ethics Archives - the patient investor

November 11, 2013

Ending Too Big to Fail | The Big Picture

From an address by William C. Dudley, President of the NY Fed, to the Global Economic Policy Forum, November 8, 2013:

There is evidence of deep-seated cultural and ethical failures at many large financial institutions. Whether this is due to size and complexity, bad incentives or some other issues is difficult to judge, but it is another critical problem that needs to be addressed. Tough enforcement and high penalties will certainly help focus management’s attention on this issue. But I am also hopeful that ending too big to fail and shifting the emphasis to longer-term sustainability will encourage the needed cultural shift necessary to restore public trust in the industry.

Dudley calls for increased capital requirements to reduce the risk of failure as well as more robust procedures to reduce the impact of a single large failure:

The major initiative here is the single point of entry framework for resolution proposed by the Federal Deposit Insurance Corporation. Under this framework, if a financial firm is to be resolved under Title II of the Dodd-Frank Act, the FDIC will place the top tier bank holding company into receivership and its assets will be transferred to a bridge holding company. The equity holders will be wiped out and sufficient long-term unsecured debt will be converted into equity in the new bridge company to cover any remaining losses and to ensure that the new entity is well capitalized and deemed creditworthy. Subsidiaries would continue to operate, which should limit the incentives for customers to run. By assigning losses to shareholders and unsecured creditors of the holding company and transferring sound operating subsidiaries to a new solvent entity, such a “top-down” resolution strategy should ensure continuity with respect to any critical services performed by the firm’s subsidiaries and this should help limit the magnitude of any negative externalities.

April 19, 2013

Fixing the Banking System for Good

I believe we have a crisis of values that is extremely deep…. because the regulations and legal structures need reform. I meet a lot of these people [from] Wall street on a regular basis. I’m going to put it very bluntly: I regard the moral environment as pathological…… I have never seen anything like it. These people are out to make billions of dollars and nothing should stop them from that. They have no responsibility to pay taxes. They have no responsibility to their clients. They have no responsibility to ….counterparties in transactions. They are tough, greedy, aggressive and feel absolutely out of control…… They have gamed the system to a remarkable extent. And they have a docile president, a docile White House and a docile regulatory system that absolutely can’t find its voice. It’s terrified of these companies……

Professor Jeffrey Sachs of Columbia University speaking at the “Fixing the Banking System for Good” conference on April 17, 2013.

http://youtu.be/7VOWnnEphjI

October 22, 2011

Teaching ethics

While we are on the subject of humanity (Yueyue) in China, it occurs to me that we need to teach ethics not only to the Chinese but to many on Wall Street as well. Unfortunately teaching ethics is not as easy as teaching Mathematics — there is more of a cultural/religious context — but IMO every educational system should place as much emphasis on ethics as on the hard sciences. And ethics should be a compulsory subject in most university degrees — especially business and sciences.

It is a long time since I studied ethics but have never forgotten the outstanding example set by a handful of British Quakers more than a century ago. Some of their businesses have enjoyed tremendous success and are now household names in the UK — Cadbury, Barclays, Lever — demonstrating that ethics and (long-term) success are not strange bedfellows, but go hand in hand.

Some are simple examples of altruism like the model village William Lever built in 1899 at Port Sunlight to house workers from his soap factory.

Others showed how to behave when confronted with an ethical dilemma. Cadbury had opposed the 1899-1902 Anglo-Boer War in South Africa. His biscuit factory was in dire straits and about to go under when he received a huge order to supply British troops in South Africa. He now faced a moral dilemma: either go against his principles or go out of business and lay off his workers. He resolved the conflict by accepting the order — enabling him to keep the factory afloat and his workers from losing their jobs — but on the condition that he would only cover his direct costs. He refused to take a single penny of profit on the entire contract.

There are examples of altruism, self-sacrifice and moral courage from many nations and religions. Feeding students a steady diet throughout their education would go a long way towards ensuring that our next generation of leaders, both in politics and business, show more humanity and compassion toward their fellow man.