The End of Ethics and A Way Back: How To Fix A Fundamentally Broken Global Financial System

By Theodore Roosevelt Malloch and Jordan D. Mamorsky

Bestselling author and professor Ted Malloch calls for real financial reform to restore confidence and fairness to a broken system

From Ponzi schemes to the credit crisis to the real estate bubble, the financial industry seems to have lost its way on the road to riches. As private greed continues to undermine the public good, one might wonder what ever happened to business ethics. And how can we reform the global financial system to benefit everyone, rather than just the very lucky few? In The End of Ethics and the Way Back, the bestselling author of Doing Virtuous Business teams up with attorney and Yale University Postdoctoral Fellow, Jordan Mamorsky to examine the most recent failures of business virtue, prudence, and governance—from Bernie Madoff to Jon Corzine and MF Global—before offering a set of structural and holistic solutions for our current ethical crisis in global finance.

• Features compelling case studies that reveal the saturation of economic vice in global finance
• Suggests structural reforms to the global financial system that would increase confidence among consumers and encourage ethical behavior among finance professionals
• Written by Ted Malloch, author of the bestseller Doing Virtuous Business with attorney Jordan Mamorsky
• Ideal for financial regulators, business students and academics, and professionals in the finance industry

• Language: English
• Publisher: Wiley
• Release date: Feb 22, 2013
• ISBN: 9781118550274

Theodore Roosevelt Malloch

Theodore Roosevelt Malloch is chairman and CEO of Global Fiduciary Governance LLC, a leading strategy thought leadership company. He was president of the World Economic Development Congress sponsored by CNN, where Lady Margaret Thatcher dubbed him a "global sherpa." He’s held positions in the US State Department and the United Nations, served as research professor at Yale University, and was Senior Fellow at Said Business School at the University of Oxford. His previous books including Common Sense Business and Service Leadership, and Hired, detailing Donald Trump’s victorious campaign for US president.

Book preview

Introduction

In the aftermath of the worst financial crisis since the Great Depression, there has not been a work that comprehensively addresses the systemic root causes of a global recession that has had a profound domino effect, including worldwide public unrest, grassroots political movements, Dodd–Frank reforms, government agency audits, and general disgust with Wall Street corporate excess.

The groundswell of public anger against the perceived evils on Wall Street and the financial markets has been extraordinary. Not since the Vietnam War has the United States rapidly mobilized behind a cause in such a passionate manner. Between the conservative Tea Party movement and the left-leaning Occupy Wall Street protests, Main Street has found a convenient scapegoat for all that ails the US economy and society as a whole.

Is it really right to blame only those Wall Street criminals? What is structurally wrong with our entire system, culture, and ethical notions as a society? Has it lost its original moorings and morphed into managerial or crony capitalism where managers can routinely loot their firms without reprisal or prosecution?

Defects in our societal moral fabric have produced financial swindlers, perhaps more evident than ever before. For example, Bernie Madoff and Tom Petters stole billions of dollars from everyday Americans as if it was standard business process to do so.

CEOs such as Jon Corzine, Jimmy Cayne, and Dick Fuld presided over the demise of proud international banking institutions. They allowed druglike addictions to boom or bust synthetic derivatives to marginalize risk management procedures and ultimately result in a massive overdose: the very destruction of their companies.

Others such as Tyco CEO Dennis Kozlowski and WorldCom CEO Bernie Ebbers were so tragically obsessed with retaining power and keeping their gravy train of profits moving that they lied to their investors and markets with inflated financial statements.

These collapses, scandals, and crimes demonstrate an ethical decay never seen before in global history.

Main Street expects its CEOs, Fortune 500 companies, and private equity firms to hit home runs on a daily basis. Unfortunately, no matter how much quantitative acumen and market awareness an investment manager may retain, no Wall Street all-star can consistently hit the ball over the fence for investors and shareholders. Sometimes, they strike out. Inevitable losses are part and parcel of a capitalist economy.

However, to appease investors and shareholders, executives have turned to the proverbial performance-enhancing drugs: what we will call economic vice. Economic vice produces artificial home runs for shareholders and creates unrealistic market expectations.

The saturation of economic vice in our culture is why this book is titled The End of Ethics. On a systemic level, the allure of vice has captured the human spirit. On Wall Street, traders concoct complex structured credit derivative products with the sole goal of making excess cash to increase the short-term bottom line. On Main Street, investors clamor for enhanced returns to fuel a continuing addiction to real and personal credit.

Prior to the real estate bubble, there was not a Tea Party movement nor an Occupy Wall Street protest capturing the eye of cable and network news—only homeowners who signed mortgages they could not afford. The failure of citizens and investors to demonstrate accountability through their own due diligence has only intensified recent financial calamities. Ponzi schemes victimize new and old investors alike because investors do not raise red flags when they see consistent unrealistic returns they are glad to stuff into their wallets.

On the other hand, overwhelming pressure is placed on modern-day corporations. Heroics are expected in quarterly conference calls announcing earnings. Cable news talking heads dissect every stock movement, every executive business judgment and movement. Without warning, a company’s reputation on the street can take a nosedive. Counterparty liquidity can evaporate in seconds. Reputations must be delicately cultivated and protected. In order to do so, more and more corporations turn to economic vice.

As a result, we are witnessing the end of ethics.

Firms have not only shifted or lost their sense of judgment but have dramatically lost their way like no other time in the post-industrial era. The entire landscape has changed. Companies and employees may know right from wrong and may have an ethical compass. Yet, because of the temptations of various economic vices and diseased corporate cultures, they often fall into deadly habits, which inevitably lead to their own demise.

