Ethics and Financial Services – SAGE Business Researcher

Has the industry learned from the global crisis?

Executive Summary

Seven years after subprime mortgage lending and Wall Street investment maneuvering precipitated a global financial crisis, managers, lawmakers, regulators and law enforcement officials continue to debate the reasons for the 2008 debacle and the lessons still to be learned. Observers disagree about who was to blame, with bankers, regulators and homeowners all attracting censure. It is widely agreed, however, that ethical lapses in the financial services industry were an important cause. “Greed,” as one expert noted, “overran peoples' ethical foundations.” In response, a Democratic Congress passed the Dodd-Frank Act to protect consumers and to more closely regulate Wall Street. Republicans, however, now control Congress, and anti-regulatory champions are attacking the constraints put in place since 2008. A host of questions remain about ethics and the financial services industry. Is the industry behaving more ethically since the crisis? Can regulation compel ethical behavior? Should top executives be held personally responsible for their companies' mistakes? One skeptic put it succinctly: “Ethics and financial services—isn't that an oxymoron?”

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Resources

Bibliography

Books

“Doing Business Ethically: Lessons Learned,” Harvard Business School Press, 2009. Top global business leaders share their perspectives on the marriage of ethics and business practices.

Brooks, John, “Once in Golconda: A True Drama of Wall Street 1920–1938,” Harper & Row, 1969. Longtime New Yorker magazine writer captures a classic tale of extraordinary people and events during a tumultuous and formative era on Wall Street.

Donaldson, Thomas, and Patricia Werhane, eds., “Ethical Issues in Business: A Philosophical Approach,” 8th ed., Pearson, 2007. Textbook compiles essays on business ethics and moral reasoning by leaders in the field.

Kaiser, Robert, “Act of Congress: How America's Essential Institution Works, and How It Doesn't,” Alfred A. Knopf, 2013. Washington Post writer and editor goes behind the scenes to narrate the Capitol Hill battle over Dodd-Frank Act financial legislation.

Lewis, Michael, “The Big Short: Inside the Doomsday Machine,” W.W. Norton & Co., 2010. Best-selling author recounts how a handful of financiers cashed in on the mortgage securities bubble by betting that the subprime lending sector was ready to crash.

McDowell, Banks, “Ethics and Excuses: The Crisis in Professional Responsibility,” Praeger, 2000. A law professor (emeritus) describes ethical dilemmas and shares guidance on how to handle them.

McLean, Bethany, and Joe Nocera, “All the Devils Are Here,” Penguin Group, 2010. Financial writers for Vanity Fair (McLean) and The New York Times (Nocera) examine the background of the financial crisis via the actions of a variety of market and government players.

Stanton, Thomas H., “Why Some Firms Thrive While Others Fail: Governance and Management Lessons from the Crisis,” Oxford University Press, 2012. Financial researcher specializing in risk management extends and amplifies extensive research by the Financial Crisis Inquiry Commission.

Articles

Baer, Justin, “Morgan Stanley to pay $2.6 Billion to Settle Mortgage Cases,” The Wall Street Journal, Feb. 25, 2015, http://tinyurl.com/pb8mxd7. Investment bank reported in securities filings that it has agreed to pay to settle federal claims that it mishandled sales of mortgage bonds.

Eisinger, Jesse, “Why Only One Top Banker Went to Jail for the Financial Crisis,” ProPublica and The New York Times, April 30, 2014, http://tinyurl.com/kzdyqaa. Investigative reporter who has followed the financial crisis examines why only one person went to jail for wrongdoing in the 2008 mortgage meltdown.

Fiske, Rosanna, “Image vs. Reputation: Which Reigns Supreme?” Adweek, Jan. 20, 2011, http://tinyurl.com/kcvwlyy. Advertising trade publication explores the virtues of brands vs. reputation in the financial industry.

