After yesterday’s chance encounter with the ex-marine who tried to pull my car out of the sand, this morning’s New York Times returned me to the ethics problems of Wall Street. Neil Irwin has a column entitled, “Why Can’t the Banking Industry Solve Its Ethics Problems?” Mr. Irwin begins his column by referencing Lloyds Banking Group’s attempt to manipulate the interest rate it owed the Bank of England as part of an economic stimulus program. In other words, Lloyds took the brazen step of ripping off its primary regulator.
While Mr. Irwin doesn’t suggest his own remedy for the systemic lack of ethics in the banking industry, he puts forward remedies posited by two critics. In 2006 before the financial crisis, Justin O’Brien of Queen’s University in Belfast suggested that Wall Street needed to impose severe economic penalties for improper behavior. Since Wall Street only understands money, bonuses, and profits, Mr. O’Brien is suggesting that financial incentives can be used to promote ethical behavior. In my view, severe penalties will not change much. Banks will simply hire more accountants, lawyers, and risk managers.
Federal Judge Richard Posner has written that Wall Street has to eliminate the short-term incentives that attract people motivated by greed. He also points out that the complexity of financial laws allows many on Wall Street to act in unethical ways that don’t violate the law.
I don’t think any one change in the law or financial incentives will change the ethical behavior on Wall Street. I certainly support these types of changes and want to drive up the costs of acting improperly. The poor ethics of Wall Street is deeply imbedded in its culture, and culture is the hardest thing to change. Unless Wall Street’s clients and the public rebel, little is going to change. The last financial crisis was an opportunity to act, and we didn’t take it. I guess we’ll just have to wait for the next financial crisis and see what happens.