Have Ethics Disappeared from Wall Street.?
by Robert Bachelder
Mr. Bachelder, who has worked in banking, in 1987 was minister of Worcester City Missionary Society (United Church of Christ) in Worcester, Massachusetts. This article appeared in The Christian Century, July 15-22, 1987 pp. 628-630. Copyright by The Christian Century Foundation; used by permission. Current articles and subscription information can be found atwww.christiancentury.org. This article was prepared for Religion Online by John R. Bushell.
Soon after the financial scandal broke last year involving Ivan Boesky, the Wall Street arbitrager, I spoke with a dean of Harvard Universityís Business School at a suburban Boston church. Not wanting to sound moralistic, .I wondered aloud if insider trading in 'securities might be ethically ambiguous since some argue that it promotes market efficiency. To my surprise, this dean of one of, America's educational bastions of capitalism replied sharply with a moralist's simplicity: "There's . nothing ambiguous about it. It's. illegal and immoral -- sheer. greed."
However, something troubled the dean ,even more than financial corruption: At Harvard we had lots of good and thoughtful young people. They would not commit illegal acts in their business. But business education doesn't do a very good job of teaching them how to incorporate values in business.
To help instill values; at an early age, he has been teaching Sunday 'school for a dozen years.
The effect in the past of. the Protestant ethic, observed historian Richard Hofstadter, was to heighten generally the sense of personal responsibility and create a strong sense of civic consciousness. And Henry James, the literary expositor of this sensibility, said that ."responsibility is glory." Not surprisingly, this outlook helped significantly to shape the ethos of American finance.
As economics writer Leonard Silk points out, the 20th-century American establishment is rooted in the19th century Unitarian Church in Massachusetts.. The Unitarian clergy reminded the Boston merchants with some success that wealth carries responsibilities as well as privileges. In this they drew, upon their Puritan antecedents. As Cotton Mather told his Boston congregation in 1701:
"God hath made man a sociable creature. We expect benefits from human society, it is but equal that human- society should receive benefits from us. We are beneficial to human. society, by. the works of that special occupation, in which we are to be according to the order of God. ["A Christian at His Calling.".The Annals of America: 1493-1973, Vol. I (Encyclopaedia Britannica, 1976), p. 39]
Uncontrolled land speculation was an issue for the Unitarians. They disliked even legal land speculation since it contributed nothing to the commonwealth, and since success resulted more from luck than from diligent labor. Historian Daniel Howe observes that the Unitarian clergy fomented considerable dissent in Massachusetts against the U. S. annexation of Texas by portraying the Texans as irresponsible speculators who had entered Mexico at their own risk.
Through the 19th century, the Protestant establishment became less ecclesiastical and more secular, but it remained concerned with shaping business by the values of service and disinterestedness. Quite a few of the establishment were sons of New England ministers, and many more mere educated. in. New England church schools and colleges. As Silk suggests, the- Unitarian heritage helped form the basis for the modern social responsibility creed that David Rockefeller articulated in the 1970s as business being a "public mission" with public responsibilities. Of course,- the Protestant establishment's practice always fell short of its professed moral standards: the decline of the Puritan ethic into an, ethic of individualist capitalism has been well chronicled. After a visit to New York, the English novelist Anthony Trollope wrote in 1857 in Barchester Towers that everyone "worships," the dollar. Twelve years, later, Jay Gould and James Fisk perpetrated, the great gold conspiracy. And -the crash of , 1929 was abetted by Wall Street's financially irresponsible practices.
Whatever the moral failures or outright hypocrisy of the old establishment, however, Wall Street's current ethos is even more lamentable. Today, moral aspirations themselves are rejected as being worthy subjects for business enterprise. In the Reagan era, extreme free-enterprise ideology, which has always been popular with entrepreneurs and small business people, is staging a takeover of the more exalted bastions of American finance. This stringent creed, eschewing mention of responsibility and social obligation, maintains that the only way to run a business (or even a country) is to concentrate on maximizing profits in the near term. It has found some of its more fervent apostles among the younger investment bankers.
The more profound implications of this development, however, have been overlooked for the most part. The elder investment bankers are appalled that younger members of the fraternity who are already making $1 million a year, such as the convicted insider trader Dennis Levine of Drexel Burnham Lambert, are trying to make even more through illegal insider trading. How can they be so greedy? the elders ask. Currently, the financial periodicals are printing jeremiads about the destructiveness of greed. But greed is not the feature of financial life that should worry us most. We can survive greediness. The quintessential financier J. P. Morgan was probably as greedy as is anyone on Wall Street today. He took a lot from society, but he left even more. Within a few years he created U.S. Steel Corporation, General Electric and International Harvester, all of which produced many jobs and contributed to the commonwealth. In contrast, today's rash of takeovers has little such value.
Wall Streetís recent scandals have diverted attention from an even more serious financial phenomenon: ordinary, perfectly legal corporate takeovers that pass for investment banking. To paraphrase Max Weber, the connection between the pursuit of wealth and ethical meaning has come undone. Or as novelist Gore Vidal comments, Puritan virtue is dead and there is nothing to replace it.
What is really disturbing is that so much of investment banking's acquisition and merger activity has ceased to be economically productive. Economic activity has an inherently moral purpose: to provide the material undergirding for our common life by allocating scarce capital in ways that will promote economic growth. To a late 20th-century church that speaks about "economic democracy" and "solidarity with the poor," these may seem like modest goals, morally speaking. But now even these goals are becoming remote from financial activity.
