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Dublin: 13 °C Friday 25 July, 2014

Column: Could we learn something from India’s banking ethics?

The culture of ‘profit at any cost’ appears to be on the wane in Mumbai, where Nick Leeson has been studying the market – but he’s wondering if the idea of ethics in banking is just ticking a box.

Nick Leeson

THE WORDS ETHICS, morality and banking are rarely found in the same sentence. There is no doubt that the first two words can often be used in conjunction but add in the third and it pretty much excludes any practical application.

I’ve just returned home from a conference in Mumbai where a number of the main market participants had come together to discuss further development of the markets in India.  I have to admit that I was impressed by the approach of many of the participants. It appeared that the culture of profit at any cost had been shelved, that there had been a positive outcome from the global banking crisis and there was a concern about how banks were perceived and the manner in which they did their business.

On reflection, a lot was hidden behind the word ‘transparency’. There has been a lot of debate around that word since my time at Barings. Transparency was supposedly to lead to a fairer market place, suggesting that if it is fairer for all then it is better than it has ever been.

Ethically for bankers that ticks a box. Realistically, the gap between those who have the best systems and those who don’t is wider than ever. There are very few businesses that strive to be evil but unfortunately much of the idealism about the way the business is carried out is only a priority after the profit has been made. That is no more evident than in the world of banking. While there are a number of idealists in the banking domain that think the change could happen and that banks could reclaim some of the lost faith in the system, I am considerably more reserved in my judgement.

The competition to be the best, provide the best, entertain the best is still very important

How much of this change in approach is just lip service is difficult to say. On leaving the conference a number of the biggest players were spirited away by a particular broker to an evening with the stars of Bollywood, apparently it is the hottest ticket in the Indian social year. The competition to be the best, to provide the best and entertain the best is still very important.

On boarding the plane home a week later, the op-ed article in the New York Times by an employee from Goldman Sachs had just started to make news. So much news that Goldman Sachs Group Inc saw $2.15 billion of its market value wiped out. The employee in question, Greg Smith, suggested that “not one single minute is spent asking questions about how we can help clients”. He wrote:

It’s purely about how much we can make the most possible money off them.

It was never widely spoken about at the time but I can immediately think of a number of uncomplicated, simple trade booking systems that were utilised at Barings that were completely risk-free, far from being in the best interests of the client – and which netted Barings millions each and every year without them barely lifting a finger.

There is no doubt that there is an element of sour grapes attached to many of Mr Smith’s comments, for reasons that are yet to surface. He worked for the company for 12 years, a period during which the bank had been fined on a number of occasions. Yet he was only now just deciding to speak up – clearly the morality curve is long and steep. He pointed to a ‘decline in the firm’s moral fibre’ and laid the blame at the door of the company’s CEO and President.

It was simply about making money

Goldman Sachs has been no stranger to controversy, in April 2010, the Securities and Exchange Commission filed a lawsuit accusing Goldman of fraud, after it sold its clients complicated mortgage back securities that later went badly wrong and never mentioned that the opposite side of the trade had been taken by the bank. The previously held ideal that Goldman’s looked to make money with their clients was clearly not true – they were prepared to make money with them, against them, whatever was necessary. It was simply about making money.

In the wake of Smith’s article, one giant banking firm after another has publicly proclaimed that it is putting its clients first. This much advertised claim is in stark contrast to Smith’s claim. Banks are gladiatorial in the way that they transact their business. They are gladiatorial both internally as employees compete for attention and glory, and equally gladiatorial in the marketplace where for every winner there is a loser.

The culture corrupts; huge numbers of lawyers and IT professionals are employed to bend the rules as far as they can go without breaking the law. Everyone is encouraged to compete, making mistakes is not something that is spoken about; there is a huge pressure to succeed and an overpowering fear of failure. What chance do ethics and morality have?

I just don’t see it changing, everyone is competing for the same business, the lavish parties will continue and the rest of us will continue to wonder how the system can continue to resist change as long as it does.

Read more from Nick Leeson on TheJournal.ie>

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