the miserable failings of people at the WB, IMF, Acorn and other "altruistic" organizations.

First, I'll get paid, then I'll chose what causes I want to support, not the government, WB or any other massive, impersonal institution. All people should strive to be better, not just bankers. Fuck that moral relativism and the shit heads who hide behind it.

Jul 7, 2010
Victor252:

First, I'll get paid, then I'll chose what causes I want to support, not the government, WB or any other massive, impersonal institution. All people should strive to be better, not just bankers. Fuck that moral relativism and the shit heads who hide behind it.

I always think this when I see Greenpeace or whatever supporters on the streets in NYC. I think, "why don't they just work hard, get paid well, and enact social change from within the system, instead of just wasting their time trying to get 3 people to fake sign up on any given day".

Jul 7, 2010
<span class=keyword_link><a href=//www.wallstreetoasis.com/finance-dictionary/what-is... rel=nofollow>LIBOR</a></span>:
Victor252:

First, I'll get paid, then I'll chose what causes I want to support, not the government, WB or any other massive, impersonal institution. All people should strive to be better, not just bankers. Fuck that moral relativism and the shit heads who hide behind it.

I always think this when I see Greenpeace or whatever supporters on the streets in NYC. I think, "why don't they just work hard, get paid well, and enact social change from within the system, instead of just wasting their time trying to get 3 people to fake sign up on any given day".

EXACTLY!! Earn money and put it towards worthy causes, don't become just another self righteous special interest group. Plus, if you have earned money over years of working you probably have more life experience than the college kids out there protesting or signing petitions on issues they don't understand with a mind that hasn't been tempered with experience and maturity.

Jul 7, 2010

Personally, I think working on wall street is more ethically palatable than working elsewhere... do you want to be working at Boeing, Gen Dynamics, Lockheed, selling aircraft and missiles that kill people? Do you want to be an executive at McD's trying to push hamburgers on the American public, knowing full and well that heart disease will be the leading killer in the US this year? Do you want to work for big agriculture, trying to push pesticides and fertilizers on farmers in order to push up yields, and destroy soil quality? Do you want to work at Chevron, and pump oil from under the soil of exploited Nigerians who receive nothing from the proceeds of that oil since it is all stolen by their government? (I can go on with Lobbyists, Senators, Car Manufacturers, but I think you get the picture)

At the end of the day, if you are unethical on wall street, who are you hurting? 90% of financial assets in this country are controlled by 10% of the population. And that 10% includes people working on wall street, or one of the people running one of the companies above (by the way I love those companies and obviously they all have positive value add contributions to society... I'm just saying, their business could be construed as unethical or immoral just as it may be on wall street). Also, I'm not saying this behavior is acceptable, I'm just adding to the relativist argument.

I agree with the above posters, this is a human problem. I think our society has lost a sense of morality and ethics.

Just remember the slogan from your favorite steakhouse: "Do Right and Fear No Man"

Jul 7, 2010

Great point by your ex-director Edmundo.

Jul 7, 2010

I think a lot of the ethical/moral issues that are being brought up here have more to do with ppl doing business on faith or people engaged in businesses that they have no idea about. Fraud is fraud, and those involved should be punished, but there is something to be said of the responsibility of "the victim" who invests in a fund relying on the supposed past performance of some guy wearing a suit, only to see his savings disappear. If people took responsibility for their actions and performed due diligence on their own a lot of these so-called issues wouldn't come up in the first place.

an example I'd give for ppl doing business on faith: investing in funds that are run by mgrs with consistently poor returns. The structure of management fees, 2 & 20, isn't the issue, the issue is why are these investors continuing to invest money with these individuals.

an example of ppl engaged in businesses with no idea what they're doing: A lot of the fund managers buying up cdo's during the mortgage debacle these past few years. Don't try to blame the ratings agencies for giving bad ratings, especially when your faulty research matched their findings. there were quite a few ppl who knew these assets were toxic based on research, if you dont know what your doing, you shouldnt be in that business

and Libor is spot on, its not enough to complain about environmental damage, "evils" of free trade, wage disparity. Unless you can come up with another idea that can compete without subsidies with oil sands, nafta and walmart, all your doing is complaining not offering a solution. and just like the homeless guy I see everyday, you damn sure aren't going to get my attention.

Feb 4, 2011

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Jul 7, 2010

I think Warburg had a great philosophy. It ultimately boils down to this:

1.) "Wow. My clients must have been really smart to do business with someone as good as me."

2.) "My clients chose me because I can do a good job for them and they believe I'll act in their best interests if I'm acting as their agent."

3.) "Uhoh. My clients are really smart and are only going to keep doing business with me if I put their interests ahead of mine and give them the same service I'd give my family and friends when said clients are paying me to act on their behalf."

4.) Hey, this is kinda funny. When I behave ethically, everybody around me makes more money, and they have more money to give me! Having to play nice because my clients aren't idiots maybe isn't so bad after all!

