Financiers must be taught to think beyond their bonuses – rather than be regulated more, argues Niall Ferguson.
Demonstrators demand Lloyd Blankfein be jailed Photo: Getty
When Goldman Sachs chief executive Lloyd Blankfein claimed that he and his fellow bankers were "doing God's work", there was near-universal incredulity. Banking has never looked less like a divine calling. Indeed, in the public mind bankers have achieved what would once have been thought impossible: they have managed to sink lower than journalists.
Have banks become ethically as well as literally bankrupt since 1982, the year Siegmund Warburg died and, with him, the era of "relationship banking"? Was the love of money – to be precise, fat bonuses – the root of all the economic evil we are currently enduring? And, if the answer is yes, is tighter regulation the solution?
You might well think so. "We cannot control ourselves. You have to step in and control [Wall] Street." Those were the immortal words of John Mack, former chief executive of Morgan Stanley, speaking last November.
We know from the hubristic emails of the Goldman Sachs trader Fabrice Tourre just how out-of-control things were on the eve of the financial crisis. Tourre positively gloried in selling the quintessential toxic assets – "synthetic abs" (asset-backed securities) and "cdo2s" (collateralised debt obligations "squared") – to "Belgian widows and orphans", knowing full well that the subprime mortgages on which these assets were based were already "totally dead".
"More and more leverage in the system," wrote "Fab" to a girlfriend. "The entire edifice threatens to collapse at any moment. Only potential survivor, the fabulous Fab... standing in the middle of all these complex, highly levered, exotic trades he created without necessarily understanding all the implications of those monstrosities."
"Anyway," he went on, "not feeling too guilty about this, the real purpose of my job is to make capital markets more efficient and ultimately provide the US consumer with more efficient ways to leverage... himself, so there is a humble, noble and ethical reason for my job ;) amazing how good I am in convincing myself !!!"
With its sly winks and surplus exclamation marks, Tourre's email perfectly encapsulates the spirit of the age – an age in which clients were merely "counterparties" and conflicts of interest were there to be "embraced".
To some commentators, this is precisely what happens when deregulation gives free rein to greed. Cocky clever-dicks make a killing at the expense of widows and orphans. Answer: more regulation – a lot more. That is certainly what is coming Wall Street's way: the final version of the new law devised by Senator Chris Dodd and Representative Barney Frank runs to 2,319 pages.
Yet things were not so very different in the more tightly regulated markets that produced the secondary banking crisis of the 1970s. That era also had its Madoff, its Bear Stearns and its Lehman Brothers – though who now remembers Gerald Caplan of London and County Securities, or Cedar Holdings, or Triumph Investment Trust?
The real lesson of history is that regulation alone is not the key to financial stability. Indeed, over-complicated regulation can be the disease it purports to cure, by encouraging a culture of box-ticking "compliance" rather than individual moral judgment. The question that gets asked in highly regulated markets is not: "Are we doing the right thing?" but "Can we get away with this?"
What is more important is to instil in financial professionals the kind of ethical framework that was the basis of Siegmund Warburg's life and work. "Success from the financial and from the prestige point of view... is not enough," Warburg told his fellow directors in 1959. "What matters even more is constructive achievement and adherence to high moral and aesthetic standards in the way in which we do our work."
That is the spirit that seems to have vanished from the City since the 1980s. In my view, business education urgently needs to be reformed so that bankers learn to strive for more than just the "maximisation of shareholder value" (code for driving up the share price by fair means or foul). The next generation of financiers needs something like a Hippocratic oath, along the lines recently proposed by students at Harvard Business School. It is no accident that Warburg thought of himself as a "financial physician". The world needs money doctors, not investment bankers focused myopically on "the numbers".
Better education, not over-regulation, is needed to repair our financial system. Banking will never be God's work. But we can make it less like the Devil's.