From Fool’s Gold to Financial Integrity


On the surface, what had all the markings of an evening filled with six-syllable words and finger wagging turned out to be informative and insightful even to the simple mind of this marketer.

In the eyes of Joe Nocera, the 2008 financial crisis was not about a failure of ethics, but a failure of incentives to align with broader social goals.

Nocera’s perspective is that during the decades of the 1933 Glass-Steagall Act, affiliations between commercial banks and securities firms were limited. Starting in the 60s, regulators began interpreting provisions that allowed commercial banks and their affiliates (commercial banks are federally backed while securities firms aren’t) to engage in more and more securities-type activities). By 1999, when the act was repealed, it was widely argued that it had been effectively dead for some time.

While many argue that deregulation and consolidation allowed for more effective operations and that the activities that resulted in the financial crisis were not regulated by the Glass-Steagall Act, without the ability of commercial banking firms to acquire securities firms they would not have been able to “gamble” with their depositors’ money. To look at it through the incentive lens, bankers were in fact acting ethically in that they were using the tools available to them to maximize profits for their shareholders. Their incentive was to support the shareholders – which they did – very, very well. Nocera explained: “Oftentimes executives make decisions that they don’t agree with in order to stay competitive in the market … the market often trumps a responsible corporate culture.”

So how do we prevent this from happening again?

Well, according to Nocera, “Dodd-Frank doesn't change incentives and without a change in incentives, problems will arise again. … The regulations are so complex that they actually create risk.” What does work are third parties (risk assessors) who can act as an independent eye to an organization’s internal incentives and processes and raise the question when one of these comes into conflict with the long-term goals and health of the organization.

Andrew Duff “the pace is so rapid there can be a herd mentality but no one person’s bottom line is more important than the reputation of the firm.”

Responsible, ethical people may act in irresponsible and unethical ways without realizing it because they don’t see how their actions are impacting the larger community.

Joe Nocera is a weekly op-ed columnist for The New York Times, a regular commentator for NPR’s Weekend Edition and co-author of All the Devils Are Here: The History of the Financial CrisisAndrew Duff  is chairman and CEO of Piper Jaffray Cos. Peter Young, Ph.D. holds the 3M Endowed Chair in International Business at the University of St. Thomas Opus College of Business and is an expert on risk management. Ron James is chairman and CEO of the Center for Ethical Business Cultures at St. Thomas.

- Ghihslaine Ball