Dominic Hobson's Blogs

Dominic Hobson's Blog

Dominic Hobson is Editor-in-Chief of Global Custodian, the leading magazine covering the international securities services business.

Politics is a notoriously ignoble profession. But in any gainful pursuit the temptation to behave dishonorably is as common as the opportunity to do the right thing. In financial markets, where the sums are large, leverage multiplies returns and insiders always know more than outsiders, the temptations are commensurately greater. As I look back over the decade or so that separates the activities of Fabulous Fab in the structured credit boom of the 21st century from those of Bernard Ebbers in the TMT boom of the 1990s, or the dozen years that divide Jerome Kerviel from Nick Leeson, or the 25 years that divide Raj Rajaratnam from Ivan Boesky, or even the near-100 years that lie between Charles Ponzi and Bernie Madoff, one fact is obvious. Markets change, but human nature does not. Doubtless our inner being is evolving into something better in the longer term, but clearly not fast enough to make a difference in three generations, let alone one. From this perspective, the rising tide of regulation, like the rising population of the prisons, is no more than another measure of the fallen state of man. Yet if the old Adam in all of us is immortal, the uselessness of regulation is a given, for even the introduction of the death penalty for being on both sides of a structured credit trade could not change human nature and its practical expression: human behavior.


This is depressingly evident in the compliance industry that regulation has created. Compliance, which is easily the fastest-growing sector in modern financial services, now rivals the credit committee as the true seat of the business prevention department, for it is always safer to say or do nothing than to say or do something. Yet if the compliance industry has any effect on behavior at all, it is perverse. The moral status of investment bankers is reduced to that of children, unable to act in public without seeking the permission of the compliance department beforehand, and even begging regulators to tell them what to do rather than take the risk of working it out for themselves. This process relieves individual bankers of the burden of thought, let alone judgment or responsibility. It leads by default to a manner of business in which compliance is nominal rather than real, whatever is not forbidden is permissible, the only effective constraint is the fear of discovery and imprisonment, and behavior falls to the standards set by the regulators instead of rising to the ideals laid down by moral philosophy. Thanks in large part to pervasive systems of regulation, the culture of modern investment banking is one in which regulatory fines have come to be seen as part of the cost of doing business - a sort of tax, and not a source of shame. The culture of compliance has created a business without honor.


In this sense, the contempt of the public for the profession of banking is not unjustified, for honor accrues only to those who are worthy of respect, and bankers have ceased to respect even themselves. This is dishonor defined, for to be without honor is to be treated without respect. Though investment bankers are often exceptionally gifted, brilliant at their work and invariably rich, even their most ardent apologist would not claim that they currently command popular respect. A variety of embarrassing public performances by senior figures has persuaded the public that bankers demand respect without the inconvenience of being worthy of it. They have become, in the popular estimation, shameless. However unfairly, bankers are widely regarded as adhering to no code of life or morals other than money. That is why the extended metaphors of Matt Taibbi resonate so widely with the intelligent reading public. Moral conservatives argue that this shamelessness originates in the rootless cosmopolitanism of modern bankers, who can no longer sense the boundaries set by membership of an ethnic or national or religious or social group capable of enforcing a set of moral standards without recourse to regulation or the law. In fact, the predicament of the investment banking industry is worse than that. The shameless behavior of certain investment bankers (and not a few of their clients) does not contradict the collective morality of the group. Rather, it reflects it.


Too many investment bankers seem to have shed any concern about how others see them, or even how they see themselves. Self-respect, as well as the respect of others, is in abeyance. The internal email correspondences that have found their way into the public domain suggest that many in Wall Street and the City are riding a river of moral sewage, with humor but without embarrassment. Expectations in financial markets are now so low that it is possible to behave dishonorably simply because colleagues or competitors are thought to be doing the same. When even those of the highest status in the profession make Tony Blair-like pronouncements about the need to consign awkward questions to the past, it is not just a failure of leadership, but an abdication of it. If the leaders of great banks and investment banks are seen to act without honor, there is no reason to expect individuals at any level in their organizations or the industry as a whole to act honorably. This infectious behavior is partly pecuniary in nature (it becomes widely believed that wealth cannot be gained honestly) and partly sociological (high status is no longer synonymous with a reputation for honorable dealing). But it is by these means that the honorable individual becomes a rarity, and honorable behavior eccentric or perverse. It may even be that investment banking, like electoral politics, now attracts more than its proportionate share of dishonorable individuals precisely because its moral code is seen to be so lax.


It follows that the return of investment banking to the ranks of the honorable professions will follow the steepest of paths. It will be circuitous as well as arduous. The moral capital accumulated by the Victorians is spent, and the evangelical tradition that was its motive force is broken. Trying to mend a broken moral tradition, warned Wittgenstein, is akin to mending the web of a spider by hand. Yet there is solid material with which to build. Most importantly, the moral revolution required is not one of understanding. All the important moral arguments were settled thousands of years ago. Rather, what is needful is the willingness to live and work by the light of those settled moral beliefs. What must change, in other words, is not morals but moral behavior. The most direct means of altering behavior is regulation. Yet regulation, which operates not inwardly but by the fear of punishment, is more a part of the problem than any part of the solution. Biology and anthropology teach us that the most powerful incentive to good behavior is what Adam discovered and modern investment bankers must rediscover. This is the sense of honor, or, to adopt its obverse, shame. To lie or cheat or steal or just treat colleagues badly without feeling ashamed is the province of the psychopath. Everybody else can respond to the call to honor.


