Posts Categorized: Banking ethics
Back to Basics
July 30 2019
Ever since the financial crisis started there has been a plethora of explanations about why traders and bankers behaved as they did. Some have been purely descriptive: what happened and when, allowing us to marvel at the folly of it all, at least in hindsight. At the time these clever financiers were praised by pretty much everyone from Chancellors down. There were very few pointing out at the time that the Emperor had no clothes.
But increasingly there have been attempts to use the insights gleaned from other disciplines to explain why what happened in the way it did. The latest neuroscientific findings were used to describe the biology of boom and bust (The Hour Between Dog and Wolf, for instance). Behavioural economics has had its say, as has nudge theory. Rather than nudging people to behave well, all the payment and reward incentives nudged financiers into doing what suited them financially irrespective of the effect on the customer and no matter what the expressed good intentions of the firm were. Goodness! Whoever could have predicted that, without a theory to explain it.
Psychologists have had their say, of course, though only a cynic might wonder about how much actual knowledge about the realities of life in the financial sector they have. No matter: all could opine merrily on the importance of culture in finance and on all the wonderful insights that these disciplines could bring to those seeking to manage and regulate the financial sector.
And now the anthropologists have got in on the act, as in this article by Gillian Tett. In it she points out how anthropologists have tried to analyse the cultural patterns, the rituals and symbols, even the words people use in finance to understand what was going on under the surface. In truth, the insights brought by anthropologists (at least as described here) are pretty obvious rather than thought-provoking; the article does not need them to be worth reading.
What is interesting, though, is how commentators on finance and perhaps also regulators are, perhaps unconsciously, making the same mistake as many of those traders and bankers. They are over-complicating, coming up with all sorts of theories and hypotheses apparently grounded in science or other social studies, described and interpreted by experts, using technical language to describe common human behaviours. Just as too many traders developed over-complicated products which they only half-understood and managers kidded themselves into believing that they had found a foolproof solution to valuation or risk management or any of the other difficult tasks they had, so there is a risk of developing overly complex explanations for why so many people behaved so stupidly or worse. The risk is that the more complex the explanation, the more people feel that it is all too difficult really to do anything about it or that this is something best left to the culture specialists, psychologists and other “ologists“.
Keep it simple might be the motto. In the end, by whatever means the conclusions are reached, what everyone in finance needs to remember is this:-
- Trust is at the heart of finance.
- Everyone in a financial institution is, in one way or another, managing risk. There is no such thing as a risk-free product or institution. Or, indeed, individual. Understanding the risk you are running and managing it properly is what every bank, every employee in a bank, every customer of a bank, every shareholder in a bank, every investor in a financial product and every regulator of a bank is doing. Or ought to be doing.
- Understanding properly is hard work. There is no magic bullet, algorithm, theory, process, spreadsheet, AI or killer piece of management information which will do it for you. Thinking is often required.
- There is no way of eliminating risk. Mitigating and minimising it: yes. Eliminating it: no. If anyone says otherwise (and much of the financial crisis was caused as a result of clever people thinking they had done just this and learning, painfully, that they hadn’t) they’re a charlatan or worse.
- Human beings, even clever ones (particularly them, it sometimes seems) do not behave rationally around money. Money and emotions are bosom pals. As any decent novelist or lawyer dealing with divorces or wills will tell you. The “animal spirits” Keynes described do not just apply to market participants but to all of us.
- Managing people, understanding them, motivating them, inspiring and leading them, teaching them, setting them a good example, setting them high expectations and making it clear what the boundaries are, what behaviour will not be accepted, what crosses the line, helping them get past their frailties, working effectively with them is hard work, the hardest work anyone ever has to do. And by far the most valuable – and rewarding.
- Finance is there to serve others, not itself. It is a means to an end and the moment it (and the people in it) start thinking of themselves as indispensable, as set apart from the society they are part of, as entitled to special consideration and immunity from challenge is the moment when hubris sets in. Nemesis will surely follow.
Here We Go Again
February 28 2019
One of the financial sector’s characteristics is a short memory. After about 5-7 years memories, particularly of tough times, begin to fade. New joiners bring their enthusiasm and keenness to do new deals, develop new structures, explore new possibilities. Blockchains, ever more complex algorithms, AI, new paradigms: all are being created and expanded. The future’s exciting. So the surfeit of scandals which came to light following the financial crisis a decade ago are beginning to sound like stories from a forgotten age, interesting but no longer really relevant to now, let alone the bright new future.
And then, from the other side of the world, comes this – a searing report (a Royal Commission, no less) into misbehaviour in Australian banks, to remind us, once again, that – in the words of an official with the US’s Financial Crimes Enforcement Network back in 2013 – “large amounts of money sometimes bring out the worst in people.”
(As an Australian might put it: “You don’t say!”)
The report followed a year-long public inquiry into the culture and practices within Australian banking and revealed shocking, widespread and systemic examples of the sort of misbehaviour with which we have become so familiar.
- Rewards for misconduct: the focus of all the institutions, whether banks, mortgage brokers, insurance firms, intermediaries was on selling, as much as possible for as high a fee as possible, regardless whether this was in the customer’s best interests. In some cases, non-existent services were provided to dead people for years.
- It will come as no surprise that this arose from badly skewed incentives. Or greed, of both the individuals and the institutions, as the Report says, bluntly and refreshingly.
