The Wall Street Effect: Does Money Make Us Dishonest?

The Wall Street Effect: Does Money Make Us Dishonest?

USA, New York, Wallstreet, BörseWall Street may sometimes feel synonymous with corruption, especially following these recent scandals:

  • HSBC funneling money to the Mexican drug cartel and suspected terrorist groups
  • British investment bank Barclays’s manipulating inter-bank lending rates, possibly cheating several U.S. municipalities out of millions of dollars, thanks to the rate’s impact on bonds
  • J.P. Morgan’s attempt to hide huge losses from risky derivatives trades, resulting in a Congressional hearing
  • Capital One telling customers that their credit monitoring service was free when, in fact, they were charging for it—resulting in a $210 million fine from the Consumer Protection Bureau
  • Giant hedge fund SAC potentially engaging in insider trading
  • Goldman Sachs’ alleged fraud for failure to disclose conflict of interest on mortgage investments, leading to an investigation by the Securities and Exchange Commission (ultimately, the Department of Justice decided not to prosecute … leading to more charges of cronyism)

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In light of all this, according to the Wall Street Journal, Barclays Chief Executive Antony Jenkins told a U.K. parliamentary group that he wants to eradicate a culture that is "too short-term focused, too aggressive and, on occasions, too self-serving."

This begs a bigger question: Given how Wall Street is set up, is there a financial incentive to be dishonest? And is there any way to change that problem at its core—perhaps by providing financial incentives for honesty itself?

Dishonesty and Money

You could certainly argue that there’s monetary incentive for unethical behavior. If you make more money without being punished, then why should you stop?

Cathy O’Neil, a former quantitative analyst at hedge fund D.E. Shaw, says that her colleagues' immediate goal was to land a large bonus—and their ultimate goal was to earn as much as possible. Although O’Neil never saw anything illegal at D.E. Shaw, she did witness analysts developing a misleading model that served their best interests, as opposed to their clients', because they ignored risk assessments.

“While discounting risk is not criminal, it makes people feel safe when they shouldn’t,” she says. Actions like these upset her so much that she left Wall Street— and joined forces with the Occupy movement. “Right now, there's a system in place where insiders get rich when they fail. It’s like having an alcoholic brother in your living room, with your ATM card.”

RELATED: Are Women More Honest Than Men in Finance?

Making matters worse, investors naively play into the scenario. “It’s ludicrous that people assume they can get good, unbiased financial advice without any conflict of interest from a fellow human being,” says Satyajit Das, a former banker and the author of "Extreme Money" and "Traders, Guns & Money."

Bankers will push their own agenda based on how far the company culture allows it before they get caught and reprimanded, says Nina Godiwalla, author of "Suits: A Woman on Wall Street." And sometimes even criminal practices go unpunished. O'Neil tends to agree: At times, she says, illegal acts are tolerated when they yield high profits, making it more acceptable to cut corners.

Could Financial Incentives Make People Honest?

Jenkins’s plan includes changing the way employee bonuses and commissions are decided via the Barclays Strategic Review, in which the company will analyze 75 distinct business units for return on investment, and for the impact that they make on the company’s reputation.

Generally speaking, financial incentives for broader social goals do seem to work: According to Godiwalla, organizations where diversity initiatives are directly tied to performance review and compensation have been more successful than those without some form of accountability.

RELATED: What Is Insider Trading, and How Does It Work?

Godiwalla adds that if companies want to legislate honesty, they could start looking at factors other than profit to determine an employee’s compensation, such as managerial leadership and practice of good ethics.

Everyone has a different perspective on what it means to be ethical, making it nearly impossible to enforce one set of principles. “You can’t legislate ethics—you either have them or you don’t,” says Das. “It’s very difficult to solve the problem, but that doesn’t mean we shouldn’t try.”

To put these principles into practice, solid ethics should start at the top and trickle down. But if executives have used questionable ethics for more than a decade, it will be difficult for them to lead or evaluate their subordinates, Godiwalla says.

Only time will tell if such measures will be adopted by major players like Barclays, which has yet to outline exactly how it plans to keep its employees honest.

Truly Too Big to Fail?

Despite HSBC’s recent admission of laundering billions of dollars for international drug cartels and clients with terrorist connections, the company wasn’t indicted.

O’Neil's opinion is that the government didn't take further action because the institution is “too big to fail, too interconnected to fail” and protected by its status.

In a corporate culture where making the most money is the primary objective, ethics are going to be compromised, Godiwalla says. It's much harder to change the tide than simply talk more about ethics because altering the existing mindset could negatively impact profits.

If one company strengthens their ethical code and strictly adheres to it, that organization could make less money than others taking shortcuts. Investors might then choose another firm with more profit potential. “If a company only receives a hand slap—a small financial penalty—it might still benefit them to continue whatever they were doing,” Godiwalla notes.

From HSBC’s failure to be indicted to the government’s decision not to prosecute the allegations against Goldman Sachs, hand slaps appear to be bountiful.

So is there really any way to remove the desire to conduct business unethically when you're dealing with an industry run by financial incentives? O'Neil has a bold suggestion: “Abolish bonuses altogether—as long as there are bonuses, profit will always be put over risk.”

In the meantime, regular investors can protect themselves by being financially literate ... and skeptical. Ultimately, Das explains, a banker is a salesperson who's trying to get you to buy a product, so it’s important to question the proposal and motives at play before investing. No one has your best interests in mind—or knows your toleration for risk—better than you.

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