Nathan Many on Wall Street Say It Remains Untamed MAY 18, 2015
Andrew Ross Sorkin
Wall Street has changed. But perhaps not as much as you would think.
The past several years have been filled with headline-grabbing legal settlements by financial services firms — $11 billion here, $5 billion there. Most of them involved conduct that took place before the 2008 crisis. Virtually every major Wall Street firm has pledged to redouble its efforts to instill an ethical culture. And virtually all the large firms said that if there was bad behavior, it is behind them.
Well, it isn’t.
A new report on financial professionals’ views of their industry paints a troubling picture. Rather than indicating that Wall Street has cleaned itself up, it suggests that many of the lessons of the crisis still haven’t been learned. And the mind-boggling settlement numbers, as well as stringent new rules, like the of Dodd-Frank regulatory overhaul in 2010, appear to have had little deterrent effect.
In the study, to be released Tuesday, about a third of the people who said they made more than $500,000 annually contend that they “have witnessed or have firsthand knowledge of wrongdoing in the workplace.”
Just as bad: “Nearly one in five respondents feel financial service professionals must sometimes engage in unethical or illegal activity to be successful in the current financial environment.”
One in 10 said they had directly felt pressure “to compromise ethical standards or violate the law.”
And nearly half of the high-income earners say law enforcement and regulatory authorities in their country are ineffective “in detecting, investigating and prosecuting securities violations.”
Two years ago, this column reported on an earlier version of this report. The attitudes were concerning then.
This year, the University of Notre Dame — on behalf of the law firm Labaton Sucharow — expanded its questionnaire to more than 1,200 traders, portfolio managers, investment bankers and hedge fund professionals both in the United States and Britain. Its results appear even more noteworthy today for the sheer number of individuals who continue to say the ethics of the industry remain unchanged since the crisis (a third said that, by the way).
Every report has an asterisk of some sort and this one does, too: Although it was conducted by Notre Dame and surveyed a large number of people in the industry, it was paid for by Labaton Sucharow, a firm that often represents whistle-blowers in cases against the financial services firms.
But if anything, the opinions expressed demonstrate that despite the very public campaign by the government to root out bad behavior in finance, it remains a problem that still deserves attention, notwithstanding the industry’s protestations that it has changed.
“The pattern of bad behavior did not end with the financial crisis, but continued despite the considerable public sector intervention that was necessary to stabilize the financial system,” William C. Dudley, the president of the Federal Reserve Bank of New York, said in a speech late last year on Wall Street culture. “I reject the narrative that the current state of affairs is simply the result of the actions of isolated rogue traders or a few bad actors within these firms.”
Is there something inherent to Wall Street that leads to bad behavior?
Mr. Dudley challenged the view that “risk-takers are drawn to finance like they are drawn to Formula One racing.”
But there is truth to that. Wall Street is a business of risk-taking and those who seemingly do it most successfully find that edge of the line and get as close to it as possible without crossing it.
Mr. Dudley, however, also made the case that “the degree to which an industry attracts risk-takers is not preordained, but reflects the prevailing incentives in the industry. After all, risk-takers have options. Second, and, more importantly, incentives matter even for risk-takers.”
If incentives are the problem, the perspectives suggest a dire situation. Nearly one-third of those asked “believe compensation structures or bonus plans in place at their company could incentivize employees to compromise ethics or violate the law.”
It is unfair to suggest the entire industry is a den of thieves. In many ways, Wall Street is quite different than it was before the crisis, and for the better.
Structurally, Wall Street firms carry much less risk than they did years ago. Capital requirements are significantly higher. Indeed, even the moniker “Wall Street” has shifted as the power of the big banks has diminished and the influence of asset managers has increased.
But when it comes to the ethos of the industry just as it is reaching pre-crisis levels of employment and compensation, whatever change has taken place remains an open question.
While Wall Street often takes the brunt of the criticism about culture, an extra heaping might be due those who work in the financial industry in Britain.
On virtually every question, those in Britain seem to indicate that ethics problems could be even more widespread there. “Respondents from the U.K. are either more willing to commit a crime they could get away with — or are more frank about it,” the report’s authors write.
One of the big problems, it seems, is that so few people in finance are willing to speak up and report bad actors, even after the Securities and Exchange Commission developed a whistle-blower program.
Many of those asked said they worried “their employer would likely retaliate if they reported wrongdoing in the workplace.”
And quite a few said that they had signed, or been asked to sign, a confidentiality agreement that would prohibit them from reporting illegal or unethical behavior to the authorities.
Equally disturbing was that many respondents said they would use nonpublic information to make a guaranteed $10 million, if there were no chance of getting arrested for insider trading. A quarter said they would do so. That’s up from two years ago, and it is that attitude of “getting away with it” that worries many who hope to root out problems in the industry.
“The vast majority of people are good and ethical, but they have become desensitized on Wall Street,” said Jordan A. Thomas, a partner at Labaton Sucharow.
Nathan Coplin, Deputy Director
New Rules for Global Finance
2000 M Street NW, Suite 720
Washington, DC 20036
Tel.(810) 348 3165
Fax. (202) 280-1141
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