Views on improving the integrity of global capital markets
10 October 2011

Wall Street: “Bloodsuckers” Unite

Posted In: Asset Manager Code

“If you see something, say something.” That has become the mantra of security organizations worldwide, drawing millions of additional eyes and ears into the struggle to keep the world safe. The same should apply to the financial services industry. Here are some relevant examples.

In a recent speech to a slew of the nation’s largest investors, investment guru Jeremy Grantham of GMO called out the industry. He’s done it before, so no surprise there, but the language was more colorful this time, referring to many in the investment profession as hopelessly unproductive in the sense of creating anything of value or benefitting anyone other than themselves. He referred to the industry, by and large, as a horde of “bloodsuckers” on the U.S. economy.

I marvel at how clear, concise, and to the point he can be while many of us have only poked around the edges with more tepid commentary. It is a harsh assessment, to be sure, and in Jeremy’s case — I would add Vanguard founder Jack Bogle to the same case file — many will dismiss this type of industry introspection as grandstanding by geezers. “Easy for them to say,” the junior money-manager corps may lament, “those two already got their millions.” Nonetheless, they see something and they say something.

In another recent article, Satyajit Das, an industry expert and author of Extreme Money, sees the case for a financial industry facing a rapid decline in socially redeeming value. We create exotic instruments that we trade along with other pieces of paper representing financial interests — all in the chase for vast sums of personal wealth. And, hopefully, the client gets something along the way.

In our defense, the industry generally pays plenty of taxes, but do we create jobs, widgets, new technology, groundbreaking science, or do we just bet on those who do? Says Das, “… as everyone was making lots of money doing this stuff [i.e. packaging up simple instruments like mortgages into complex, leveraged tradable securities] it was hardly in anyone’s interest to stand up and point out the reality of what modern finance had become.” Das and others see something and they say something.

In a recent event sponsored by CFA Institute in Los Angeles, the question of the value created by this industry was raised. The ranks of investors and consumers worldwide who fork over their modest savings for investment, insurance, home loans, and retirement, to name but a few services, are growing exponentially. And financial middlemen extract an ever-increasing toll for the privilege. It was agreed that this toll, and its collectors, have never looked more suspect in terms of the benefits delivered.

The discussion closed with the panel listing four things for the industry to focus on in order to provide value and restore trust. A unanimous suggestion was to get control of industry compensation practices. In other words, “pay for performance,” not just pay for accumulating more and more assets under management. Other recommendations included making sure we have client-focused compliance and professional standards and that enforcement is rigorous, resulting in serious consequences when we break the rules.

Finally, and perhaps most important for all of us practitioners dedicated to the ethics and integrity in this profession, publicly pronounce your private commitment to making this industry more honest and trusted. If you see something in your firm or in our profession that is not right, say something.  If we are going to unite around something, that is a far nobler cause.

Until next time, see the CFA Institute Asset Manager Code of Professional Conduct for more ideas on ethical practice and keeping investor protection and the professional conduct of managers as top priorities.

What do you think — do you agree with Grantham and Das’ ominous assessments of the industry?

About the Author(s)
Kurt Schacht, JD, CFA

Kurt Schacht, JD, CFA, is managing director of the Standards and Financial Market Integrity division at CFA Institute, where he oversees all advocacy efforts and the development, maintenance, and promotion of the highest ethical standards of practice for the global investment management industry.

1 thought on “Wall Street: “Bloodsuckers” Unite”

  1. Agnès Le Thiec, CFA says:

    Mr. Das’ views are getting visibility among regulators. This morning, 7 October 2011, Mr. Das made a magisterial 80-minute presentation at the European Parliament in Brussels on his views of the financial situation in Europe and in the world, and the future lying ahead of us — not bright, to say the least. Most of the facts and figures presented are already known, but that does not make them less worrying. And his “let’s look at the fundamentals” approach, even if sometimes provocative, has the merit of showing that there is no easy way out. In a recent article [http://bit.ly/SatyajitDas], Mr. Das also strongly criticized the leveraging of the European Financial Stability Facility (EFSF), now under consideration by EU policymakers to potentially bail out failing EU countries starting with Greece and undercapitalized banks.

    The “trick” would be to raise the size of the €440 billion EFSF to €2 trillion, by asking the European Central Bank to bear any potential losses beyond the €440 billion “first loss tranche” represented by the EFSF. Interestingly, Mr. Das compared this structure to one of the tranched CDOs that went bust in the 2008 crisis.

    At the minimum, all this is puzzling. But maybe one of the most important messages Mr. Das passed at the European Parliament this morning was that, if the financial industry and the regulators do not get their act together themselves, at some point it may be the man on the street that will — and that could be more brutal.

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