It was the first week of college. I sat down in my business ethics class with a fresh face and unmatched enthusiasm. I had a clear plan in my head: get through four years of university to become an investment banker earning a six figure salary. Piece of cake. The professor walked in and turned on a video. “Ethics… how hard can this be, right?” I said to myself as the projector reel stuttered to a start. The first words on the screen sent a chill down my spine:“Banking: The Bane of Humanity.” That was exactly how my dream of becoming a big shot banker was turned on its head.
Investment banking has become a highly controversial subject in the 21st century, especially as the world steamrolls towards a globalized free-market economy. The official report by the Financial Crisis Inquiry Commission proves that the Financial Crisis of 2008 was not only an indicator of the functional flaws in the banking system, but also a trigger that exposed the moral lapses of powerful executives on Wall Street (The Financial Crisis Inquiry Commission 23). However, there still remain powerful advocates for the importance of banking such as the world-renowned billionaire investor, Sir Richard Branson, who “backs the investment banks to the future” and stays convincingly persistent that it is what drives the world economy and harnesses the true spirit of capitalism (Hurley). Driven by the motive to gain clarity about my potential future, I believe it is my personal responsibility to explore both sides of this argument and answer the question that plagues the minds of most finance majors around the world: is it possible to be a successful investment banker and an ethical human being?
Investment banking has not only helped the United States of America soar to dizzying heights of financial and economic success, but it has also been the propellant of globalized development for countries all across the world. As the African Business Magazine reports, top investment banks such as Goldman Sachs and JP Morgan play a pivotal role in both western countries and emerging economies such as South Africa and Kenya by providing the essential link between investors and innovative African businesses (African Business Magazine). Even Asian countries including 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). This money flow from the West to the East and back is largely made possible by investment banks and their bankers, who work tirelessly for about 14 hours each day in their cubicles on Wall Street. Thus, it seems that the investment banking industry is a ‘boon’ to mankind, rather than the “Bane of Humanity,” acting as the all-important pivot in the flow of capital, helping investors and businesses thrive, and driving the world economy to great success. Yet, the question remains: where did it all go wrong?
To answer this question, I interviewed Boston College Professor Edward J. Kane. Professor Kane, an accomplished finance professor at the Boston College 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 a highly flammable fuel, susceptible to the “sparks of corruption and fraud” (Kane). Investment banking is a field which deals with high risk decisions for each investment a banker facilitates, which can force the industry, as Professor Kane describes, “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 immensely unpredictable nature of the industry well. In his critically acclaimed article for The Guardian, 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).
While this comparison of an international industry to a casino could seem glamorized and far-fetched, John P. Watkins, in his paper on “Banking Ethics and the Goldman Rule,” says that we must understand the fundamental purpose of an investment bank before making such judgments. In the paper, published in the Journal of Economic Issues, Watkins clearly describes banking as a “peculiar capitalistic activity” and states that its sole purpose, just like any other business, is to make profit through the continuous purchase and sale of debts (Watkins 364). However, 18th century French philosopher Jean-Jacques Rousseau would beg to differ with Watkins’s ideas, and would even present a harsher critique of banking in our society. In his book the Second Discourse, Rousseau discusses how capitalistic activities such as banking have led to the “abolishment of human sympathy and natural pity” (Rousseau 169-171). He argues that banking “promotes dependency and effectively leads 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 on the large investment banks to manipulate and bet on their clients’ personal wealth, while taking little to no responsibility for the consequences of their own actions (Watkins 370). Professor Kane explains that banks can get away with this unacceptable behavior only through government bailouts, or, as he likes to call them, “protection rackets that promote theft by safety-nets” (Kane). He explains that bailouts are huge payoffs funded by taxpayers’ money that the 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 their private business operations, but the bailouts can also eliminate any accountability which would force them to pay their clients back if they were to liquidate. On the contrary, the same 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 which exists, as banks demand responsibility in form of collateral from borrowers, but refuse to take liability for their investors. Therefore, while Watkins may argue that the concept of banking was considered inherently immoral from the medieval times, where religious philosophy branded interest as a “sin punishable by eternal damnation,” it seems that in modern society the unfairly-overpowered banks have a plethora of additional opportunities to exploit their borrowers, investors, and the tax-payers in the economy (364).
Now, even though the idea of profit-driven investment banks may have sent 13th century philosophers into a cold sweat, today’s practical generation would not think twice about keeping collateral, let alone charging interest. 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 your personal safety appears to be a sensible prerequisite for survival in the profit-dependent capitalistic society (Kane). Professor Kane even disagrees with Rousseau’s anti-capitalistic 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” (Kane). Subsequently, his focus on the individual banker’s fault is reflected in the findings of a 2015 survey done by Labaton Sucharow. The survey on the UK and US’s financial service sectors shows that about 27% of investment bankers believe that their industry doesn’t prioritizes their clients’ interests and about a whopping 47% believe that their competitors have used illegal and unethical practices to gain an upper hand in the market (University of Notre Dame and Labaton Sucharow 3). Evidently, it appears that it is this casual and alarming attitude towards basic ethical and moral values that gives the investment banking industry a tainted reputation and leads to multiple financial scandals and frauds each year.
