Investment Banking Ethics and Grey Areas

The term “investment banker” has a very strong negative connotation in American society, especially in the aftermath of “The Great Recession”. They are often characterized as greedy and selfish individuals whose sole purpose is to make money at the expense of others. The public typically blames the personal traits of bankers for the scandals that make headlines. While it is certainly true that the actions of investment bankers played a huge part in the latest financial meltdown, is it possible that these scandals are caused by the huge amounts of “grey areas” that there are within the industry and the hyper-competitive cultures at firms as much as the personality traits of the individual bankers?

The list of financial scandals that have come out over the past several years is pretty long. Many of these scandals, such as the LIBOR scandal, have real world implications not only for the finance industry but also average Americans. Many of these scandals are partly the result of the huge amounts of “grey areas” within the industry. In other words, while there are a lot of regulations in finance there are just as many creative ways to get around those regulations. When new products or methods are created the regulation of those products and methods often lags behind. An example of this was the credit default swaps that played a huge part in the most recent financial crisis. Investment bankers created a new product and few truly understood what the implications of this new product were. Regulation lagged behind the creation of new products and the industry paid for it. While often these new products were thought of due to the desire of bankers to make their firm, and subsequently themselves, richer, ingenuity is overall a good thing. Even credit default swaps, which were essentially a ticking time bomb that lead to the financial crisis, have some good. When risks and information are conveyed accurately between parties they can successfully transfer risk from one party to another at a fair price. This is a useful instrument for companies or organizations that do not have the financial assets to back their own financial risks and companies willing to take on the risk. Ingenuity in finance, like any industry, brings risks and rewards. It can create useful products not previously thought of, but there need to be ways to mitigate as much of the “grey area” that comes with it as possible.

In a recent scandal in the UK, former UBS trader Kweku Adoboli is accused of the largest unauthorized trading loss in the country’s history. At a first look this story seems like a classic episode of a greedy trader making unauthorized trades for his or her own profit. According to Mr. Adoboli however, it is more a story of the pressure of a highly competitive job in an increasingly desperate time. Adoboli is accused of booking fake trades to hedge against the risk of real trades costing his employer UBS around $2.3 billion is losses. He plead not guilty to the charges of false accounting and fraud that were brought against him in September of 2011. In his court appearance he put the focus not on his desire to make money but instead on the pressures of his job. Adoboli pointed to 16 hour work days, weeks without seeing family, and the fact that “unwinding” positions as he did was part of the culture of the firm as reasons he is not guilty. He argues that multiple people not only taught him how to do the procedure, but at least knew about the procedure and never said a negative thing about it. It was part of the high pressure culture of the firm to cover up large risks by booking fake trades. Adoboli’s account is interesting because it is one of many examples where bankers undertake actions that are certainly at least in the “grey area” of legality, but instead of doing it for personal financial gain they do it instead for, what they think is, the benefit of the firm. From what is known about the case Adoboli’s actions in no way benefited himself financially. Although certainly immoral and probably illegal, there are many cases where bankers make poor decisions not for themselves but for the firm they work for.

So what is the best way to prevent these types of scandals from taking place in the future? Perhaps instead of blaming the integrity of bankers themselves lawmakers should look at how regulations could reduce the amounts “grey area” there are in banking. Researching new products and procedures more intensely would probably produce insight as to what new regulations are needed. Additionally, firms need to realize that although a competitive culture is important in business, it can also have tremendous downside when it produces scandals. Not only do these scandals hurt firms financially, but they lose people their jobs and lose the firm its reputation. Leaders of banks need to become more far-sighted when it comes to the strategy of their banks. Although these measures would certainly not prevent every financial scandal in the future, they certainly could help to improve the reputation of an already tarnished industry.

Sources: Bloomberg.com

Stephen Padgett

Stephen Padgett

Stephen Padgett is a current junior at the University of North Carolina at Chapel Hill. He is working toward a BA in Economics and Political Science and plans on graduating early in December of 2012. Although he does not know what he wants to do for his career, he is looking forward to an opportunity with Credit Suisse’s Operations Team this summer in Raleigh.

Financially Stephen grew up in a family that preached saving and living below your means. That, in part, translated to his interest in Economics, especially how economics can affect individuals’ financial lives. Through his financial markets class in the fall of 2011, he furthered this interest by analyzing macroeconomic events. Stephen believes that finance, personal finance in particular, is a subject severely left out when it comes to public schooling in this country, and it is a problem that has manifested itself and contributed to many of the problems seen today. He also believes that education is the key to improvement and hopes that through his writings he will be able help people learn about finance, macroeconomics, and how to be financially savvy for the future.

In his free time Stephen enjoys playing and watching sports, wakeboarding, sailing, and country music. At UNC he has participated in Strive for College, UNC Dance Marathon, and UNC Relay for Life.
Stephen Padgett

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