The financial reform act that was signed into law this week -- while imperfect -- represents an important first step in attempting to preclude or mitigate future financial collapses. But increased regulation and oversight alone will be insufficient to prevent a recurrence of the recent financial crisis.
The causes of the collapse are no secret. While it is often claimed that "victory has a thousand fathers, but defeat is an orphan," the defeat suffered by investors in our devastating financial crisis seems to have, figuratively speaking, a thousand fathers. The Federal Reserve kept interest rates too low for too long after the 2000-2002 stock market crash, and failed to impose discipline on mortgage bankers. Not only did our commercial and investment banks design and sell trillions of dollars worth of incredibly complex and risky mortgage-backed bonds and tens of trillions of dollars worth of derivatives (largely credit default swamps) based upon those bonds, they were also left holding the bag, with many of these toxic derivatives held on balance sheets that were highly leveraged -- sometimes by as much as 33 to one or more. Just do the math; a mere three percent decline in asset value wipes out 100 percent of shareholder equity.
These institutions also brought us "securitization," selling off loans as the backing for untested financial instruments, and severing the traditional link between borrower and lender. With that change, the incentive to demand credit-worthiness on the part of those who borrow almost vanished as banks lent the money, only to sell the loans to the creators of these new financial instruments. In banking, we've come a long, long way from community lending built on the financial probity and the character of the borrower, the kind of thing that we saw in It's a Wonderful Life.
Our market regulators, too, have a lot to answer for: The Securities & Exchange Commission was almost apathetic in its failure to recognize what was happening in the capital markets. The Commodity Futures Trading Commission (CFTC) allowed the trading and valuation of derivatives to proceed opaquely, without demanding the sunlight of full disclosure, and without concern for the ability of the counterparties to meet their financial obligations if their bets went sour.
And let's not forget Congress, which passed responsibility for regulation of the derivatives market to the CFTC almost as an afterthought. Congress also allowed -- indeed encouraged -- risk-taking by our government-sponsored (now essentially government-owned) enterprises -- Fannie Mae and Freddie Mac -- enabling them to expand far beyond the capacity of their capital, and pushing them to lower their lending standards. Congress also gutted the Glass-Steagall Act of 1933, which had separated traditional deposit banking from the riskier business of investment banking, a separation that for more than 60 years well-served our national interest.
Our professional security analysts also have much to answer for, especially in their almost universal failure to recognize the huge credit risks assumed by a new breed of bankers, who were far more interested in earnings growth for their institutions than in the sanctity of their balance sheets. So do our credit rating agencies, for bestowing AAA ratings on securitized loans in return for enormous fees--handsomely paid in return by the very issuers who demanded those ratings, allowing what proved to be largely junk bonds to be marketed as high-quality securities. (Yes, it's called conflict of interest.)
An Ethical Crisis
But there is yet another factor underlying this crisis that is the broadest of all, pervasive throughout our society today. It was well expressed in a letter I received from a Vanguard shareholder who described the global financial crisis as "a crisis of ethic proportions." Substituting "ethic" for "epic" is a fine turn of phrase, and it accurately places a heavy responsibility for the meltdown on a broad deterioration in our society's traditional ethical standards.
Commerce, business, and finance have hardly been exempt from this trend. Relying on Adam Smith's "invisible hand," we have depended on the marketplace and competition to create prosperity and well-being. But self-interest got out of hand. It created a "bottom-line" society in which success is measured in monetary terms. Dollars became the coin of the new realm. Unchecked market forces overwhelmed traditional standards of professional conduct, developed over centuries.
The result has been a shift from moral absolutism to moral relativism. We've moved from a society in which "there are some things that one simply does not do" to one in which "if everyone else is doing it, I can too." Business ethics and professional standards have been lost in the shuffle. The driving force of any profession includes not only the special knowledge, skills and standards that it demands, but the duty to serve responsibly, selflessly and wisely, and to establish an inherently ethical relationship between professionals and society. The old notion of trusting and being trusted -- which once was not only the accepted standard of business conduct, but the key to success -- came to be seen as a quaint relic of an era long gone. Somehow, our society must be spurred into action to return to that standard.
Until it is, I fear that a repeat of our recent meltdown is not just possible, but probable, for there's no end to the ways that motivated individuals can get around even the most stringent regulations. True reform of our financial markets will not be found until our nation's financial professionals turn their focus away from the salesmanship that produced so much of the excess of the recent era, and embrace the stewardship that their profession demands. Such a change cannot happen soon enough.
This essay has been adapted from the Author's Note of Enough: True Measures of Money, Business, and Life.
