Ethical Banking: A Worthless Investment?
Investment banking has not only helped the USA soar to dizzying heights of economic success, but it has also been the propellant of globalized development for countries all across the world. Top investment banks, such as Goldman Sachs and JPMorgan, now play a pivotal role in emerging economies, like South Africa and Kenya, by providing the essential link between hungry investors and innovative African businesses (African Business Magazine). Asian countries, like Bangladesh and India, are experiencing a significant inflow of investments from American investors, who are enamored by the rapid rates of growth and high interest rates offered by these developing economies (Firstpost.com). Thus, it seems that the investment banking industry acts as the all-important pivot in connecting investors with businesses and facilitating the flow of capital in our society. Yet,the steady growth of the Global Economy in 2018 appears to have faded in the current year (Behravesh). Moreover, as talks of an impending economic downturn emanate from newsrooms, one can’t help but be reminded that in times of economic distress, this fruitful industry can compel yield-hungry investors and desperate bankers to commit unethical acts as well. Thus, this dichotomy in the nature of the industry alludes to one haunting question - Is investment banking a necessary evil in our world?
To answer this question, I decided to interview Boston College’s Professor Edward J. Kane. Professor Kane, an accomplished Professor of Finance at the Carroll School of Management and a current World Bank consultant, strongly believes that while investment banking can be the “fuel for entrepreneurial ambitions and financial dreams,” it is susceptible to the “sparks of corruption and fraud”. Investment banking is a field which deals with high risk decisions for each investment, and this can force the industry“to concentrate on gambling for huge risk-based incentives, rather than following traditional business protocols.” Echoing the professor’s ideas, Vince Cable, Britain’s former Secretary of State for Business, Innovation, and Skills sums up the unpredictable nature of the industry well, in his article for The Guardian where he says, “Investment banking has, in recent years, resembled a casino, and the massive scale of gambling losses has dragged down traditional activities as banks try to rebuild their balance sheets” (Cable).
Now while this comparison of an international industry to a casino could seem far-fetched, John P. Watkins in his paper on “Banking ethics and the Goldman Rule” feels that we must understand the fundamental purpose of an investment bank before making such judgements. In the Journal of Economic Issues, Watkins states that its sole purpose is to make profit through the continuous purchase and sale of debts (Watkins 364). However, the 18th century French philosopher Jean-Jacques Rousseau, would beg to differ, and would even present a harsher critique for modern banking practices in the contemporary society. In his book the Second Discourse, Rousseau discusses how capitalistic activities, have led to the “abolishment of human sympathy and natural pity” (Rousseau 169-171). Furthermore, he also feels that interest-dependent enterprises like banking “promote dependency and effectively lead to a deterrence in individuals’ natural ability to sustain themselves” (171).
Although Rousseau’s views may seem radical, even Watkins concedes that what makes banking unethical is the sheer power that rests with the large investment banks. They can bet with their clients’ personal wealth, while taking little to no responsibility for the consequences of their actions (Watkins 370). Professor Kane explains that banks can get away with this behavior only through government bailouts, or “protection rackets that promote theft by safety-nets.” He explains that bailouts are taxpayer-funded payoffs that bank executives receive to protect their financial future when their bank collapses. This means that not only can banks spend their investors’ saved wealth for private business operations, but they can also eliminate any sense of accountability to pay their clients back if they liquidate. Simultaneously, these banks also force their borrowers to risk their personal wealth as collateral if they are unable to pay back the amount borrowed. Thus, there is a double standard, as banks demand responsibility in the form of collateral from borrowers, but refuse to take liability for their investors. Therefore, while Watkins argues that the concept of banking is inherently immoral from the medieval times, where religious philosophy branded interest as a “sin punishable by eternal damnation”, it seems that in modern society, powerful banks have a plethora of opportunities to exploit their borrowers, investors, and taxpayers (364).
Subsequently, Professor Kane emphasizes that “Dog eat dog is the code that Wall Street lives by” and so the concept of freezing someone’s wealth for personal safety appears to be a sensible prerequisite for survival in the profit-dependent capitalist society. He disagrees with Rousseau’s anti-capitalist philosophy and argues that “There is nothing wrong with capitalism. The unethicality only occurs when the investment bankers make reckless decisions and choose to break the trust of their clients by indulging in illegal practices.” Additionally, his focus on the individual banker’s fault is reflected in the findings of a 2015 survey conducted by Labaton Sucharow. The survey on the UK and US’s financial service sectors shows that about 27% of investment bankers believe their industry doesn’t prioritize clients’ interests, with about 47% believing their competitors have used illegal or unethical practices to gain an upper hand in the market. Evidently, it appears that this casual and alarming attitude towards basic moral thinking gives the investment banking industry a tainted reputation, and leads to multiple financial scandals and frauds each year.
