Practical analysis for investment professionals
11 December 2020

Book Review: Seeking Virtue in Finance

Seeking Virtue in Finance: Contributing to Society in a Conflicted Industry. 2020. J.C. de Swaan. Cambridge University Press.

J.C. de Swaan, an investment practitioner who teaches business ethics to Princeton undergraduates, has produced a field manual of genuine value to those fearing for their virtue in the moral minefield that is the modern finance industry. One is reminded of criminal defense attorney Alan Dershowitz’s famous admonition to his Harvard law students that, as most of them are bound for white-shoe corporate law, they are far more likely to need the services of a specialist in criminal law than to practice it.

The major benefit of Seeking Virtue in Finance is that it might just relieve many of its young readers of that necessity.

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The book is compact and well written, weaving together three broad areas: the familiar horror show of financial illegality and moral corruption that makes the nation’s newspapers all too often; compelling and uplifting narratives of practitioners who have lived exemplary professional lives, sometimes at great cost to themselves; and finally, Socratic meditations on the nature of private and public morality in multiple areas of finance.

The author provides clear and concise descriptions of the usual malfeasance and scandals: extractive mutual fund and hedge fund fees; the cynical disregard of compliance and risk-control departments at most large institutions; more-localized misbehavior, such as the savaging of Valeant Pharmaceuticals’ essential R&D budget and the price gouging of its life-saving drugs; Goldman Sachs’s marketing of the Abacus collateralized debt obligation (explicitly designed to blow up by hedge fund manager John Paulson) to its other customers; and, of course, Bernie Madoff’s financial fraud and the Arthur Andersen–Enron scandal. Along the way, de Swaan also describes abuses that are less well known but equally egregious, particularly the dividend recapitalizations deployed by private equity buccaneers to extract sorely needed liquidity from perilously indebted companies.

The most compelling sections deal with practitioners whose self-abnegation humbles the reader. The best known among them are Jack Bogle and David Swensen, who, although more than financially comfortable, forwent far greater wealth in the pursuit of public virtue. But many of the practitioners will be unfamiliar, such as David Benes, who spent his entire career in Japan in the service of improving that nation’s awful corporate governance. In the process, he steadfastly refused to capitalize on his connections at the highest levels of the government. Benes currently lives in a modest house in an unfashionable Tokyo suburb. Another notable story is Alayne Fleischmann, a JP Morgan Chase mortgage analyst who blew the whistle on the company’s fraudulent mortgage originations, which made her so unemployable that she was forced to find work as a legal intern.

The most remarkable example of all is Eric Ben-Artzi, a Deutsche Bank risk analyst who exposed the company’s inflation of credit derivative valuations. He was eventually awarded several million dollars from the bank’s SEC settlement, but after paying off his attorneys and ex-wife, he refused the remainder on the grounds that the settlement money came from the shareholders and not from the managers who authored the malfeasance. Short of funds and, like Fleischmann, unemployable, he moved back to his native Israel.

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In between the splendid and the vile, de Swaan deftly discourses on the gray areas and the trade-offs. How proper was it that George Soros cleared a US$1 billion profit from his 1992 bet against the British pound, whose fall most observers credit with reinvigorating the country’s economy? Is private equity a net plus or minus, both in terms of corporate performance and overall societal health? (Spoiler alert: Venture capital comes off somewhat better.) More generally, even if a practitioner executes their fiduciary responsibility to the client with the utmost rigor, should they consider the societal externalities of their craft? Or, on a more basic level, should not schoolteachers and nurses command more respect than finance professionals do?

As is typical of many academic publications, there were a few lapses in fact checking. One of John Bogle’s successors at Vanguard was William McNabb, not Frederick, and the author perpetuates the nearly de rigueur misspelling of Northern Pipe Line as “Northern Pipeline,” whose immense cash hoard Benjamin Graham made famous.

More seriously for a tome on corporate ethics, de Swaan, who worked at McKinsey & Company, praises the moral quality of McKinsey’s leadership but fails to mention its high-profile scandals, such as its enabling of South Africa’s larcenous Gupta family, its long client list of authoritarian despots, and its involvement with inhumane US Immigrations and Customs Enforcement deportation procedures (which it unsuccessfully tried to hide).

