The Moral Imperative of Investment Banking
With so much potential for creation of "social good," much of the industry seems to be seriously underperforming. Many leaders both within and outside of the profession suggest a moral crisis fed by years of misguided economic theory.
A popular joke circulated just over a year ago:
What's the difference between a pigeon and an investment banker?
The pigeon can still make a deposit on a BMW.
In the last 18 months, times have certainly changed. Investment bankers are once again flush with cash. It is hard to understand today's extravagant bonuses, given the recent chaos and bailout of the industry. The venerable investment bank, Bear Stearns, collapsed, and its equal rival, Lehman Brothers, declared bankruptcy. A comatose Merrill Lynch sold itself to Bank of America, and Wells Fargo took over a faltering Wachovia. To deal with this mess and others like it, the U.S. Department of the Treasury formed the Troubled Asset Relief Program (TARP) to purchase or insure up to $700 billion in faltering assets.
Outrage at investment bankers, with their year-end bonuses and perceived arrogant manner, seems well deserved. Lloyd Blankfein, chairman and chief executive of Goldman Sachs, recently described himself to the Times Online as "just a banker doing God's work." Unsurprisingly, he was savaged by the public and the press for his comment. But Blankfein doesn't stand alone in his missteps. Other banking chiefs have been skewered for even more ludicrous actions. John Thain, former Merrill Lynch chief, was lambasted for buying an $87,000 area rug for his office while his company was self-destructing.
Stephen Green, Chairman of HSBC, offered the following understated admission in a Times Online article: "The banking industry has not covered itself in glory, to say the least, in recent years." Rolling Stone, in an article last year entitled "Inside the Great American Bubble Machine," goes farther, describing Goldman, the most venerable of the investment banks, as "a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money." With sentiments like that, it is not surprising that Bloomberg.com recently reported on the uptick of Goldman Sachs executives filing for handgun permits for self-defense purposes.
But while the banking industry seems to lack wisdom, a rootedness in reality and a spirit of contrition for past mistakes, Lloyd Blankfein's basic assertion may be right. Investment banking can be God's work.
It's important to acknowledge that we can't blame the global recession entirely on investment banking or commercial banking. They contributed to it, but are not the only reason we're in this mess. Jamie Dimon, Chairman and CEO of JP Morgan Chase, outlined many of the underlying causes in his 2008 Letter to Shareholders. Banks contributed—certainly to the housing bubble—but there were glaring regulatory lapses, especially in the mortgage industry and with Fannie Mae and Freddie Mac. "Pro-cyclical" policies, such as loan loss reserving and mark-to-market accounting, according to Dimon, also played a role, as did the ensuing freeze of credit and financial markets. Consumers are culpable, too. Seduced by artificially low interest rates, they borrowed and consumed at unsustainable levels. In October 2008, credit card debt in the United States reached $1 trillion, a 25% increase in just five years, according to the Federal Reserve.
Furthermore, the work of investment bankers is complex and technical, and many of the products and services don't seem tangible, which, if you are like me, heightens your suspicion. In general, investment bankers help clients with capital: issuing stocks and bonds; trading securities; identifying and negotiating corporate mergers and acquisitions (M&A); and assisting with myriad other financial advisory services. They're like the circulatory system in a body, facilitating the flow of capital and other assets to entities that need it most and will put it to best use.
Aaron Westlund, Director for Corporate Transactions at DaVita Inc., describes investment banking as "capital matchmaking." Mark Denton, a private banker with J.P. Morgan Chase & Co., agrees. He states that investment banking exists so "people with good ideas can find capital to grow a concept which benefits all of us." Lord Brian Griffiths, Vice Chairman of Goldman Sachs, takes this idea even farther in a recent interview in Ethix, suggesting that the profession contributes in material ways to the common good. "Consider what international banks have done through global capital markets to help China and India develop. It is phenomenal: Hundreds of millions of people have been taken out of dollar-a-day poverty. To me that is a social good and in part is the result of financial markets."
But with so much potential for creation of "social good," much of the industry seems to be seriously underperforming. Many leaders both within and outside of the profession suggest a moral crisis fed by years of misguided economic theory.
Contrary to popular economic thought, human beings are not mechanistic, perfectly-rational creatures, and neither are the markets in which they act. George Akerlof and Robert Shiller explore this idea in their recent bestselling book, Animal Spirits (Princeton University Press, 2009). To create thriving economic systems, the authors contend, we cannot ignore the "animal spirits" that enliven people's emotions and behaviours.
Ken Costa, former Vice Chairman of UBS's investment bank, in delivering the 11th annual Wilberforce Address last June, concurs with the "non-rational" aspects of human behaviour but argues that "humans are more than just animals. We are moral and spiritual creatures, and if we fail to recognize that—either by pretending we are rational robots, or by pretending we are only animal spirits—we debase our humanity."
