December 1, 2014
Institutionalized Cultural Greed:
A trait that is hard to change
- Bad behavior continues
- Anger of the masses
- A culture built on greed
- Are there solutions?
The first financial scandal that I witnessed brought down Drexel Burnham Lambert and put its’ superstar trader, Michael Milken, behind bars. I was sitting at a trading desk at the time and I will never forget what my boss said on that fateful day. “Drexel is going down; let’s suck the marrow from their bones”. You see, Drexel had many positions on with the firm that I worked for and they had to close them out directly with us. My firm profited handsomely.
In 1991, I found myself in the epicenter of a scandal as I sat on and ran a precious metals trading desk in the football field sized fixed-income trading room at Salomon Brothers. Paul Mozer, the head US government bond trader, decided to rig government auctions for US bonds. His actions put him in jail and put the venerated investment bank, out of business, as I knew it. In that situation, the rest of the market sought to suck the marrow out of MY bones.
Financial scandals are nothing new. There were plenty in the past and there promises to be many in the future- if we do not understand and seek to address the root causes. In 2008, a financial scandal put Lehman Brothers and Bear Stearns, both financial powerhouses, out of business. Those scandals forced regulators and politicians to act. Regulatory agencies like the SEC and CFTC received new powers. The Dodd-Frank Consumer Protection and Wall Street Reform Act set out copious new rules for markets.
Bad behavior continues
The press and legislators spend a great deal of time these days highlighting bad behavior by business, particularly financial institutions. Most recently, all but one of the US banks have abandoned the physical commodities business. A recent Senate subcommittee headed by retiring Senator Carl Levin “found substantial evidence that these activities exposed major banks to catastrophic risks that are poorly understood. They are raising costs and uncertainty for end users of commodities, which hurts American manufacturers and consumers”. I took Senator Levin to task in an article published on Seeking Alpha on November 24, A Message to Senator Levin: Your Swan Song is a Tragic Miscalculation. My point being that chasing the physical commodities business offshore into the hands of manipulators not under the US regulatory or tax umbrella did nothing to correct the problems and actually creates issues that are potentially worse.
Bad behavior continues in the financial markets, it has always been there and possibly always will. In order to properly address the problem and find a solution one must understand what the problem is and where it comes from. I would argue that the problem is one of institutionalized greed sewn into the very fabric of the stock market itself.
Anger of the masses
People are angry. The financial crisis of 2008 pitted Wall Street against Main Street. Conventional wisdom painted traders, brokers, financial analysts and other highly paid Wall Street employees and managers as evil.
When I first started as a trader, I experienced this anger in the mid 1980s early in my career. A family member had finished his residency and internship to become a surgeon. We were both around the same age. I spent the time working my way up the ladder at a Wall Street institution. By the time we were 30 I was making a lot of money while my relative, the physician, struggled with school loans and the limited income a new medical professional earns. On more than one occasion he made commented to me, “I spent years in college, medical school, in residency and internship killing myself borrowing a fortune and now you, who went right out of college to Wall Street earn many multiples of what I earn. That is not fair”. I did not pay him much mind in those days and wrote it off to jealousy but as I reflect back on those comments, today I realize that his arguments had some relevance. As do the arguments of those who avec that Wall Street and banking professionals shuffle paper to make money out of money while the rest of society creates things, serves people or makes a tangible contribution to create a greater society. These controversies are the basis for anger at Wall Street, which seems to intensify when there are financial collapses or bad behavior is exposed.
A culture based on greed
Banking, finance, trading and other Wall Street disciplines are deeply rooted in a culture of greed. The reward, the spoils the chief motivating factor for anyone in the business is money. One of my bosses used to say, “We all rise to the level of our own poverty”. How very true, the more earned the more the hunger to earn more. That culture keeps the money machine well oiled and moving forward creating more and more profits.
I remember the comments of another boss, later in my career, who told me he interviewed a trader for a job. The person had lost $50 million at his last shop and I thought to myself that is scary a person that could sink a company. My boss looked at it a different way, “anyone who can lose $50 million can make $50 million- this guy is a risk taker”. That says a lot about the culture of Wall Street and its orientation to risk.
The culture in the world of finance has always had greed deeply ingrained its roots. Paul Mozer who took down Salomon Brothers did so because he was competing with others at the firm who were getting $20 million bonuses. Although the amount of profits that had to be generated in Mozer’s government bond business necessary to receive that kind of payout were not available under normal conditions, the culture pressed the trader to make more and more. Management each year increased his annual profit budget. He had to struggle to meet and exceed the minimum. Eventually Mozer decided to, as he probably thought of it at the time; bend the rules to achieve the company’s and his own financial objectives. The question becomes- was Mozer the criminal or was the organization given such high expectations?
There are so many more examples of bad behavior however; the root of choices made by all protagonists is virtually the same. Shareholders buy company stock to invest in future success. Management’s number one objective is to increase shareholder value. Each company issues a report card each quarter called earnings. If earnings targets are not met the price of a stock declines, a punishment for the company. If exceeded the price of a stock appreciates, a reward for the company. Therefore, management has adopted a policy of focusing on performance on a quarter-to-quarter or at the longest on an annual basis. Overall corporate performance filters down to each cog in the wheel. In the world of Wall Street, the individual players in profit making roles receive pressure from management, shareholders and the market itself to perform on a consistent and increasingly profitable basis.
Therefore, it is the very culture of Wall Street, and all business by extension, that breeds the greed that so angers the outside public who observes the excesses and is exposed to bad behavior by virtue of the media.
Are there any solutions
It would be easier to deal with the greed in markets; whether equity, fixed income, foreign currency or commodities, if laws and ethics were homogenous across the globe. This is not the case. For example, China deals with greed and bad behavior in one of two ways. It is either summarily ignored or in other cases convicted parties receive long prison sentences or the death penalty.
The challenge for America is to lead but at the same time to preserve the institutions that raise capital, provide liquidity and support businesses not only in the US but also around the world. It is in the strategic national interest of our country to uncover solutions and keep businesses within US borders. The problem with many of the recent solutions is that they have been reactive rather than proactive in nature. This results in business, which tends to be flexible and search for the most favorable jurisdiction in which to operate, moving away from US shores to avoid both US regulation and US taxation. When this happens, America loses on both counts, the US loses control and revenue flows. Another potential result of reactive legislation is that it handcuffs US business making it less competitive on the international playing field.
The solution lies in a proactive approach that fosters a partnership between Wall Street and Main Street. Henry Clay, a skilled orator who represented Kentucky in the House of Representatives and the Senate during mid 1800’s, was the Great Compromiser. Clay served three terms as Speaker of the House, was Secretary of State and unsuccessfully ran for President on three occasions. Clay said that the perfect compromise was one where both parties left the table unhappy. At this time in our history, Wall Street and Main Street are in need of a great compromise and America is in need of a great leader who can create and foster a proactive approach to the problem of institutionalized cultural greed.
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