Jul 8, 2010
IlliniProgrammer:

I think Warburg had a great philosophy. It ultimately boils down to this:

1.) "Wow. My clients must have been really smart to do business with someone as good as me."

2.) "My clients chose me because I can do a good job for them and they believe I'll act in their best interests if I'm acting as their agent."

3.) "Uhoh. My clients are really smart and are only going to keep doing business with me if I put their interests ahead of mine and give them the same service I'd give my family and friends when said clients are paying me to act on their behalf."

4.) Hey, this is kinda funny. When I behave ethically, everybody around me makes more money, and they have more money to give me! Having to play nice because my clients aren't idiots maybe isn't so bad after all!

+1

This is a great summary of the ideal mentality for ethical conduct. I think I'll print this out and keep it next to my Courage Wolf catalog.

Jul 7, 2010

I agree with IlliniProgrammer. Acting in the best interests of intelligent and wealthy customers who pay you exactly because you do so advances your own interests. Most conventional ethical principles in general evolved because, historically, they tended to promote the long-term interests of the people following them.

Jul 8, 2010

Great topic of conversation as always Edmundo. When I came into finance I was so naive to the world. But after a few months of conference calls, models and business plans of biotech companies everything started to become real clear. No one gave a shit about anything but money. It wasn't lets target a disease, make a cure and as the benefit make some money. It was lets analyze a market, determine diseases with payouts large enough worth curing, make money and in the process cure a disease. Now, not that there is this is entirely immoral, however, it was my first eye opening experience into the world of business and finance. Before I had thought research was done for the quest to cure certain diseases but in reality it was done in the quest for money. I learned hard and fast the finance was all about the money.

As my years progressed in my firm I began to question why we were pushing advisory projects on clients that they clearly didn't need. Granted those fees were paying my paycheck and we ourselves were a business, however I did question how we where being trusted by our clients yet we were really just doing projects that they clearly didn't need and siphoning cash out of them. I wasn't really a fan of this.

Then with more time and as I got involved with more direct MD interaction and drafting agreements etc. I began to realize, that at my firm, we often times were really working against our clients interest to generate more fees yet convincing them it was the best deal. I remember after one conference call I said to my boss, you just said the best rate was 7% but I'm pretty sure the markets at 5%, can't we get it down, to which he responded something along the lines of don't you get it, we are making the spread. Basically we had some kind separate agreement with the lender, honestly I have no idea of any of this stuff was even legally possible. So not only were were telling our client it was the best deal we could get for them and making a fee of the transaction but we were also making the spread on the over inflated rate. I have countless anecdotes like this. Each time something morally wrong was asked upon me I grew to disdain my job that much more. Now, I'm not saying that all finance is like this but this was at least my experience. I was always the idealist that thought if operated in the best interest of our clients and investors everyone would win. I transitioned from loving going to work, even with the long hours, to hating every minute of every day. Each email, each phone call from my MDs made me cringe. It was a living hell. Everything we were doing was such a farce. We were in the business of working for our clients but were were really working for ourselves. Now, there is nothing wrong with this if its up front. But when you are pitching clients, talking to clients and negotiating with clients under the false pretext that you are working for there best interest, there is a major moral problem.

So after almost 4 years I quite and let me tell you the day I put in my notice was quite possibly the greatest day of my life. The weight that was lifted off my shoulders felt amazing. Even though I still worked for a month or so knowing I was free was such an amazing feeling. Currently I'm doing international development work living abroad while pondering what I want to do next. One thing is for sure, whatever path I take I want to make sure that there is morality embedded in my profession and/or company. Its a lot easier to sleep at night with a free conscious than a fat bank account.

The sad thing is most people don't have the balls to stand up to what they believe in. Most of my friends all hate their jobs just as much as I did but none have the balls to pull the trigger. When I actually did so they were in shock and amazement and might I say a bit jealous. If more people actually acted on their beliefs and feelings so many greater things could be accomplished in the world. Instead way too much talent is wasted on bright, hardworking and creative kids acting as drones and compromising their principals for a fat pay check.

Jul 8, 2010

Goods and services improve the goods and services offered by others, gradually raising the standard of living through economic efficiency and technological progress. Finance incubates and accelerates this virtuous cycle by recycling all of that accumulated capital effectively. So in principle the functions of S&T and IBD are morally good for society (if you want you can call it "God's work").

Unfortunately as we have seen this can all go to crap in reality, ruining the reputations of the good guys and lead society to cut off its nose to spite its face, if enough distortions by bad guys (Madoff, etc) and misguided government incentives (arbitrary rules, taxes and tax credits) build up over the years and turn the system itself into a shaky ponzi scheme.

Such a desperate condition increases the pressure for normal people to become predatory or place blind faith in authoritarian control, so it's a vicious cycle, the road to serfdom as Hayek said.

Jul 8, 2010
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