Finally, the book’s index is nearly useless. In future editions, I would suggest that the superb conclusion, which summarizes the book’s structure, should largely replace the current introduction, which is somewhat weak and overlong.

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The book also features a major omission, which is perhaps intentional. Having described the industry’s ethical dangers and how to avoid them at the practitioner level, the author almost completely ignores just why, in the first place, these transgressions are endemic to the finance profession and what to do about them at a systemic level. This is a subject that Robert Shiller, for example, begins to approach in Finance and the Good Society. At a few points, de Swaan gets tantalizingly close to these questions, observing that “Professions that attract mission-driven individuals whose objective is primarily to serve society — think of public school teachers, nurses, and NGO employees, to name a few — tend to be associated with low levels of compensation.”

It is not difficult to tumble to the obverse of this statement — that finance tends to attract those who are not “mission-driven.” Collegiate economics majors, for example, donate less to charity than do other students; even worse, after non-economics majors take economics courses, they become less charitable. At another point, he notes that relatively low-paid areas, such as endowments and foundations, attract “individuals who are not predominantly motivated by building up the size of their net worth.” The author fails to take the obvious next step, which is to recognize that people do not go into finance for the same reasons that they become social workers, elementary school teachers, paratroopers, or foreign service professionals.

Finance, in short, suffers from a Willie Sutton problem. Consider, for example, the difference between the highest levels of journalism and finance, neither of which have mandatory credentialing of the sort seen in law, medicine, or accounting. The typical reporter at the New York Times, Wall Street Journal, or Economist labors under a strict code that mandates rigorous fact checking, fairness to investigative subjects, and protection of sources. The same depth of professional ethics does not apply at the nation’s top investment banks.

Why the difference between journalism and finance? In de Swaan’s lexicon, the former attracts those who are “mission-driven” toward intellectual curiosity and public service but certainly not toward monetary reward, whereas the latter attracts those who are “mission-driven” in the opposite direction. (Or, as pointed out by Wall Street Journal’s Jason Zweig, the former complicates simplicity whereas the latter simplifies complexity — so it’s no surprise which pays better.)

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The author and his educational colleagues can infuse only so many of their students with the requisite moral fiber. Any significant reform of the ethical and legal morass that is modern finance may well require more-direct alterations in its compensation and regulatory structure. I would urge de Swaan to direct his impressive research and prose skills in that direction in a follow-up volume.

In the meantime, and despite the aforementioned minor flaws, I can highly recommend this volume to any and all practitioners attempting to navigate the industry’s treacherous ethical waters.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

About the Author(s)
William J. Bernstein

William J. Bernstein is a neurologist, co-founder of Efficient Frontier Advisors, an investment management firm, and has written several titles on finance and economic history. He has contributed to the peer-reviewed finance literature and has written for several national publications, including Money Magazine and The Wall Street Journal. He has produced several finance titles, and also three volumes of history, The Birth of Plenty, A Splendid Exchange, and Masters of the Word, about, respectively, the economic growth inflection of the early 19th century, the history of world trade, and the effects of access to technology on human relations and politics. He was also the 2017 winner of the James R. Vertin Award from CFA Institute.

3 thoughts on “Book Review: Seeking Virtue in Finance”

  1. Thank you William J. Bernstein for a thoughtful review. I’ve added the book to my holiday reading list (and pleased to see it’s available in electronic version, too). Financial ethics is an area that often steers too far towards narrative examples or theoretical framework, and his observation that this book combines both into “a field manual of genuine value” is compelling praise. I’m looking forward t reading it.

    A quick personal thank you to Mr. Bernstein for authoring one of my favourite books (not listed in his short bio above), Deep Risk: How History Informs Portfolio Design.

  2. Thanks William. Insightful and concise review! 🙂

  3. Stephen Davenport says:

    This book does some great work to improve our industry! We need CFA practitioners to be aware of these risks as leaders in the investment industry. The one area that I feel was lacking is the responsibility to stakeholders versus shareholders.

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