Corporations often lose valuable capital in the process, increase leverage to unsustainable levels, reduce staffing, and suffer damages to their growth potential and industry reputation. The costs of unethical business are huge for everyone in the downstream value chain.

Business and personal ethics are no longer an integral part of global corporate cultures. The reality is that ethics has been dumbed down to mean compliance. Compliance is generally seen as a back office, ineffectual division of a corporation or investment bank. Managers simply don’t want to know of ethical dilemmas or failures. The new normal is to simply know just enough to stay out of courtrooms and, potentially, jail. Best practices, doing the right thing, or building lasting bonds of trust have become reduced to an idealistic goal, not the actual reality.

For modern-day executives, the devil is in the details. Leaders are increasingly driven to various forms of corruption. Corrosive and systemic, governance failures drive companies and markets with out-of-control demands, unbridled ambition, and corrupt practices. In the process, the very corporate modality as we know it has the potential to take down the entire global economy.

Like Olympic and cycling doping scandals, or steroids in professional baseball, the counterintuitive analogy holds that you should do anything to win, even if in the long run you are found out and suffer the consequences. Lance Armstrong is a quintessential example of this tragic quest for glory and fame.

Maybe you won’t get caught? The prior formal sets of ethics and important business virtues no longer hold sway. Today’s corporate culture and CEOs increasingly encourage nearly any behavior that produces short-term results, supposedly satisfying shareholders and boosting the stock price in the process.

This short-termism is the very root of the problem, causing the end of ethics as we know it. It is a mania and a mantra. Leaders focus on results now, without regards to the consequences and any lingering ethical qualms. CEOs ignore how they got here and, instead, focus on short-term performance and reward, concentrating solely on this quarter, not the next ten.

This mantra abandons any real sense of risk management, reputation, or durable and sustainable reward. It throws responsibility and character under the bus. Companies have become willing and ready to forsake any moral compass or ethical rudder for bumps in stock price and industry perception.

One of the reasons doping and steroid use is so rampant in many professional sports and international competitions is the constant pressure to be super-human and to perform ever better in order to garner recognition and enormous, immediate reward. This does not excuse the use of so-called performance-enhancing drugs, but it may explain why athletes, even famous and accomplished ones, take them. The payoff almost requires it, which makes the breach of ethics that much easier for them. Everyone is doing it, so why not us, too?

In the last decade, more companies have come to operate in much the same way. This is outlined in William D. Cohan’s Prologue of this book. Vice has overtaken Wall Street and the human spirit.

Moreover, demands from shareholders and international markets have become so tremendous because a premium is placed on rapid, short-term results. Accordingly, the personalities and vices of Jon Corzine, Bernie Madoff, Tom Petters, Jimmy Cayne, Bernie Ebbers, Dennis Kozlowski, and Kenneth Lay have flourished. Many executives now feel the only way to meet profitability and performance standards, quarter to quarter, is to breach established ethical codes and norms.

This is why the end of ethics has overtaken us. This is why governance, risk management, and business virtue are no longer much of a priority for corporations and their top leaders. Sadly, resorting to economic vice is now viewed as a necessity for survival.

Prologue

On Wall Street, when the lines of fear and greed cross, big things tend to happen.

For instance, during the Ides of March 2008, when the board of directors of Bear Stearns, the venerable 85-year-old investment bank, realized it had little choice but to sell the company over the weekend or file for bankruptcy on Monday morning, at first it held out for a high price. The company’s stock closed on Friday afternoon at $30 per share, and it was not unreasonable for the board and management to expect that a buyer would pay a premium. That’s the way deals normally get done.

But Bear Stearns was in serious financial distress. The previous day, the Federal Reserve Bank of New York had arranged with JPMorgan Chase to provide Bear with a $30 billion line of credit so that it could open for business on Friday morning. Bear’s management thought the $30 billion would be available for 30 days. As the market realized throughout Friday just how desperate the straits were at Bear Stearns, its stock dropped 40 percent in the first half hour of trading.

Then the government dropped the hammer on the firm. That Friday afternoon, Treasury Secretary Hank Paulson called Alan Schwartz, Bear Stearns’s short-tenured CEO, as he was heading home to Greenwich after not sleeping the night before. The credit line had been pulled, Paulson told Schwartz, setting off a weekend scramble to find a buyer. Panic set in quickly.

The only serious buyer for Bear Stearns turned out to be JPMorgan Chase, which coveted Bear’s clearing business, its prime-brokerage business, and—most of all—its luxurious new $1.5 billion skyscraper on Madison Avenue, right next to JPMorgan Chase’s headquarters. On Saturday, subject to additional due diligence, JPMorgan Chase offered between $8 and $12 per share for Bear Stearns. The Bear board found the offer insulting, given how far below it was Friday’s closing price, and asked for a higher price.

Instead, on Sunday morning, the clever negotiators at JPMorgan Chase, confident the bank was the only game in town, told Bear Stearns’ management, there would be no bid at all for the company. JPMorgan Chase was out. Suddenly, Bear Stearns faced the prospect that it would not be able to open for business on Monday morning and would have no choice but to file for bankruptcy. Forget $30 per share for shareholders, or even $10 a share—in a bankruptcy filing, shareholders would end up with nothing. Creditors, too, would take it on the chin and receive recoveries of pennies on the dollar.

The lines of fear and greed were crossing. Later on Sunday, when JPMorgan Chase returned to the negotiating table with an offer for Bear of $2 per share plus an agreement from the New York Federal Reserve Bank to take $30 billion of toxic assets from Bear that JPMorgan Chase did not want, the Bear Stearns board of directors quickly—albeit unhappily—capitulated to the