The utility of honor is best understood by one of the few social institutions to command near-universal respect even in the debased moral culture of today: the military. In the uniquely demanding circumstances of the battlefield, honor is the only motive of effective action, and the sole defense against brutality. Regulators, as well as investment bankers, could learn much from it. On a battlefield, the incentives to act could scarcely be slighter, or the disincentives greater. Yet it is there, where the shame of dishonor overcomes the fear of annihilation, that men and women surpass themselves most often. The contrast with the behavior of the leaders of our great investment banks under fire in the fall of 2008 - sacrificing staff and clients to save themselves, and demanding rescue by their fellow citizens - could not be starker. Unlike investment banks, whose hierarchies are surprisingly open in both directions, the military is of course unashamedly hierarchical. In recognition of the special demands that are placed upon it, the military is granted a certificate of exemption from the democratic assumption that all human beings are entitled to equal respect, as a natural right bestowed on everybody by virtue of their humanity alone, and owed by every human being to every other human being. It elevates some over others by means of intricate gradations of rank.


Some say this limits the value of the military as an example, though that is debatable. Whether or not it is true, even a less unequal institution than the armed forces can find a place for honor, for some will fail to live up even to the dignity that is owned by every human being. After all, Bernie Madoff and Raj Rajaratnam lost their dignity as well as their liberty and their fortune. Honor is nevertheless hard to imbue in a culture where enormous sums are bestowed on individuals who cannot by any rational measure (though many have been tried) be seen to have earned or deserved them. It is not surprising that the recipients are inclined to believe that their wealth is also the measure of their merit. But the usual criticism made of this phenomenon - that so much esteem has accrued to the rich and successful that it implies disrespect for less lucky people, and less remunerative lines of work - is misplaced. Far from attenuating the worship of material success, by making all worthy of equal respect, the egalitarian outlook removes a constraint. Perversely, by spawning the meritocratic notion that the best jobs should always go to the greatest talents, egalitarian democracy has encouraged the belief (and selfbelief) that highly paid financial intermediaries are enjoying nothing but their just desserts. Think how many investment bankers consider their humble origins a sufficient defense of their large rewards. On this view of the world, the only defensible hierarchy, pruriently measured on an annual basis by Fortune, magazine and the Sunday Times, is the hierarchy of money.


The result is a paradoxical culture, of plutocratic egalitarianism. In a world in which all men and women are for the first time in history regarded as equal, money has come closer than at any time to becoming the measure of all things. The modern rich dress and comport themselves, and pursue the same interests in sex, shopping and sport, as everybody else. The difference is a matter of scale only. Even charitable donation, which financial market plutocrats have adopted wholesale, is no more than another means of purchasing the esteem of others. One reason dishonorable behavior is so commonplace in financial markets is that it is not disreputable abroad. Comforting as it is to believe that the Madoffs and the Rajaratnams are rogue individuals, the truth is that they are Caliban to our Prospero. Our laxity is not without cost. Regulation is consequence first, and cause second. Its steady insinuation into commercial and social life, as the state pursues its interminable quest to ordain the terms and even the outcome of every transaction by law, has reduced the scope of self-regulation to vanishing point. The informal constraints on dishonorable behavior have withered in lockstep with the advancing power of regulation and law. Where the scope for self-government is so narrow, the room for self-indulgence is wide. To tame it, governments have only the bludgeon of regulation and the law. Bankers, like any human being, have a far subtler weapon at their disposal. For a free man, as Demosthenes put it, the greatest compulsive force is shame. Only slaves are compelled by chains.


Shame sets people free because it is the source of self-government. The first fruits of disobedience have clung to our nature with remarkable tenacity precisely because of their social utility. Shame remains, as Carlyle once put it, the "soil of all virtue, of good manners, and good morals." Until investment bankers rediscover its lessons, they cannot be free of the encroachments of the state on their business, for they will lack the means of self-control. But shame is more than a means of liberation. It offers also a return to a more dignified position in the estimation of the public. By behaving honorably, bankers can shed not only the incubus of the state, but become worthy of an elevated status that is currently dependent on wealth alone. There is much to be said for the pursuit of money (of the many and varied occupations of our species, it is among the least harmful) but its possession cannot rest soundly on the shutting-out of unwelcome criticism, the purchase of politicians and the parody of possessive individualism that passes for leadership in so many investment banks today. Here hierarchy, as military castes have always known, has more useful advice than equality. By placing adherence to virtue above lineage, the chivalric ideal of the military hierarchies that dominated medieval Europe ensured that those at the top of the social hierarchy remained always worthy of respect, or lost all status. Likewise, the appeal to honor was at the heart of Bushido, the unwritten code of the samurai. "When others speak all manner of evil things against you, return not evil for evil," reads a saying of Ogawa, which ought to resonate with quiet insistence throughout the banking halls of the world. "Rather reflect that you were not more faithful in the discharge of your duties."