Although it seems that the lack of awareness of philosophical concepts might explain an investment banker’s unethical inclinations, it is also important to consider the role of large investment banks that nurture the immoral practices of their profit-hungry employees. To do this, Watkins notes it is imperative to analyze the Goldman Rule which had been the guiding philosophy of most of the big banks up until the Financial Crisis of 2008 (Watkins 364). Watkins explains 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 the society. You may think, “So what? It’s the same thing, banks love profits.” However, what must be realized is that this rule promoted reckless and irresponsible behavior by banks whose only priority became profit even over the economy’s interests and long term sustainability. Thus, in the industry’s back offices, where profits become the portal to big paychecks and bonuses, the industry’s code of ethics is frequently sacrificed in preference to a code of relentless, material growth.
While it seems that there is no place for moral consideration for society in investment banking’s profit driven world, the true extent of the horrifying immorality of big-shot bankers and CEOs was exposed in the fallout of the Financial Crisis (Schoen 816). In Edwards Schoen’s investigation for the Journal of Business Ethics, he describes how, during the Financial Crisis, while intentionally selling worthless mortgage-backed securities to their clients, big banks like Lehman Brothers, Merrill Lynch, and Goldman Sachs also bet against their clients’ ability to pay back these securities (with full knowledge that the clients would inevitably fail to do so). As if this was not bad enough, these banks, by handing out securities which the executives of Lehman Brothers referred to as “toxic waste and goat poo,” depleted their own liquidity to an alarming average of 3% , while 97% of their assets depended on their client’s bank accounts (Schoen 810; Humer).
But why did the bankers put their job in danger in the first place? To that, Schoen simply answers: “Billions of dollars in compensation.” He argues that due to these inflated compensation packs and lack of accountability, the banks only encouraged their bankers to be unethical, risky, and destructive in the long-run. While these compensation packs were funded by their clients’ bank accounts, the institutions themselves were bailed out of liquidation by the government who replenished the banks’ reserves using the tax-payers’ money (Schoen 814-15). Thus, on September 15, 2008, when the financial bubble burst and left millions of people homeless, the CEOs of Goldman Sachs and Lehman Brothers walked out of their office with a cumulative $500 million dollars of “compensation fee” in their pockets (815).
Watkins and Schoen agree with each other. Even though the banking industry’s long term philosophy and operational structure need to be reformed, the US government bailouts are also in dire need of corrections (Watkins 370; Schoen 815). Curtis C. Verschoor, in agreement with these ideas, attempts to present a solution to the problem in his article for Strategic Finance: The giant, widely diversified financial services firms such as Citigroup have a competitive advantage by being able to borrow in the marketplace at more favorable rates because lenders know that debt repayment is guaranteed by the Government. In stark contrast, the public should rather have the confidence that giant financial firms can never again take so much risk that they might need taxpayer bailouts. (Verschoor 18) Verschoor makes it clear that the banks that are dependent on government bailouts act recklessly and mismanage their funds. Therefore, echoing Schoen’s idea, he proposes that banks should have a separate and unbiased regulatory committee to guide them back on track and correct their misdemeanors in the market in the short run (Verschoor 61; Schoen 828).
In order to make a difference, society must focus on instilling ethical and moral principles in children from a young age. Professor Kane suggests that this can be done by requiring investment bankers and students of subjects like finance and economics to study philosophy, particularly Kant’s “objective, non-theological reason for not hurting other people.” By doing this, he believes that we can create bankers who are “not afraid to look at profit as a secondary objective and who can prevent their moral code from crumbling in pressure situations.” Finally, as a student, it was reassuring to understand that the strength of my ethical code is dependent only on my own resolve in testing situations. Analyzing this long-standing question through different perspectives of the economy, the industry, and the individual, has also given me the confidence to go into each interview smiling about a potential future that I know only I can control. Thus, I can now say with renewed hope and fervor: it is possible to be an ethical human being and a successful investment banker at the same time.
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.
Cable, Vince. “The Storm … How to Survive it (and How to Prevent its Return).” The Guardian 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.
Hurley, James. “Richard Branson Backs ‘Bank to the Future’.” The Telegraph 12 Aug. 2014. Web. www.telegraph.co.uk/finance/businessclub/9474501/Richard-Branson-backs-Bank-to-the-Future.html. 12 Oct. 2018.
Kane, Edward J. Personal Interview. 28 Sept. 2018.
Rousseau, Jean-Jacques. The Discourses and Other Early Political Writings. Ed. Victor Gourevitch. 1. Vol. 1. Cambridge UP, 1754, 169-171. Print. 20 Sept. 2018.
Schoen, Edward. “The 2007-2009 Financial Crisis: An Erosion of Ethics: A Case Study.” Journal of Business Ethics 4 (2016): 805-830. SpringerLink. Web. 23 Sept. 2018.
The Financial Crisis Inquiry Commission. The Financial Crisis Inquiry Report: 23. Government Report. US Government. Washington D.C.: Superintendent of Documents, 2011. Document. 24 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.
Verschoor, Curtis C. “Taxpayers Need to Shout: Enough Bank Bailouts!” Strategic Finance (2010): 18, 61 .Business Source Complete. Web. 25 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.