Last week,
a new survey was released by the University of Notre Dame, in which over 1,200 financial professionals were interviewed -- and the results aren’t pretty. For the most part, it seems like the Wall Street crowd has learned absolutely nothing from the past decade, and has actually become increasingly indifferent towards laws and regulations over the past few years.
As the stock market has boomed, the same old unethical behavior has seemingly returned to form. In asking respondents whether they believe their competitors have engaged in unethical or illegal behavior in order to gain an edge on the market, 47% said yes; up from 39% in 2012, while 23% believed their own employees had engaged in illegal activity, almost double the 12% in 2012. It was also found that about one-quarter of respondents would be willing to break insider-trading laws to make a guaranteed $10 million, as long as they knew they wouldn’t get arrested.
So, has the financial crisis taught them nothing, and is there truly no hope in creating an honest environment in the investor community?
One reason why the financial industry seems to be hopelessly destined for corruption and unethical behavior is that the industry by and large seems to attract cutthroat personalities. According to CFA Magazine, about ten percent of people working in financial services industry are psychopaths, compared to just one percent in the general population.
This is an estimate, subject to criticism, but it is not particularly surprising that Wall Street is full of these kind of personalities. As shown by certain characters in popular culture, such as Gordon Gecko and Patrick Bateman, having little remorse or emotions can be quite beneficial in the high risk-high reward environment. Former Chief Executive of Countrywide Financial, Angelo Mozilo, for example, seemed to represent this uncaring behavior perfectly. Internal emails show that he viewed his companies loan products as “poison,” and said that he had “never seen a more toxic (product).” But this didn’t stop his company from selling these toxic products, until it lead to disaster. In an interview with Bloomberg last year, he seemed to have completely forgotten about his misdeeds, and blamed it on the world (while referring to himself in the third person):
“Countrywide didn’t change. I didn’t change. The world changed...No, no, no, we didn’t do anything wrong...Countrywide or Mozilo didn’t cause any of that.”
When it comes down to it, however, this kind of behavior seems to be a direct result of incompetent regulators and slap on the wrist punishments handed down by the law. Indeed, in the Notre Dame survey, it was also found that 39% of respondents think law enforcement and regulators are ineffective at detecting and prosecuting securities violations. So why not break the law if you know you won’t get caught, or if you do, it will probably just result in a fine.
One of the major problems is the sheer complexity of modern finance and the limited resources of the regulators. The SEC’s budget is around $1.5 billion, while America’s largest bank, JP Morgan Chase had nearly $100 billion in revenue last year. The big banks have endless resources and tend to always be one step ahead of the regulators. And when the regulators do catch up, the banks simply create new financial products to get past regulations. Financial institutions have a great deal of tolerance for complexity, while the regulators do not. Add regulatory capture and the seemingly built in revolving door between the regulators and the regulated, and its no wonder Wall Street keeps slipping out of trouble.
Even when dealing with independent hedge funds, there is great difficulty in proving criminal acts, like insider trading. For example, there can be little doubt the Steve Cohen, whose hedge fund SAC Capital plead guilty to fraud and paid a record $1.8 billion fine in 2014, knew of the insider trading being done at his company. Cohen even received an email with insider information, but claims he did not read it; making him at the very least an incompetent executive, but more likely a careful boss keeping his distance so as to plead ignorance. Though SAC Capital plead guilty, was barred from dealing with outside money, and multiple employees went to prison, Cohen remains a free man, and his renamed hedge fund, Point 72, brought in $2.5 to 3 billion in gross profit last year.
All of this makes the goal of changing Wall Street culture for the better seem rather hopeless. This kind of ruthlessness is too rewarding in the financial industry -- an industry that does not actually create any material product, and is more or less a form of respectable gambling. It seemed like after the economy collapsed because of dangerous financial schemes, predatory lending, weak oversight, and loose monetary policies, things would change. People would learn from their mistakes. But Wall Street does not really look at the housing bubble as a mistake; after all, a lot of money was made, and thats what markets do -- go up and down. Banks were bailed out, and nobody went to prison. Even the sociopathic Angelo Mozilo, who clearly knew what his company was doing, got off with a fine of $67.5 million ($45million of it was paid by Countryside and Bank of America), even though he reportedly made over $520 million between 1999 and 2008.
The new Notre Dame survey indicates that in the years after the financial crisis, there may have been a brief cultural shift; but as it falls further into the past, the same old behavior is returning. The stock markets are breaking records, while big banks are already working at dismantling Dodd Frank regulations. Has anything really changed? Yes, the big banks are actually bigger than ever, making them too big to fail or jail.
Our regulators are still too weak, while our government is still flush with Wall Street money. Certain progressives, like Bernie Sanders and Elizabeth Warren, are aware of this -- and are fighting hard for radical change, which is what the system really needs. But Washington, by and large, is still a Wall Street government, and fears that increased regulations and government action, like higher capital requirements or big bank break-ups, will hurt the economy and global competition, are quite effective at convincing Washington to do nothing. Of course, big banks are not fans of radical change, because everything is still quite good for them. But the financial crisis should have taught us that what is good for banks is not necessarily good for the people. Clearly we have not learned this, and those on Wall Street are just taking advantage of our inaction.