- Firms abused their superior knowledge to mislead and defraud customers. Conflicts of interest were ignored. Individuals did what they could not what they should.
- When customers complained, staff were trained to lie to them, even when compensation was paid; deliberate actions were conveniently and misleadingly described as an “administrative error”.
- Firms lied to and misled regulators, often for years on end. Nor were these the actions of junior staff but of senior management who felt no compunction about noting down in internal correspondence how to keep information from regulators and prevent any proper scrutiny of their actions.
- Regulators were weak and did not hold those who misbehaved to account, even when they became aware of them.
500 pages set out in blistering detail a sorry tale of greed, fraud, lies, poor leadership, contempt for customers and a systematically rotten culture. The usual action is, of course, now being taken: resignations, new leadership, building a good culture, training, new legislation, enforcement, litigation and so forth.
Two points in particular are worth noting:
- These scandals did not happen in investment banking but in retail institutions, those dealing every day with ordinary consumers, the very people who need trustworthy and reliable financial services, who had a right to trust their providers and who were so badly let down.
- The banking sector in Australia is one of the most profitable in the world: 2.9% of Australia’s GDP. Compare this to the US share of 1.2% and 0.9% in the UK. The pre-tax profits of Australia’s banks are 6thin the world even though it is only the world’s 13th largest economy and its population only 25 million. Little wonder that they thought they could do no wrong.
When sectors / institutions start thinking of themselves as indispensable (“look at our profits, our tax revenues”), when finance forgets that it is a service industry, there to serve others not itself, when banking is seen as a product to be sold rather than as a long-term relationship to be nurtured, then hubris and the sorts of behaviours seen in Australia, as well as elsewhere, will happen.
The Australian report is a salutary reminder that the old stories still have much to teach us.
December 31 2018
2018 has been a year for anniversaries, September bringing forth a slew of articles about the financial crash 10 years on and a number of books by learned professors (to add to the ones already written about the fall of individual institutions) seeking to make sense of it all. See, for instance, Adam Tooze’s “Crashed: How a Decade of Financial Crises Changed the World”.
But despite the colourful characters, scandalous activities and stories aplenty, it is curious that in the last decade novelists and playwrights have largely shied away from writing about the world of finance. It is an odd omission. 19th century writers were much less shy: see William Thackeray’s Vanity Fair with its wonderfully sardonic and cynical and oh so apposite to our times take on a world where “everyone is striving for what is not worth having“. Or Balzac with his tales of how money – having it, not having it, wanting more of it – corrodes personal relationships. And not forgetting our very own Dickens, whose every novel is stuffed with characters for whom debt was an ever-present – and often malign – reality. Mr Micawber stands as an object lesson to those who think that living beyond your means indefinitely is sustainable.
There have been a few attempts to make a drama out of a crisis: Caryl Churchill’s expletive-ridden “Serious Money”, written in 1987, just after an earlier stock market crash (and featuring the International Tin Council litigation, the very first case I was involved in as a junior solicitor) was one of the earliest. Not a play likely to feature in the repertoire of amateur dramatic societies, given its colourful language.
A few years later “Capital City” was a TV series based on the lives and loves of City traders in the late 1980’s when Britain learnt to fall in love with making Loadsamoney, as much and as fast as possible and with precious few scruples about how it was done. This was the era of the Guinness affair and Robert Maxwell and BCCI. Enough larger than life characters and juicy stories and morality tales there for even the most mathematically challenged writer. But even that great State of the Nation playwright, David Hare, whose plays in the 1990’s: “Pravda” (journalism), “Racing Demon” (the Church of England), “Murmuring Judges” (the law) and “The Absence of War” (the Labour Party) sought to take the moral temperature of contemporary Britain and its institutions, ignored the tumultuous changes in the world of finance and how they were changing British society more radically than even the most provocative newspaper or campaigning politician.
Lucy Prebble’s “Enron” in 2009 succeeded in London but failed in NY. More recently, the BBC’s McMafia series focused on Russian money laundering. John Lanchester’s 2012 novel, “Capital”, was set around the time of the 2008 crash but mainly showed the mysterious alchemy whereby ordinary London homes turned into money-making machines for those lucky enough to acquire them when they were, well, just houses. Sebastian Faulks’s “A Week in December” from 2009 had as one of its main characters someone rumoured to have been based on a well-known – and once successful – trader and featured a naive junior FSA regulator (the resemblance being purely coincidental in the latter case, one assumes). But whatever the books’ other merits, the characterisation of the bankers, traders and regulators was cartoonish and one-dimensional.
Lanchester’s “Whoops: Why Everyone Owes Everyone and No One Can Pay” was a better attempt to understand the mysterious world of finance. As was the US documentary “Inside Job”. Maybe only Michael Lewis has been able to present the human stories present in the financial world in a way which feels like fiction. Perhaps the dramatisation of real life events (“The Big Short” and Massini’s “The Lehman Trilogy”) is the only way to make sense of this world. Perhaps.
It is too easy to think that no-one will understand – or care – about the technicalities and complexities and arcane language of modern finance, let alone about the people whose lives revolve around it. A pity if so. It is not the numbers which matter but the instincts, proclivities and emotions – what Keynes called “animal spirits” – which determine what people do. There is little that is more emotional than people’s behaviour around money.
If the range of human behaviour on show in the run up to, during and after any financial scandal is not a subject for writers, it is hard to know what is. All human life is there, after all.