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In the early 20th century, the Left demanded that we reject capitalism in the name of progress. Embrace "scientific" socialism, it said, and prosperity will ensue. This delusion could not be maintained.
Faced with the ever-rising living standards in the more capitalist countries, from the United States to West Germany to Asia, and with the ever-increasing misery and even death in the more socialist countries, from Soviet Russia to East Germany to North Korea, the Left had a choice. Either reevaluate the path to progress and become a champion of capitalism, or continue attacking capitalism knowing full well that it is the only means to prosperity.
The Left chose the latter
I don't know for sure, however, if it is the case that they indeed do, then it appears there is very little hope of returning to: " The old notion of trusting and being trusted "
That made sense 75 years ago, when a relatively small number of corporations -- oil and coal companies, steel producers, car makers -- controlled a vast segment of the work force and when government was a comparatively anemic enterprise. In recent decades, however, as technology has reshaped the economy, more and more Americans have gone to work for smaller or more decentralized employers, or even for themselves, while government has exploded in size and influence.
the white collar white upper class is being taken off the air - the service businesses they provided since 1975 and keeping up the GNP growth curve in building their businesses and wealth and belief in the participation in the great republican fraud of "freedom and self responsibility" - nor longer have the volume and margins they need to survive with their businesses - so they all are sliding down the economic scale to join the blue collar workers out of the system more than 20 years ago and the while collar middle managment being let go by the thousands every day - the system is set up for the uber-rich - anyone under $3 million a year income is headed for the cellar sooner or later - via more taxes and higher costs and less jobs for their kids and less returns on their money.
The republicans next will seize on the public desperation and promote lower taxes and less regulations being the immediate answer - more trickle down economics propaganda -
the romans and the communists did the same in their own ways - they both smelled that their respective civilizations were
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No! As long as we keep giving CEOs and CFO and board members the big bonuses now .... for profits .... at whatever costs later.
Answer to above will be "Yes" only after we throw more of the top echelon crooks and robbers (mentioned above) into common prison jails.
W here I worked, we were part of a large company but our plant had only about 120 employees. The plant manager knew everyone by name.
It is much harder to fire "Fred" than to downsize 5% of "workforce". It is also harder to be a jerk or steal(talking employees now) if you think you're screwing Mr. B. instead of the "suit" in the front office and making him look bad to company.
Then about the late 80s , you started to hear about being "lean and mean" to be competative-plant managers started being rotated between plants every few years and we became just another expence on the books to be bought at the cheapest price possible.
Most of this new thinkon ofing seemed to come after a couple of mergers, when the top management came with degrees in accounting and business instead of chemistry or engineering ( WE WERE A CHEM. PLANT).
They didn't care what we made, it was units of production not chems. and had no idea how we made it! They just wanted it faster, cheaper and more proffitable this quarter. The only question was how to improve the bottom line- quality, safety, research were all cut back.
My generation of employees usually worked 20-30+ years at this plant--now the average is 5 years.
Now it is "We will do it because they can't/won't prosecute".
Ethics is so far under the bridge that I can't see it being revived, and there is no shame at the highest level in cheating and stealing. Look at Joe Naccio, no shame there.
There must be a heavy price for neglience, willful or otherwise.
Many people walked away from Freddie and Fannie with $$millions in their pockets.
Until this is throughly and unbiasly investigated.....
and ALL guilty individuals required to forfeit illgotten gains and serve time....
We're not sincere and this/their behavior will continue. No witch hunts, but make examples of them
Nice piece. Thanks for the cute words describing White Collar Crimes.
Having said that, the loss of Ethics in Society was inevitable, was’nt it? Trickle down effect and all that??
Attitudes in our Corporate/Political arenas these past Decades demonstrate a clear lack of good working Consciences.
There are indeed: "some things that one simply does not do" and the place to start if we would like a return to “standards of professional conduct, developed over centuries.” would be with the use of the words - Human Resources. For one.
We all know words matter. The pen is mightier than the sword and all.... So it follows that being thought of, referred to as such, there’d be no thought of Ethics for a resource, right....?
But People, are not and were not born to be Resources. Things. Inanimate Objects. To be used. And discarded after use or after usefulness.
Business must go back to the proper - Personnel - Or another agreed upon Respectful term.
How strange that Everyone bought into such a disrespectful label and in the 20th Century no less. This needs a change for Attitudes to change and Ethics to return.
One cannot be a good Steward, “serve responsibly” & “embrace the stewardship that their profession demands” without showing proper Respect for the Lives of Those that serve one, yes....??
Perception of Respect is not Respect. That's Conflict Creation 101....
Yes, guess "less 'personal' " is probably exactly what was intended.... Dont know much about Unions, will look that up, thanks.
:)
Take care
:)