THE BLOG
06/24/2011 12:48 pm ET Updated Aug 24, 2011

What Happened to Shame?

The other day, I was on my way to a special place, when on the street, a little girl, about 5 or so, came up to me with a makeshift cardboard box. I could tell it took courage for her to approach me. Wide-eyed, she asked if I would please buy a chocolate candy bar from her. I looked into the box. She had about six bars beautifully lined up. I said, "of course." Her surprised reply, "but it's two dollars" to which I responded, "that is quite alright."

It got me thinking, once again, about the true crisis behind the headlines.

When I was growing up there was shame. The proverbial "shame on you." Shame is defined as, "a painful feeling of humiliation or distress caused by the consciousness of wrong or foolish behavior."

I must have been around 7 or so when I got myself into a bit of trouble, by stealing and lying, about my sister's Kissy doll.

We had matching Kissy dolls with red-checkered dresses. The dolls made a kissing sound, like a "pop," whenever you squeezed their hands together. Curiosity took hold of me one day. I wondered how they made that sound. I embarked to explore. Didn't think at the time that a stretched out paperclip going into my doll's mouth, would make the kiss fade, but it did. I jammed the sound apparatus. She no longer kissed. I found myself at a crossroad as to what to do. Hence, a plan was soon in the making.

Dressed in a pink jumper and white turtleneck, I peeked outside the bedroom door to scope out the terrain. I looked to the right, then to the left -- the "coast was clear." I knew exactly what I was doing. A clandestine cover-up was to take place. I tippy toed slowly back into the room, like the Pink Panther, towards my sister's doll and swoosh! The surreptitious exchange took place. Half an hour later, my sister walked into the room to play with her doll; the shout "my doll's broken!" I was a sneak, and pretended to have little knowledge.

No doubt, parental intervention surfaced with a "shame on you." I confessed, but only after repeated denial, interrupted by an excruciating stare down. I was punished. With pain, I learned that integrity and trust are the basis of any relationship. Dishonesty hurts.

Don't know how anything could ever work without trust, let alone markets. Credibility in the markets hinges on trust.

I can barely keep up, can you, with all the SEC settlements, in the hundreds of millions, which "neither admit nor deny wrongdoing."

Hot off the press, the most recent -- the $200 million settlement by Morgan Keegan for:

...defrauding investors by inflating the value of mortgage-backed securities in its mortgage bond funds...

The falsification of fund values misrepresented critical information exactly when investors needed it most -- when the subprime mortgage meltdown was impacting the funds.

And, the $153.6 million settlement by JP Morgan Chase:

...that it misled investors in a complex mortgage securities transaction just as the housing market was starting to plummet...

The SEC alleges that J.P. Morgan structured and marketed a synthetic collateralized debt obligation (CDO) without informing investors that a hedge fund helped select the assets in the CDO portfolio and had a short position in more than half of those assets. As a result, the hedge fund was poised to benefit if the CDO assets it was selecting for the portfolio defaulted.

The name alone of this CDO, "Squared CDO -- 2007- I," makes me sit up and take note. Recall, not too long ago, the Goldman Sachs $550 million SEC settlement for a similar transaction (Abacus).

Whew!

Muse with me for a moment. If the role of a bank, as financial intermediary, is to flow credit through the economy, to facilitate business, where are we now? What exactly is the point of all this complex financial innovation? And, is it moving us forwards, or backwards, or are we standing still as if in circular motion? Who is benefiting? And, is making money, about making money, any which way, through any means that ones imagination and tools allow, even to the detriment of others, and on such scale?

Not only are limited resources expended to investigate the consequences, but "such" sums to restore what was lost by investors through this kind of "innovative" activity. Imagine the possibilities if energies and money had found a different use and falsehood had not taken place.

What's disturbing is the pervasiveness of bad deals, the metastasis throughout the financial system. The SEC may not have the resources to go after all the bad deals similarly structured.

How do we, then, move forward from here, how can we feel confident, how can we have faith, in a financial system within which each passing day brings yet another surprise. It's beginning to feel like this worldwide interconnected financial spider web (with hundreds of trillions in derivatives concentrated in a handful of big banks), fraught with risk, hangs low over us. Or, maybe, it's so tangled, that in dealing with this man-made creation, it brings to mind the image of a person with a bucket running from one side of the room to the next trying to contain the water before the ceiling caves in.

Take the example of Greek debt. If Greece were to default, it puts the European banking system at risk, which in turn puts the US banking system at risk. There was a time when a default was a default. In this day and age, financial institutions also write credit default derivative contracts that insure against a default. How this would all play out, in case of a Greek default, where institutions would have to make good on the contracts, is the unknown. It reminds me of AIG all over again.

Where does this put the American people -- "on the hook" if something were to go wrong for something we have little to do with. Nor did we profit in any way.

Disorder inevitably leads to waste, but it doesn't have to if we learn and make necessary changes. Anyone can come back if they've lost their way. Waste is at the center of Shakespearean tragedy. Shakespeare's tragic heroes pushed the limits, were a bit obsessive as they persisted in, and caved into, their tragic flaw. Through their actions, or omissions, they brought eventual ruin upon themselves and others.

I came across this just recently:

...I think civil penalties and bad press just are not a deterrent given the amount of money being made. The only real deterrence, the only thing that would concentrate the mind of someone at the top of Wall Street, is the possibility of going to jail. And that hasn't happened. And so, in a sense, as as one banker said to me, the financial crisis amounted to a speed bump for Wall Street.

What happened to shame?