Bruce Whitestone
Canada's Business
If you had to pick something that marked the turning point for the financial community, you undoubtedly would choose the scandal surrounding that leading Wall Street firm, Goldman Sachs. While they may be innocent of violating any law until proven guilty, the lack of ethics-morality illustrated by that firm's conduct will prove to be a seminal event.
It is well-known by now that Goldman Sachs sold a bundle of underfunded mortgages, conscious that the entire package would be worthless. The buyers lost about $1 billion, but the sellers claimed that it was not their responsibility. An economist with Bloomberg News, Ben Stein, wrote that "This is simply the worst behaviour in finance by a large firm that I have seen." Later on it transpired that Goldman sold that package short, in other words sold it, hoping to repurchase it at a lower price and amass a large profit.
The investment industry for some time has been buying up and bundling these risky subprime mortgage loans into highly profitable (for the brokers) securities and selling them to unsuspecting investors.
Unfortunately, this type of misconduct is not an isolated case, as the finance industry is riddled with corruption. What is so surprising is that the securities industry's short-term concerns are so overpowering that it is forgotten that actually it is contrary to its long-term interests.
Complicit have been bond-rating agencies like Standard & Poor's and Moody's. They failed miserably to appraise securities under review. They did not examine some securities they highly rated without a complete examination. They merely wished to win the goodwill of the firms peddling those issues, and to be compensated for that.
Conflicts of interest abound in the industry; it must make its transactions more transparent. Sales personnel repeatedly place their orders ahead of a client's, thus capitalizing on that pending transaction. Also, many benefit from inside information, a violation of the law seldom prosecuted.
Many firms' employees receive huge bonuses, with little correlation with the value of their contributions to society or to the industry.
All this idiocy and negligence were in large part to blame for last year's financial collapse.
Clearly, the financial industry needs a major overhaul. The recent examples of misconduct must not occur again. Also, the character of the people coming into the business must change. There has not been sufficient care taken about the employees hired.
The industry once again must begin to work for the clients' best interests, and thereby restore integrity to the financial sector, one that is at the core of the economy.
