Here's why Wall Street has a hard time being ethicaltheguardian.com /business/2013/nov/25/wall-street-hard-time-ethical

Chris Arnade

Working on Wall Street, a study says, is a constant battle between profit and morality. Photograph:Richard Drew/AP

My first year on Wall Street, 1993, I was paid 14 times more than I earned the prior year and threetimes more than my father's best year. For that money, I helped my company create financial productsthat were disguised to look simple, but which required complex math to properly understand. That firstyear I was roundly applauded by my bosses, who told me I was clever, and to my surprise they gaveme $20,000 bonus beyond my salary.

The products were sold to many investors, many who didnt fully understand what they were buying,most of them what we called clueless Japanese. The profits to my company were huge hundreds ofmillions of dollars huge. The main product that made my firm great money for close to five years waswas called, in typically dense finance jargon, a YIF, or a Yield Indexed Forward.

Eventually, investors got wise, realizing what they had bought was complex, loaded with hiddenleverage, and became most dangerous during moments of distress.

I never did meet the buyers; that was someone else's job. I stayed behind the spreadsheets. My jobwas to try to extract as much value as possible through math and clever trading. Japan would send usfaxes of documents from our competitors. Many were selling far weirder products and doing it in farlarger volume than we were. The conversation with our Japanese customers would end with themurging us on: We cant fall behind.

When I did ask, rather naively, if this was all kosher, I would be assured multiple times that multiplelawyers and multiple managers had approved the sales.

One senior trader, consoling me late at night, reminded me, You are playing in the big leagues now. Ifa customer wants a red suit, you sell them a red suit. If that customer is Japanese, you charge himtwice what it costs.

I rationalized that our group was careful by Wall Street standards, trying to stay close to the letter of thelaw. We tried to abide by an unwritten "five-point rule": never intentionally make more than five

percentage points of profit from a customer.

Some competitors didnt care about the rule. They were making 7% or 10% profit per trade fromclients, selling exotic products loaded with hidden traps. I assumed they would eventually face legalcharges, or at least public embarrassment, for pushing so clearly away from the spirit of the law.

They didnt. Rather, they got paid better, were lauded as true risk takers, and offered big pay packagesto manage similar businesses.

Being paid very well also helped ease any of my concerns. Feeling guilty, kid? Here take a big check. Iwas, for the first time in my life, feeling valued for my math skills the ones I had to hide throughout mychildhood, so as not be labeled a nerd or egghead. Ego and money are nice salves for any potentialfeeling of guilt.

After a few years on Wall Street it was clear to me: you could make money by gaming anyone andeverything. The more clever you were, the more ingenious your ability to exploit a flaw in a law orregulation, the more lauded and celebrated you became.

Nobody seemed to be getting called out. No move was too audacious. It was like driving past thespeed limit at 79 MPH, and watching others pass by at 100, or 110, and never seeing anyone pulledover.

Wall Street did nod and wave politely to regulators attempts to slow things down. Every employee hadto complete a yearly compliance training, where he was updated on things like money laundering,collusion, insider trading, and selling our customers only financial products that were suitable to them.

By the early 2000s that compliance training had descended into a once-a-year farce, designed toliterally just check a box. It became a one-hour lecture held in a massive hall. Everyone had to goonce, listen to the rushed presentation, and then sign a form. You could look down at the audience andsee row after row of blue buttoned shirts playing on their Blackberries. I reached new highs on BrickBreaker one year during compliance training. My compliance education that year was still complete.

By 2007 the idea of ethics education fell even further. You didn't even need to show up to a lecture hall;you just had to log on to an online course. It was one hour of slides that you worked through, blindlypushing the forward button while your attention was somewhere else. Some managers, too busy forsuch nonsense, even paid younger employees to sit at their computers and do it for them.

As Wall Street grew, fueled by that unchecked culture of risk taking, traders got more and moreaudacious, and corruption became more and more diffused through the system. By 2006 you couldopen up almost any major business, look at its inside workings, and find some wrongdoing.

After the crash of 2008, regulators finally did exactly that. What has resulted is a wave of scandals withodd names; LIBOR fixing, FX collusion, ISDA Fix.

To outsiders they sound like complex acronyms that occupy the darkest corners of Wall Street, easilydismissed as anomalies. They are not. LIBOR, FX, ISDA Fix are at the very center of finance, part ofthe daily flow of trillions of dollars. The scandals are scarily close to what some on Wall Street believe isstandard business practice, a matter of shades of grey.

I imagine the people who are named in the scandals are genuinely confused as to why they are beingsingled out. They were just doing what almost everyone else was, maybe just more aggressive, morereckless. They were doing what they had been trained to do: bending the rules, pushing as far as theycould to beat competitors. They had been applauded in the past for their aggressive risk taking, nodoubt. Now they are just whipping boys.

That's the paradox at the core of the settlements we're seeing: where is the real responsibility? Otherswere doing it, yes. Banks should be fined, yes. But somebody should be charged. Yet the people who

really should be held accountable have not. They are the bosses, the managers and CEOs of thebusinesses. They set the standard, they shaped the culture. The Chuck Princes, Dick Fulds, and FredGoodwins of the world. They happily shepherded and profited from a Wall Street that spun out ofcontrol.

A precedent needs to be set, to slow down Wall Streets wild behavior. A reminder that rules are there tobe followed, not exploited. The managers knew what was going on. Ask anyone who works at a bankand they will tell you that.

The excuse we have long accepted is ignorance: that these leaders couldn't have known what washappening. That doesn't suffice. If they didn't know, it's an even larger sin.

Here's why Wall Street has a hard time being ethical