From the May 2012 issue of Research Magazine • Subscribe!

April 25, 2012

Liars, Cheaters and Thieves

Janet Tavakoli is a Chicago-based consultant with experience structuring and trading credit derivatives. With her knowledge of these complex securities, the tough-talking principal of Tavakoli Structured Finance has unique insight into the workings of the money economy, and has decried the low morals of high finance to any who would listen. Her new e-book, aptly titled The New Robber Barons, chronicles the unpunished, illegal socialization of losses and privatization of gains that have characterized our era of fraudulent securitization and backscratching bailouts.

In this month’s cover story (“Finding the Culprits”), Tavakoli laments the cozy, nay crony relationships between Washington and Wall Street. MF Global’s Jon Corzine, erstwhile U.S. senator and Goldman Sachs alum, personifies the dysfunction: More than $1 billion disappeared from customer accounts following years of irregularities that examiners failed to probe.

Tavakoli has written books and taught university courses on structured finance and it is useful to have someone with her knowledge and moral compass evaluating today’s financial scandals. She calls for a return to the separation of commercial and investment banking activity that ended with the repeal of Glass-Steagall in1999, and this makes sense from a policy point of view.

But something far more fundamental than technical expertise and sensible regulation is missing in today’s economy — and that is an ethically aware workforce. Congress has responded to scandals with sweeping increases in regulation, such as the Sarbanes-Oxley and Dodd-Frank bills. While these help to maintain employment among CPAs and lawyers (trillions of dollars have already been spent in compliance), they do little to arrest the tide of unethical behavior in corporate America.

It has become fashionable in recent years to strengthen the business ethics component of MBA programs. While the trend should be encouraged (in every field, not just business), university-level programs come into play only after a person’s essential moral character has been formed.

The budget deficit gets unceasing press attention, but the character deficit of America’s youth bodes is even more alarming. A survey of 43,000 U.S. high school students in 2010 by the Josephson Institute found that one in three boys, and one in four girls, admitted to shoplifting, while 21% admitted stealing from a parent or relative and 18% from a friend. Even larger proportions of students lied to save money (48% of males, 35% of females), and an outright majority of students (59%) admitted to cheating on tests.

Said Michael Josephson, founder of the Institute, which has conducted these report cards since 1992: “As bad as these numbers are, they appear to be understated. More than one in four students confessed they lied on at least one or two survey questions.” Despite these appalling statistics, 92% of surveyed students were satisfied with their personal ethics.

The financial services industry of the future, if it is to avoid further scandal, needs a cadre of ethically sensitive individuals to root out the liars, cheaters and thieves who will inevitably find their way into high positions.

Financial services firms, large and small, have long fallen over themselves to back financial literacy programs. Who will step up and sponsor youth-oriented ethical literacy programs?

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