Although, a lack of awareness on philosophical concepts might explain an investment banker’s unethical inclinations, it’s also important to consider the role large investment banks have in nurturing immoral practices of profit-hungry employees. To do this, Watkins notes it is imperative to analyze the “Goldman Rule”, which had been the guiding philosophy of most big banks up until the Financial Crisis of 2008 (Watkins 364). The Goldman Rule (named as such due to the initial success it reaped for Goldman Sachs) is rooted in the ideals of Laissez Faire policies where, “Individuals and organizations may pursue pecuniary values without restraint” (364-365). This implies that to be profitable, the investment bankers would be willing to go to unrestrained lengths with no consideration about the economy and society. You may think, “So what? It’s the same thing- banks love profits.” However, this rule promoted reckless and irresponsible behavior by banks whose only priority became profit, over their clients’, as well as the economy’s, interests and long-term sustainability. Thus, in the industry’s back offices where profits become the portal to big bonuses, the industry’s code of ethics is frequently sacrificed in preference to a code of relentless, material growth.
In conclusion, to make a difference, it appears that not only does the system of bailouts have to be reformed, but society as a whole needs to focus on instilling ethical and moral principles in children from a young age. While the SEC clamps down by imposing regulations in the stock market, Professor Kane suggests that a more fundamental reform can be achieved by requiring investment bankers and students of Finance and Economics to study philosophy, particularly Kant’s “objective, non-theological reason for not hurting other people.” Overall, preventing one’s moral code from crumbling in pressure situations seems to be the ideal approach for a successful future in financial services, as well as maintaining the health of a stable economy.
African Business Magazine. "Investment Banking: All Eyes On Africa." African Business Magazine 1 Oct.2012. Web. www.africanbusinessmagazine.com/african-banker/investment-banking-all-eyes-on-africa/. 25 Sept. 2018.
Behravesh, Nariman, and IHS Markit. “10 Predictions for the Global Economy in 2019.” World Economic Forum, www.weforum.org/agenda/2019/01/what-to-expect-for-the-global-economy-in-2019/.
Cable, Vince. "The Storm … How to Survive it (and How to Prevent its Return)." The Gaurdian 24 Mar. 2009. Web. www.theguardian.com/business/2009/mar/24/vince-cable-economic-crisis-extract. 26 Sept. 2018.
Firstpost.com. "India's Equity Market Outperformance Could Cause FPI Flows to Return: Morgan Stanley report." Firstpost 20 Aug. 2018. Web. 2www.firstpost.com/business/indias-equity-market-outperformance-could-cause-fpi-flows-to-return-morgan-stanley-report-5001231.html. 26 Sept. 2018.
Humer, Caroline. “JPMorgan Says Lehman Called Assets ‘Goat Poo.’” Reuters 18 Feb. 2011. Web. www.reuters.com/article/jpmorgan/jpmorgan-says-lehman-called-assets-goat-poo-idUSN1829544020110218?WT.tsrc=Social%2BMedia&WT.z_smid=twtr-reuters_%2Bcom&WT.z_smid_dest=Twitter. 15 Oct. 2018.
Kane, Edward J. Personal Interview. 28 Sept. 2018.
Rousseau, Jean-Jacques. The Discources and Other Early Political Writings. Ed. Victor Gourevitch. 1. Vol. 1. Cambridge UP, 1754, 169-171. Print. 20 Sept. 2018.
University of Notre Dame and Labaton Sucharow. "The Street, The Bull and The Crisis: A Survey of the US & UK Financial Services Industry." Survey. University of Notre Dame, 2015. Web. www.labaton.com/en/about/press/Historic-Survey-of-Financial-Services-Professionals-Reveals-Widespread-Disregard-for-Ethics-Alarming-Use-of-Secrecy-Policies-to-Silence-Employees.cfm. 26 Sept. 2018.
Watkins, John P. "Banking Ethics and the Goldman Rule." Journal of Economic Issues 45 (2011): 363-372. Business Source Complete.Web. 23 Sept. 2018.