Latest Scandals Stir Debate Over Decline in Ethics : Corruption: Experts blame everything from lack of leadership at firms to the recession and poor training at business schools.
The year 1991 will be remembered as a sluggish one for business. But in one key measure--the unearthing of financial scandals--1991 has been a banner year.
Three mega-scandals have dominated the news: Salomon Bros. and its cornering of Treasury note auctions; stock market manipulations by Japan’s big four brokerage firms, and the spectacular failure of Bank of Credit & Commerce International amid allegations of money laundering and arms smuggling.
Combined with a plethora of lesser scandals--and harrowing details that continue to emerge about the junk bond, insider trading and savings and loan fiascoes of the 1980s--the wave of corruption has rocked financial centers around the world and led to some anguished soul searching.
Are we witnessing a general breakdown in morality in financial markets? Or has corruption always been rife on Wall Street? Are participants in financial markets and institutions more prone to dishonest dealings than, say, people who work for industrial companies?
Firm answers are hard to come by. But, based on interviews with analysts, traders, academic observers and historians, a consensus is emerging that a decade of excess bred extraordinary temptations that now are being reflected in a wave of scandals.
“In the ‘80s, the prevailing mentality was that government, and rules, and even ethics were barriers to success,” says Richard C. Leone, who until 1988 was a managing director in corporate finance at Dillon, Read & Co. “In that environment, and especially on Wall Street where there were huge profits to be made, people got confused. They lost moral bearings.
“What is happening now is that the piper is being paid. As a result, a lot of people will act differently in the future,” adds Leone, who is executive director of 20th Century Fund, a public policy group, and the chairman of the Port Authority of New York and New Jersey.
Henry Kaufman, the respected former chief economist of Salomon Bros., agrees with many other experts that scandals tend to run in cycles and possess many common characteristics despite dramatically changing economic conditions.
“Every period of excess breeds its own scandals--and its own undoings,” he argues. “You need only go back to the 1920s, when you had all kinds of speculative excesses and cornerings of markets.”
Kaufman and others point to other influences that contribute to ethical lapses. These include the proliferation of business news media, their closer scrutiny of markets and their role as magnifiers of scandals; lax regulatory enforcement and financial deregulation that swept financial services during the 1980s; the emergence of new and exotic financial securities and trading vehicles and, most controversially, the emergence of a new generation of Wall Streeters trained at business schools that still don’t place enough emphasis on ethics.
Some offer the theory that the bulk of scandals surfacing today are in financial services because U.S. industrial companies tightened their ethical standards in the wake of widespread prosecution of price-fixing in the 1960s and the foreign bribery and Watergate-related offenses of the 1970s.
There was no such restraining force on Wall Street. “Even people who were appalled by the excesses of the 1980s were silent,” Leone says. “The dominant culture was that you were either slow, or stupid, if you weren’t making a fast buck.”
One pivotal question now under debate in business circles is how much human nature is to blame or whether executives now are simply more susceptible to temptation. Scott E. Pardee, former senior vice president of the Federal Reserve Bank of New York, is among those who believe that conditions--not people--have changed.
“I’m not impressed with the idea that people are more corrupt now,” says Pardee, who now is chairman of the brokerage Yamaichi International (America) Inc. “Jesus Christ threw the money changers out of the temple. . . . Looking back over history, there has been in every man’s lifetime some huge scandal that left people feeling unhappy and cheated.”
Historian Ron Chernow, author of “The House of Morgan” and a keen observer of financial cycles, offers yet another interpretation. He suggests that the “lingering recession or halting recovery” may be fueling the public’s appetite for scapegoats--and for financial scandals.
“We’re in a recession now,” Chernow says. “The public is very angry over the tab from the S&L; crisis. We have a real estate depression. And a lot of fine companies are going bankrupt or laying off people because of excess debt accumulated in the ‘80s.”
Chernow believes that the spate of disclosures about financial improprieties, and the prominence they have been given in the news media, feed upon society’s collective reappraisal of the ‘80s.
“Boesky, Milken, Gutfreund--the people who are suddenly rogues--were great heroes at the time they were doing these things,” he says, referring to Ivan F. Boesky, the corporate raider convicted of insider trading, junk bond king and convicted felon Michael Milken, and John Gutfreund, former chairman of scandal-plagued Salomon.
“As their veneer of omniscience wears off, we see the reality of old-time corruption. Instead of big-time financial wizards, they sound more and more like small-town crooks.”
That the spate of scandals surfaced in close succession should come as no surprise, Chernow says. “Once things start unraveling, they unravel fast,” Chernow says. “People tag one another. And investigations tend to snowball.”
“These things are definitely cyclical,” adds J. Gregory Dees, a professor at Harvard Business School and one of the teachers for that school’s required three-week ethics course for first-year students.
“The cycles may be related to the values that are instilled (in market participants) while they are growing up,” he says. “It could also be that enforcement goes in waves or cycles--that behavior is relatively constant but we go in waves of cracking down and backing off, cracking down and backing off.”
Some blame business schools for failing to inculcate ethical values. “If you look at the graduates from business schools, most are well-trained quantitatively and technically,” former Salomon economist Kaufman says. “But few have been taught about financial and economic history.”
Dees rejects the indictment of the younger generation. “Ethical leadership has to come from inside, and from the top,” he says. “Ethical considerations have got to be on senior management’s agenda. And they have to set the tone by example, not by sending memos.”
Horace J. De Podwin, president of Economic Studies Inc. and the former dean of Rutgers University graduate school of management, says the ethics scandals would, appropriately, lead to tighter regulation by government officials. Indeed, under its new chairman, Richard C. Breeden, the SEC has taken a more activist role despite the free-market rhetoric of the Bush Administration.
Former Fed official Pardee believes that tighter management is the answer. “By definition, a person who is skillful as a trader has a personality that is more aggressive,” he says. “They enjoy taking risks, they are good at taking risks, and they need to be managed accordingly.”
Managers, he argues, should especially scrutinize someone whose personality changes suddenly. “Say a trader who is lively, talkative, always telling jokes is suddenly staring silently at his screen,” Pardee says. “He may just have had a fight with his wife. But he may also have gotten in trouble on a position” and broken company or market rules by getting in deeper.
“Management has the responsibility to clean up problems as soon as they occur and not to let them fester,” Pardee adds. “The next generation of chief executive officers and chief financial officers will be a lot more careful.
