Prof Edward Kane of Harvard has written a recent research paper titled – Ethics vs. Ethos in US and UK Megabanking. Ethics in finance? That sounds like a sure joke to most. Banking histories across most parts of the world tell you that early form of banks and their bankers were highly despised. No one liked them on both religious grounds (as in Islamic countries) and general livelihood grounds (too high interest rates, pests etc). How a profession has changed from being an unethical sector to a highly wanted one is quite a story by all means.
And now we have come to a different extreme where all sins of bankers are just laughed away. Despite seeing it in so many crisis recently, banking remains a coveted job. The kind of greed the sector has shown and the way we celebrate it will even surprise likes of Gordon Gekko. I am a banker is said with a huge pride leaving others to guess the kind of salaries the banker would be making.
Here Prof Kane discusses the broad findings. He starts with he most obvious question – why do bankers get away?
Does the question of morality have a place in the realm of banking and regulation? That it feels awkward to even raise the issue is convenient for bankers who engage in reckless and harmful activities every day without fear of punishment.
Ed Kane, Professor of Finance at Boston College, believes it’s vital to discuss moral questions, in plain English, without abstractions. Following his own advice, he is blunt in characterizing some of the behavior in the banking industry in recent years: “Theft is a forced taking of other people’s resources,” he says. ‘That’s what’s going on here.” Kane urges a deep inquiry into our culture to understand why bankers so commonly get away with crimes in the United States.
In 2007, just before the housing bubble burst, Goldman Sachs chief Lloyd Blankfein wrote to a colleague to discuss how the bank could deal with toxic mortgages — ” cats and dogs” as he called them — on the books. Blankfein’s bank went on to sell the toxic junk to unwitting investors who were told they were sound, while taking short positions on the very same securities. As the Financial Crisis Inquiry Report noted, one structured finance expert compared Goldman’s practices to “buying fire insurance on someone’s house and then committing arson.”
Still, Blankfein and his fellow bankers later pocketed billions of dollars from the American people in the form of a bailout. They profited at the expense of their clients and society. Nobody went to jail.
In Kane’s view, the word “should” — used in the moral sense — needs to be reinserted into the vocabulary of bankers. Today’s executives may spend a lot of time considering the question, “Could we get away with it?” but there is little focus on the question, “Is it right to do it?”
He says part of the problem is the way we are taught about money these days:
In Kane’s view, pernicious cultural norms within banks and regulatory agencies have crowded out fundamental moral principles. Regulators in both the U.S. and the U.K. are fully aware that the reckless pursuit of profits is one of the main reasons for the expanding scale and frequency of financial crises over the last 50 years, but they tend to approach the issue differently.
Kane sees things as much worse in the U.S., where, he observes, authorities are stuck on the idea of toughening corporate-level rules: capital and liquidity requirements, corporate fines, periodic stress tests, and so-called living wills. That’s not enough, says Kane. The British have done this, but they have also supplemented corporate restraints and punishments by defining a new crime called “reckless misconduct leading to the insolvency of a bank.”
Besides that, Kane notes, it has been long been illegal in the U.K. for an individual director to allow a corporation to issue new debt if he or she knew or should have known that the firm was insolvent. In the U.S., Dodd-Frank Act allows a limited clawback of stock-based bonuses in the wake of a bank failure, but it does not make individual bankers criminally responsible for actions that they should have known were reckless. Prosecutors typically settle lawsuits and bankers find ways to put taxpayers on the hook.
In the U.S., Kane argues, the Dunning–Kruger effect — a cognitive bias named for two Cornell researchers in which people can’t recognize their own weaknesses — compounds the problem. If you don’t recognize your inability to make sense of things using an ethical code, for example, then how can you overcome the shortcoming? Part of the problem is that ethical codes have to be taught and practiced. “College education in the U.S. has been much more watered down,” observes Kane. “In the U.K., people still have some training in philosophy that helps them to see the ethical implications of their actions.”
Philosophy for financiers? Yes, says Kane. “When I present these ideas in Europe, I get much more enthusiastic reception than in the U.S., where people have this relativistic view of ethics.” He argues that in America, there is a common perception that whatever feels good at the moment must be okay and that this kind of thinking justifies nearly any behavior. “Kant is still a force in modern philosophy,” says Kane, “and he tries to develop an objective, non-theological reason for not hurting other people.” Hurting others to please yourself, says Kane, is the essence of theft. It’s a problem caused in part by ethical blindness.
At some level there is little doubt that US dominance has ruined many a thing. The whole idea of consume, consume and consume has impacted us in amazing ways. Needless to say banks have played a crucial role in financing this consumption. This whole house of cards is just falling down.
He rightly say no amount of regulation can help us through this greed machine. Greed and banking have become synonymous:
Kane believes that students need to be taken through numerous real life scenarios in which they can apply ethical principles. In business schools, students get bombarded with case studies in which they look at a company, identify a problem such as poor sales, and try to figure out how to solve it. But, he argues, they need to go through well-designed ethical case studies. When your bank holds toxic mortgages, what should you do? What would Kant’s model suggest that you do? What does the Golden Rule indicate as a course of action?
According to Kane, no amount of policy tweaks or added regulatory staff can solve this basic problem of ethics and cultural norms. There is no way around the necessity of inculcating an ethical perspective on the choices we make.
Something is seriously wrong with all this. The journey of banking sector is usually seen just from the growth angle. Not much thought is given to how the sector moved from one extreme of being a pariah to another extreme of so coveted…