Johnson, Simon, “Financial Regulators' Fine Mess,” Project Syndicate, Dec. 30, 2013, http://tinyurl.com/mwsmsc6. An economist from the Massachusetts Institute of Technology likens the disciplining of Wall Street to the punishing of professional athletes—both are often inadequate.

Kelleher, Dennis, “What's Wrong With JPMorgan Chase & Wall Street's Big Bank Earnings? Lots,” Better Markets blog, Better Markets, Oct. 14, 2014, http://tinyurl.com/lhl54tl. A reformer warns consumers and regulators not to let banks' strong earnings lull anyone into thinking that banks are all right.

Zibel, Alan, et al., “Car Loans See Rise In Missed Payments,” The Wall Street Journal, Jan. 8, 2015, http://tinyurl.com/knhbrkw. Evidence of sliding lending standards in the auto industry alarms regulators and others.

Reports and Studies

“2014 Annual Report,” Office of Financial Research, http://tinyurl.com/lfjvkyb. Treasury Department's Office of Financial Research analyzes potential threats to financial stability in this annual report to Congress.

“2014 Annual Report to Congress on the Dodd-Frank Whistleblower Program,” U.S. Securities and Exchange Commission, http://tinyurl.com/k47cn2z. Whistleblower program highlights accomplishments through fiscal 2014.

“Financial Crisis Inquiry Commission Report,” U.S. Government Printing Office, January 2011, http://tinyurl.com/44pkjn3. Congressionally appointed panel lays out causes of the financial crisis in hopes of preventing a repeat.

“HOPE NOW Reports 34,000-Plus Loan Mods Granted in November,” National Mortgage Professional Magazine, Jan. 14, 2015, http://tinyurl.com/kwxlagj. Nonprofit alliance that tries to keep people in their houses reports mortgage modification data.

H.R. 4173, “Dodd-Frank Wall Street Reform and Consumer Protection Act,” http://tinyurl.com/kl824dz. Legislation revamped the financial services industry and how it is regulated.

Baily, Martin Neil, Robert E. Litan and Matthew S. Johnson, “The Origins of the Financial Crisis,” Brookings Institution, November 2008, http://tinyurl.com/k2mlq2p. In the immediate aftermath of the 2008 crisis, economists associated with the liberal Washington think tank assess failures that produced the debacle.

Wilmarth Jr., Arthur E., “A Two-Tiered System of Regulation is Needed to Preserve the Viability of Community Banks and Reduce the Risks of Megabanks,” Research Paper No. 2014–53, George Washington University Law School, Oct. 31, 2014; available at SSRN, http://tinyurl.com/n8qf4cu. Legal scholar proposes ways to ease costly burdens on community banks that are harmed by regulations aimed at large systemically important financial institutions.

The Next Step

Corporate Culture

Glazer, Emily, “As Regulators Focus on Culture, Wall Street Struggles to Define It,” The Wall Street Journal, Feb. 1, 2015, http://tinyurl.com/laqjzpv. The Federal Reserve warned executives at big banks that they will break apart companies if they do not adequately address wrongdoing by improving company ethics and culture.

Jankel, Nick Seneca, “Can Brands Be Enlightened?” The Huffington Post, Feb. 24, 2015, http://tinyurl.com/lkwtwsk. Rebranding a company's public image is a low-cost way to effectively boost a business' commitment to practicing corporate social responsibility, according to a leadership trainer.

Russell, Joyce, “Career Coach: The value of keeping an eye on ethics,” The Washington Post, Feb. 20, 2015, http://tinyurl.com/n96u675. Studies by the Ethics Resource Center and the Great Place to Work Institute consultancy found that a strong company culture and commitment to ethics are the best indicators of how much market value a firm can generate for investors.

Lenders

Blackmore, Nicole, “Lenders ‘trapping’ borrowers who want to downsize,” The Telegraph (U.K.), Jan. 31, 2015, http://tinyurl.com/lpo8mrn. Some U.K. banks are discouraging indebted borrowers from arranging to reduce their mortgage payments and are penalizing those who change lenders, an investigation by The Telegraph found.