Pope Benedict XVI agrees, and in his recent encyclical Caritas in Veritate he encourages business and government leaders to develop new frameworks that will diminish repetition of past mistakes: "Admittedly, the market can be a negative force, not because it is so by nature, but because a certain ideology can make it so. It must be remembered that the market does not exist in the pure state. It is shaped by the cultural configurations which define it and give it direction."
Tragically, economics is largely divorced from the moral and spiritual dimensions of life. But it shouldn't be. Prevailing economic theory needs to be challenged. When we divorce economics from moral imperatives, we relegate our work to base levels and diminish our commitment to serve our neighbour and contribute to human flourishing. Caritas in Veritate speaks directly to this important idea: "The conviction that the economy must be autonomous, that it must be shielded from influences of a moral character, has led many to abuse the economic process in a thoroughly destructive way."
Reform must come at many levels, especially at the place where the "heart" of the profession begins to change. Chi-Dooh "Skip" Li, founder of Seattle-based Ellis, Li & McKinstry PLLC, as well as Agros International, an NGO empowering land ownership for the economically impoverished around the world, made the following observation at a recent breakfast hosted by the School of Business and Economics at Seattle Pacific University. "Investment bankers have lacked a sense of reality, wisdom and shame . . . If arrogance were a criminal offense, we'd see a lot of long-term jail sentences." Skip, reflecting on his own spiritual vulnerabilities, then spoke of the redemptive impact that authentic relationships, learning from failure and intentional proximity to the poor have made in his own professional journey.
Such habits are grounding, and engage the whole person. They check our impulses to elevate ourselves above others. For those who move in the halls of power, prestige and wealth, developing sustained connections to some of the pain and injustice of the world is essential. Privilege, position and capital are to be employed for the benefit of others. Living for selfish ambitions may result in short-term gains, but over the long haul it isolates us and diminishes our personhood. As Jesus taught, "Truly, truly, I say to you, unless a grain of wheat falls into the earth and dies, it remains alone; but if it dies, it bears much fruit." (John 12:24)
In carrying out the reconciling work that has been entrusted to us by God (2 Corinthians 5:18), Christians in the investment banking field—and all Christians in business, for that matter—would be wise to exercise what Emmanuel Katongole and Chris Rice in Reconciling All Things: A Christian Vision for Justice, Peace and Healing refer to as the "discipline of lament." In the authors' words, "Lament is a cry directed to God . . . of those who see the truth of the world's deep wounds and the cost of seeking peace. It is the prayer of those who are deeply disturbed by the way things are."
This habit doesn't come naturally or easily. Rice and Katongole in examining the Scriptures posit three ways to nurture it: pilgrimage, relocation and public confession. Pilgrimage helps us "unlearn speed," slowing down long enough to "hear the crying" around us. Relocation helps us "unlearn distance," moving us to put ourselves in hard places, "tarrying long enough to be disturbed." And confession helps us "unlearn innocence," prompting in us responsibility and a commitment to realign ourselves to God's purposes. In the fast-paced world of banking and business, when we slow down long enough, get close enough and regularly acknowledge our culpability in causing pain for others, we invite God's Spirit to do deeply constructive work in us and in the communities to which we belong.
Reform in investment banking is therefore dependent upon "soul" change. As individuals pursue what is good and right, personal, organizational and industry-wide currents begin to change. Solid policies and practices, built on moral imperatives, create a virtuous cycle of healthy reform and mission.
J. Michael Bontrager, founder and managing principal of Chatham Financial, a highly-respected interest rate and currency hedging advisory firm, emphasizes the importance of creating "life-giving" cultures. He sees the role of his company as "restoring a little corner of our world to a place that has more integrity and transparency, where relationships matter more and people are treated with respect without regard to their role or position."
Ken Costa offers an idea for corporate governance that also redirects the prevailing tide in the industry. "Let's invite teachers, voluntary sector executives, military personnel, academics, members of the medical profession, journalists, commentators and so-called 'outsiders' into our boardrooms. They will help us avoid some of the disastrous consequences of financial introspection."
John Steinbeck's classic novel The Grapes of Wrath chronicles the Joad family's journey West out of dust bowl devastation. This from its pages presents the challenge and opportunity before us today. "The bank is something more than men, I tell you. It's the monster. Men made it, but they can't control it." The moral and economic dimensions of the industry can be reunited. Re-integration can occur, but we need to stop pretending that markets and its participants are amoral.
Leaders in banking can shape who they are and what their industry becomes. Investment banking can be a shining example of God's work, and investment bankers can be God's stewards, allocating capital in ways that nourish and empower people, companies, communities and entire countries.