Ethics and finance

Today Jérôme Kerviel was found guilty in the trial over his unauthorised trades for Societe Generale, the unwinding of which caused huge losses. He faces three years in prison and (this is surely the French sense of humour) he must pay €4.9billion back to SocGen.

Of course the only way Mr. Kerviel would ever be likely to make such money would be as trader…But I doubt that will be an area he works in again.

A previous “rogue trader”, Nick Leeson caused the collapse of Barings Bank – which was sold for a nominal £1 to ING. Leeson also speculated in great size, far beyond what he was supposed to trade. After some years in prison in Singapore, he now makes a comfortable living as an after dinner speaker.

Kerviel is one of the very few people to be found guilty in court in connection with the recent financial crisis, but his role was really quite incidental. What the public is angry about is the lack of penitent bankers doing the perp walk – being photographed in hand cuffs and chains being led away from their offices with the full scrutiny of the media.

Understandably, people feel upset that when most countries are cutting social welfare programmes to reduce government deficits caused in part by the banking crisis, bankers bonuses are on the rise and in aggregate make for very large numbers. But this is a separate issue from whether banking or finance are stuffed with crooks. My own anecdotal experience is that most people are pretty honest and I’ve met nobody who I thought was really unethical.

But an oligopolistic banking system which has captured the government in the US and to a lesser extent in other countries is able legally to make very large profits with activities of questionable social value to the wider economy.

The solution to this must come mainly in greater competition. In any industry, concentration tends to come at the expense of the customer, though in some cases it’s unavoidable owing to the technical features of the production process. The extreme case is the natural monopoly of an electric or water utility. But we regulate these cases. Banks are regulated mainly with a view to avoiding catastrophic losses of confidence. Evidently we have some way to go in getting that right. But the wider problem of apparently undeserved profits and pay requires new entrants to the market which will compete away some of that surplus.

Where will those new entrants come from? In the case of commercial banking, technology is reducing entry barriers. In the UK, Tesco, a formidably successful food retailing giant, is gradually moving into retail banking and should do well.

And in investment banking? The main hope is from the East, when the mighty Chinese banks start invading the cartel. Let’s hope they wreck the cartel, rather than simply try to join it.

One Response to Ethics and finance

  1. Got acquainted with the article with huge interest.
    I do completely agree with all the points made.
    Although the crisis seems to be behind now, I think that the global financial sector still has vital lacks of governance mechanisms. Before putting the overall guilt on a specific individual, the regulating bodies should concentrate on a higher global issue- how could this individual be gained access to such huge resources that caused these losses. Each bank has its unique risk diversification system which it oughts to keep to strongly. But while the top management is doing everything in their power to pay themselves such high bonuses, the system seems to crop in the core. The banking system in my country, Armenia, has too tough regulation. The Central Bank limits the risk per one borrower/trade/transaction, claiming to approve such if exist. Although in global system the economic freedom can consider such regulation out of the date and non applicable to the current trends of development, we may foresee its positive aspects, too. A centralized statement system will keep the entire governance system transparent and controlled. A multinational corporation such as Societe Generale with hundredths of branches has the problem of global correspondence to single standards of development, corporate governance and risk. Another question is how it is going to maintain it on a defined acceptable level within its core system? And here is much more to do.
    I think that this significant “unauthorized” transaction is not the end of the chain. Yet many more may come for “easy money earning” if urgent steps towards control and unification are not taken.
    Thank you.

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