Many years ago, I wrote for a New York investment bank whose name has been semi-obscured by the epidemic of shotgun marriages on Wall Street in the intervening decades. Thus, the news that Goldman Sachs enabled the miserable financial accounting habits of Greece did not surprise me, nor, I feel sure, anyone who ever worked for one of the banks. As many characters on “The Wire” put it over five years of exquisite television, “All in the game, yo.” Or, in the words of a previous era’s television icon — JR Ewing, Texas oilman on “Dallas” — “Once you give up your ethics, the rest is a piece of cake.”
The New York Times account of a team of Goldman bankers parachuting into Athens last November was unusual in one way: the fact that the assault was led by the bank’s president. That indicates the priority attached to the possibility that a sovereign nation’s economy might go the way of Lehman Brothers, with Goldman’s DNA on the corpse. What financial resources did he have in his briefcase? I wonder. It can’t have been US taxpayer money — Goldman had already paid that back.
No, Goldman offered the same kind of solution, ultimately refused, that had worked many times in the past, which the Times described as “a financing instrument that would have pushed debt from Greece’s health care system far into the future, much as when strapped homeowners take out second mortgages to pay off their credit cards.”
Legal? Probably. Ethical? Well…
You remember “Ethics.” It’s defined in the Oxford English Dictionary as the “science of morals; moral principles or code.” Some science. I once had to go from office to office at the bank for a CEO speech on the topic, to be delivered at the Harvard Business School. I heard story after story about how the bank’s morals were routinely tested, ranging from the ridiculous to the sublimely ridiculous, to the frontiers of illegality.
To be fair, some bankers still felt bound by institutional standards, in part because they still operated under a commercial bank charter, which meant they were more tightly regulated than pure investment banks. For example, the bankers were precluded by bank policy from making political contributions to state and municipal politicians to underwrite bond issues — so-called pay-to-play — which put them at a big disadvantage in competition to Wall Street’s classic buccaneers. The separation of commercial and investment banking, embodied in the Depression-era Glass-Steagall Act, is something many in government and the financial industry would like to restore.
But generally speaking, rules were meant to be bent, if not broken. In finance, doing things you might have trouble explaining to your own mother is business as usual. The ethical line that defines what’s right is often very close to the line that defines what’s legal. The bigger problems are posed by the line that separates what’s right from what’s profitable. Bankers always have their feet firmly planted on a slippery slope.
At times, the distinctions are trivial. For example, among the people I met at work, there was the old Middle Eastern hand who kept a bottle of Scotch in his desk in Riyadh for clients who dropped by to talk business on evenings during Ramadan. Islam and Saudi law forbid locals to drink, but, hey, at least they only indulged after they were done praying for the day.
My acquaintance's day job consisted of arranging deals that circumvented the Islamic strictures against charging interest. This is achieved by transmuting loans into discrete purchases and sales at precise intervals and prices that happen to track market interest rates during the elapsed time. It had been common practice when doing business with oil-rich Muslims for decades, but you could see a degree of moral fudging that could easily snowball.
Today’s headlines on the crisis in Greece — and its ethical dimensions — echo the ethical quandaries faced by bankers in days gone by. There was the time that a world-renowned hedge fund operator wanted to speculate against the currency of another European country that today has massive credit problems of its own, and he wanted our bank to take some of his positions. The bank was big enough so that these positions could be disbursed throughout its book, and thereby escape notice prematurely. You do your client’s bidding, right? But what do you do when the central bank of the target country is also your client? Do you warn them? Do you refuse to act on behalf of one client when its interests are opposed to those of another? This is where the “science of morals” becomes the “art of morals,” and it is abstract art: you can see anything you want to see on the canvas. Besides, the speculator wouldn’t be attacking the currency if the country were better run.
In a case which probably came close in mechanics to the transactions in the current crises in Greece, a huge economy’s huge bank, or maybe it was a too-big-to-fail industrial company, or maybe it was the Treasury of the nation itself (the distinctions have been blurred by the mists of time) wanted to move its regulatory obligations forward and thereby delay embarrassment or financial catastrophe until the future. Sound familiar? No? Then you haven’t been reading the papers.
In this instance, explicit reporting deadlines had to be bridged, and the true health of a nation’s finances was at risk, at least insofar as accounting rules can be counted upon to define fiscal risk. The upright bankers did what any ethical beings would do. They insisted that the nation’s Finance Minister give an explicit nudge and wink, so that the bank’s complicity would have legal cover if the transaction ever came to light.
This month’s Greek situation follows this template. Loans become swaps or other transactions that escape rules on lending, and circumvent deadlines. The problem is always pushed off into the future. This is an established tradition. Speaking about sovereign debt, Walter Wriston at Citibank used to say that you pay off a Treasury bill by selling another Treasury bill. Today you pay off a Treasury bill by calling it something else and selling that, if that’s what your customer wants. Rules, credit limits, due diligence, regulations, laws...these are just words. A rose may be a rose, but if you don’t want the wrong people to notice the smell, call it something else.
At the dawn of the contemporary banking culture (the mid-1990s – so last century) a trader at Bankers Trust, another one of those institutions whose name has disappeared, was caught on tape saying, “What Bankers Trust can do for Sony and IBM is to get in the middle and rip them off, make a little money. Funny business, you know? Lure people into that calm and then just totally f--- ‘em.”
F--- ‘em? He says that as if it’s a bad thing. American banking has now tracked the full trajectory from Nicholas Biddle, president of the Second Bank of the United States, and thorn in the side of Andrew Jackson, to his descendant Sydney Biddle Barrows, known as the Mayflower Madam, who ran a New York City call-girl ring in the 1980s. She famously said, “Clients don’t pay you to be with them, they pay you to go away”. Well, yes. Banks are there to serve your needs, and then they leave. But when the urge returns, they are just a phone call away.
Henry Ehrlich is co-author of the forthcoming Asthma Allergies Children: A Parent’s Guide, and editor of the upcoming companion website AsthmaAllergiesChildren.com. Bankers Trust and “Dallas” quotations fromThe Wiley Book of Business Quotations, edited by Henry Ehrlich.