McCormick, Liz, “U.S. Banks Hoard $2 Trillion of Ultra-Safe Bonds,” Bloomberg News, Feb. 22, 2015, http://tinyurl.com/lsf7l2o. U.S. banks have accumulated more than $2 trillion in holdings and have continued to profit from investing in government bonds and purchasing federal debt, despite four years of falling consumer demand for loans.

Zibel, Alan, “Lenders Step Up Financing to Subprime Borrowers,” The Wall Street Journal, Feb. 18, 2015, http://tinyurl.com/q5cbrjz. Borrowers with credit scores below 640 received nearly 40 percent of all auto, credit card and personal loans in 2014, the highest national subprime borrowing rate since the 2008 financial crisis.

Regulation

Eavis, Peter, and Ben Protess, “She Runs S.E.C. He's a Lawyer. Recusals and Headaches Ensue,” The New York Times, Feb. 23, 2015, http://tinyurl.com/n6ftuvg. The chairwoman of the Securities and Exchange Commission has recused herself from about 50 enforcement investigations in less than two years due to ethical conflicts from her previous occupation as a high-profile securities attorney, plus some cases that involve her husband, another securities lawyer.

Richardson, Hayley, “HSBC Embroiled in New Price Fixing Scandal,” Newsweek, Feb. 24, 2015, http://tinyurl.com/oonrl3s. The U.S. Department of Justice and the Commodity Futures Trading Commission are separately investigating banking giants HSBC, Barclays, Goldman Sachs, JPMorgan Chase and six others for possibly violating antitrust laws by fixing prices within the precious metal markets.

Rudegeair, Peter, “U.S. Justice Dept questions JPMorgan over auto lending practices,” Reuters, Feb. 24, 2015, http://tinyurl.com/k77s8yf. The U.S. Justice Department is investigating whether JPMorgan Chase's auto lending practices have allowed dealerships to mark up loans to minority borrowers.

Whistleblowers

Ahmed, Kamal, “HSBC whistleblower: There are ‘more revelations,’” BBC News, Feb. 13, 2015, http://tinyurl.com/oex2xyd. A former HSBC employee who exposed the bank's role in facilitating tax evasion for its wealthy clients said there could be hundreds of other banks involved in similar practices.

Hall, Cheryl, “Citigroup whistleblower still on the trail of the too-big-to-fail,” The Dallas Morning News, Feb. 14, 2015, http://tinyurl.com/nddulvj. A former Citigroup mortgage underwriter and whistleblower, now an accounting professor at the University of Texas, Dallas, predicts the U.S. economy may experience a larger housing bubble and subsequent crash in the future.

Norman, Tessa, “FCA to force banks and insurers to protect whistleblowers,” Money Marketing, Feb. 23, 2015, http://tinyurl.com/pew6ugr. The U.K.'s Financial Conduct Authority proposed new measures requiring banks and insurers to protect whistleblowers and encourage employees to report illegal practices to authorities.

Organizations

Bank for International Settlements
Centralbahnplatz 2, 4051 Basel, Switzerland
(+41 61) 280-8080
Switzerland-based organization that acts as a bank for central banks globally and a hub for financial information; supports the international banking standards procedure known as the Basel Process.

Better Markets
1825 K St., N.W., Suite 1080, Washington, DC 20006
202-618-6464
Group established in 2010 that lobbies for tighter oversight of capital and commodity markets.

Consumer Financial Protection Bureau
1700 G St., N.W., Washington, DC 20552
202-435-7000
www.consumerfinance.gov
Federal agency established by Dodd-Frank Act to oversee consumer financial products and services, including many mortgage originators.

Securities and Exchange Commission
100 F St., N.E., Washington, DC 20549
202-942-8088
www.sec.gov
Primary U.S. federal agency with oversight of financial markets; its Office of the Whistleblower (www.sec.gov/whistleblower) collects tips about possible securities laws violations.

DOI: 10.1177/2374556815579661