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

Occupy Wall Street: The Beginning or the End?

What’s going on with the spontaneous move to occupy major financial centers? Is this the last gasp of disgust over the global financial crisis of  2008-09, or is it the first shot in a whole new war against finance? There’s a lot riding on which of these it turns out to be.  Let’s play, for a minute, with the idea that it’s actually the start of a new round of revulsion with the effects of too much leverage (Lehman, Greece, Iceland, Ireland, Fannie/Freddie, etc.), too many ostentatious paydays for financiers, and not enough jobs or wealth creation for the average person.  Where does this go, and should CFA Institute be doing anything about it? 

If it is the first shot in a new battle, then the movement will most likely spread to organized labor, to progressive citizen groups, and ultimately to candidates for public office.  Populist movements can get out the vote, and can demand public policy choices that push back on financial services in favor of other claimants.  A case in point: U.S. Sen. Dick Durbin’s success in getting debit card fees to retailers capped. If “Occupy Wall Street” organizes and spreads, other demands could easily include taxes on financial transactions, confiscation of profits at the firm and employee level, socialization of finance, and other fairly disruptive outcomes.  Don’t think this can’t happen? If you want examples, read Last Call, by Daniel Okrent. His book tells the story of how the U.S. found itself with a constitutional amendment that outlawed alcohol and helped create amazing unintended consequences.

The finance business has alienated ordinary people in at least two profound ways: It has appeared to be a profit collector rather than a spark plug of economic growth. Just try to get a mortgage or small-business loan these days to see what I mean. Second, the “people on Wall Street” seem to be making lots of money these days, when most people are struggling to get by. To make matters worse, most people’s own financial and real estate assets have stagnated for years, despite following the fundamental rules of saving, diversification, and investing for long-term growth. And that feels unfair.

Reputation Repair

Here are some things the finance profession needs to do to repair its image. First, renew a commitment to supporting society’s interests in matching risk capital to the needs of enterprises that drive and sustain economic vitality. This is the essence of finance — matching capital and good ideas to build communities.

Next, the profession must again embrace the concept of fiduciary behavior. There is too much double-talk about whether financial institutions exist to make money solely for themselves and their shareholders, or to make decisions based on the best interests of their clients. Firms that pursue the personal profit objective above all others will ultimately alienate themselves from customers, regulators, and sound ethical practice. Those ethical considerations are key to any effort by the financial services industry to restore its image with society as a whole.

Finally, we could use some entrepreneurial energy, perhaps out of the “Occupy Wall Street” movement, to generate new models of financial institutions that respond to the entirely legitimate concerns of the people. Steve Jobs’ death reminds us that powerful things can happen when one individual with a vision taps into the popular culture. Maybe we need some of that in finance too.

About the Author(s)
John Rogers, CFA

John Rogers, CFA, is the former president and CEO of CFA Institute.

11 thoughts on “Occupy Wall Street: The Beginning or the End?”

  1. Donald Davret says:

    Surprised at the mention of Fannie/Freddie as a cause of the crisis. The success that certain commercial and political interests have had in ingraining this meme in every corner of discourse is stunning to behold. The GSEs weren’t at the center of this debacle, contrary to popular belief.

    I do agree however, that the financial community must re-commit itself to the service of its clients. I became a financial advisor because I believe in the power of investment to transform people’s lives as a force for their well being and security. But the investment world’s lack of ethics is merely a reflection of American business ethics at large. America’s business community, on many levels, and in many industries, has little to be proud of. We see it every day, whether its a “big Pharma” company burying negative results of a drug they’re trying to get approved by the FDA, we see it in predatory lending, we see it in monopolistic practices.

    Aside from a cultural catharsis taking hold over the nation’s culture, (which is doubtful) I don’t know what the answer is. But I am happy to see that some people are standing up and saying “enough.”

  2. Yuehao says:

    There is a book called ‘the end of money and the future of civilization’ that talks about the prolem of current financial systems. It says linear growth in physical goods or services cannot match the exponential growth in compound interestof debt. He said more and provided a solution at the end.

    We need someone and his allies to revolutionize and bring back order . Looking in retrospect such changes were always gradual and may sometimes relapse.

    There will never be something called a perfectly fair world. Currently one is far leas fair than it should be . Quote a maverick trader on the wall street: the world is run by Goldman sachs. He told truth , didn’t he . I forgot his name, he said this on a BBC interview.

  3. Mujahid Rasul says:

    Ya I agree that the firms should make their decisions that are based on the interests of the whole society in order to keep stability in financial industry. Their business must be based on strong ethical values to build interest and confidence. The game is still on, some one have to do extra-ordinary work to make change happen in financial industry.

  4. Barbara Duck says:

    Occupy Wall Street is all about the “Attack of Killer Algorithms” in more ways than one. It could not have occurred without some skewed and bad math. Marketing has made it to where you can’t trust math 100% to find truth. Couple weeks ago a Quant was busted by the SEC for using flawed software with clients that he knew was bad for 3 years.

    This is a time to clean up and come forward as the public just believes any old stats and formulas tossed their way and it’s not true anymore. You can visit my blog and watch and listen up if you want, but we have a lot of flawed data and creative coding going on. The folks there may not even realize that so much of this is at the root as math moved the money around and it will have to re-shift it again:)

  5. Consumers are deleveraging and saving more, leading to a slow or no growth economy. While consumers and small businesses may want loans from financial institutions, the last thing these institutions are going to do is loosen lending standards. And with no growth, it is tough to make a case for investment.

    Isn’t a lot of this stagnation just paying back the piper for excess spending the past two decades?

  6. Jack Bauersachs says:

    John Rodgers comments are absolutely correct about the need for the financial community to restore its image, but that will never happen as long as the casino operators are allowed to act as financial intermediaries and financial intermediaries are allowed to play in the casino. CFA Institute has to play a leadership role in splitting the finance industry into its speculative and fiduciary parts, rebranding the fiduciary finance industry, and marketing the distinction. As CFA charterholders we need to marshall our creativity to divest the fiduciary aspects of finance from the the tainted catch all term “finance”. We have to act quickly to create a clear distinction in the public’s mind between institutions that avoid conflicts of interest with their clients and ones that do not. If we do not take the initiative to write the new rulebook, the angry 99% will write it for us and the result will be far less pallatable than Glass-Steagall.

  7. Ivan de Heeckeren, CFA says:

    While agreeing in principle with John Rodgers’ recommendations for repairing the reputation of the finance profession, I doubt they can be more than wishes in the wind these days.
    Regulators, especially in Europe with Basel III, are currently pushing financing banks to massively deleverage, thus preventing “risk capital matching” in the short-term, while at the same time obliging banks to shift their business models towards intermediation, hence lesser direct risk exposure and lesser punishment for breaking fiduciary duties.
    Maintaining a fierce competition between finance providers as it exists in the more commoditized areas of our industry seems also one of the better ways to ensure lesser breach of fiduciary duty, as well as bearing heavily on any black sheep in the flock.
    This should also be more advertised and the industry has still a lot of room for improvement in terms of public relations. Having more Steve Jobs at the head of major financial providers might indeed help in that respect, although they would have to combine charisma and pedagogy with the ability to tackle the less glamorous aspects of running the global administrative organizations that banks are today. Board directors and CEOs should step up in the light to defend the finance industry in the public eyes against politicians. They should explain the role finance providers have in backing the “real world economy”, while in return backing their words by promoting fiduciary duty as a long-term motor for a symbiotic relationship with their clients and society.
    Jack Bauersachs’analysis is totally accurate and should first and foremost apply to the CEOS of the major financial institutions. We need real celebrities to back the individual efforts each of us, charterholders or not, are making everyday.

  8. Peter Larson says:

    Rodgers is absolutely right that the industry must embrace fiduciary standards. I’d add that this is particularly critical for those who are reaping the largest rewards.

    When a banker is paid a great deal to package loans that he knows are bad, and then solicits an investment-grade rating for that package and is then paid a great deal to sell the package, and then is paid a great deal to bet against the package, there is clearly no fiduciary sensibility at work! And, I would say, no economic justice either!

  9. Dr. Laurence Brody says:

    I agree with the premise in John Rogers excellent article. I have long felt that “making money” was the goal, up and down the financial chain, with the major benefits at the top of the food chain, and not taking care of clients to the best of one’s ethical ability. It has come home to roost.
    As I see the crowds of “Occupy” I have visions of the great opportunity of Socialism’s promise of equality, which of course will lead to deterioration of our meritocracy where you can work hard and have a chance to get ahead and retire with comfort. As a student of history I note Will Durant’s small 114 page book,” The Lessons of History”. Durant commented in studying civilizations for centuries, that ALL wealthy civilizations morph into Socialism as the masses demand more, and as their governments or leaders debase their coins or currency. There is nothing new about where we are, but it looks like a political party can capitalize on staged discontent.
    I blame government not wall street. Every area in which government steps into protect and regulate; Education, Housing, Mortgage Financing, Environment etc. it oversteps and wastes. I can see government saying the Financial Services Industry is too wicked and government will take it over by regulation, and be responsible for distribution or redistribution of assets to whom they wish. There will be the political elite, and the party members and the peasant class; mostly government workers. I am not a socialist, but am concerned that our society with its incredible opportunities is going that way, and rapidly. The interbreeding of big bank executives and government leaders has become dangerous to Democracy. I think that needs to be separated, but I know that power will be the last thing that any entity will give up. Things really started changing, in my mind, when Glass Steagall was repealed and a bubbling economy started in the U.S. Banks, mortgage companies just took advantage of the open door and ran through at full speed. We know the results.
    I know CFAI cannot become political as an exempt organization, but I believe that Finance and Investment have become primarily politicized on a global basis. In my head, I have an area of interest called Political Finance because I think that’s where we are. It will be interesting to see the direction of CFAI in coming years and decades. In my following investment for decades, I cannot remember a time when so much of finance was dependent on decisions of governments and the Fed.

  10. Robert braun says:

    Yes, the article Mr. Rogers wrote is correct and what he says has to be said. Yes, Jack Bauersachs is correct to wish for Glass-Steagall to be reinstated and all the other comments are true and reasonable: too-big-to-fail should leave our vocabulary, executive compensation needs to be brought in line (why does a US manager deserve 400 times the average of his employees’ pay while a German manager is happy with 20 times? Is the US manager 20 times more valuable? Or is the German worker 20 times better? Or a combination of the two? None of these three possibilities makes sense and I have few ideas as to how in a free economy this blatant discrepancy can be solved), etc. But no one approaches even remotely the one reason that makes all this possible: the crazy increase of money supply, based on the manipulation of it by one small group of individuals who display in spades Hajek’s “fatal conceit”: thinking that humans can be more intelligent than the market. It is this conceit that has been the downfall of Communism with its central planning and the essential cause for the demise of all dictatorships. Having in the US only limited doses of the fatal conceit (the money supply is one of several), we have experienced so far only limited effects of its disastrous consequences. The only hope is that the Constitution will help us overcome distortions caused by human arrogance reaching the top levels of our society. As things stand today, there is only one political person in the higher ranks expressing reasonable thoughts in this respect; and the man is so flawed in other respects that he does more to hurt the good cause that he fights for rather than help it. I would love to see the CFA Institute somewhere in the front lines for promoting a departure from this fiat money production insanity: it is directly in its responsibilities.

  11. Richard Sklar says:

    Under the banner of Free Trade jobs were exported much faster than new jobs could be created, leaving many people with an investment in skills which were no longer needed. Wall Street can’t do much to correct this problem. There is plenty of capital available for job creating ventures that appear to have a good chance of succss. Little of the big expansion of the money supply went for job creation in the U.S. – most seems to have been used for speculation. The solution is to develop new industries and new job skills that are competitive in world markets. This will take decades and Wall Street is rarely willing to wait that long. Neither are most of the 99% who feel they’ve been wronged. We can expect that the protests, in some form, will continue and intensify. In the past this has led to some dumb results.

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