In 1986, some 3,500 companies or corporate divisions totaling $159 billion changed hands. In the past four years, over 12,000 mergers and acquisitions valued at almost $500 billion have taken place. This activity has been spurred by the prevailing market ideology, by the concomitant deregulation of the financial markets and the growth of the financial services industry and by the combination of a, fairly sluggish economy with a hot stock market that encourages paper profiteering rather than investment in plant and product. Some of these takeovers are proper: Chrysler's 1987 acquisition of American Motors Corporation gives it much-needed production and distribution capacity at an economical price. Robert Lessin of Morgan Stanley thinks that takeovers will increasingly feature such legitimate goals and be prudently financed. That is encouraging.
However, many takeover targets are companies having no relation to the business of the firms that are raiding their stocks. Takeovers generate large fees for investment bankers, increased share prices for stockholders of the acquired companies, and great gains for the raiders, who, after running up the stocks of their acquired companies, often liquidate their assets; but these maneuvers add little if anything to the economy's productive output, and they often mean a loss of jobs through devastating restructurings. Indeed, according to Irwin Friend, emeritus professor of finance at the University of Pennsylvania's Wharton School, stockholders in the raiding companies do not even benefit appreciably from takeovers, which raises the question of whether the raiders are fulfilling their fiduciary responsibilities to their own shareholders. More important, however, is the deterioration in the combined balance sheets that may occur after a firm has been acquired in a hostile takeover or through the threat of a takeover. Felix Rohatyn of Lazard Freres, a New York City investment banking firm, observes that the mergers of Occidental and Cities Service, of Chevron and Gulf, and of Mobil and Superior have all had this effect.
Carl Icahn, chairman of Trans World Airlines, and other raiders say that takeover threats force inept, bloated management, or the "corpocracy",to shape up and become more competitive, but this is not true for the most. part. Rather, as Anthony Solomon, partner president of the Federal Reserve Bank. of New York, observes, the targets of takeovers tend to be well-run companies that have a commitment to the long-term potential of an industry despite,.temporarily unfavorable circumstances that lead the market to undervalue their stocks. Even if they are not acquired, such companies often are hurt ,by being forced to pay "greenmail" -to buy-back their own stock at inflated prices from the raider in return for dropping the threat.
Further, much of the' takeover-activity is financed with low-quality, high yield bonds known as junk bonds - And takeover target companies often assume significant additional debt themselves in order to appear less attractive. This erosion of credit quality, and the high level of debt built up on corporate management, pose dangers for the future. Economist John Kenneth Galbraith fears that when corporate earnings drop, as they must at some point in the business cycle, the debt burden will become unsupportable; and then we will wonder, as we did with, Penn Square Bank and with the loans to Latin America, how we could have been so foolish.
When the distinguished firm of Salomon Brothers decided to go into the junk bond takeover business,! Henry Kaufman - the most respected economist on Wall Street, resigned from the firm's executive committee. He sounded the traditional. theme of the Wall Street establishment at its best: "I am not sure that this whole trend makes a net contribution to society as a whole.. We cannot escape the fact that we have some financial responsibility. We are not just in the business of pushing companies around" (quoted in the New York Times, November 16, 1986).
If much of the takeover business on Wall Street has ceased to be an economic activity, then what is it? It could be called an athletic contest. Young investment bankers speak about "putting companies into play, " about getting corporate managers interested in deals that would not occur to them on their own. Max Weber noted that as the pursuit of wealth becomes devoid of religious and ethical meaning, "it tends to become associated with purely mundane passions, which often actually give it the character of sport" (The Protestant Ethic and the Spirit of Capitalism). This is the picture that lawyer-writer Louis Auchincloss presents in the novel Diary of a Yuppie (Houghton Mifflin, 1986). The lawyer and takeover specialist Robert Service describes without compunction the current moral climate:
It's all a game, but a game with very strict rules. You have to stay meticulously within the law; the least misstep, if caught, involves an instant penalty. But there is no particular moral opprobrium in incurring a penalty, any more than there is [in] being offside in football. A man who is found to have bought or sold stock on inside information, or misrepresented his assets in a loan application, or put his girl friend on the company payroll, is not "looked down on," except by sentimentalists. He's simply been caught, that's all. Even the public understands that. Watergate showed it. You break the rules, pay the penalty and go back to the game [pp. 26-271.
This is why insider trading is not the most disturbing financial phenomenon on Wall Street today. It is only the consequence of legitimate economic activity transformed into sport. And this transformation reflects in turn an even more serious development: the collapse of the Protestant ethic of responsibility that traditionally connected finance to socially desirable ends that transcend personal ambition.
A poignantly appropriate symbol for the separation of financial activity from the moral values that once informed it is the configuration of the old Protestant establishment's shrine, Harvard University. On one side of the Charles River, in Cambridge, Massachusetts, stands the college, the nursery of Puritan preachers, Unitarian moralists and their secular descendants. On the other side of the river, in Boston, stands the business school, founded only in this century, with its students eager to be catechized in the extreme free-enterprise creed. In John Marquand's novel The Late George Apley),(1936), the Boston Brahmin banker described the business school as a "damnable example of materialism," and he looked the other way when he motored by. But today we are getting used to the fact that traditional values and financial practice occupy separate spheres of existence.
If we are to enjoy a viable economic future, however, we need some other approach than either revulsion or complacency. The importance of responsibility and community needs to be heard in the financial district. The insider-trading scandals expose a deeper crisis in values in our financial leadership that must be confronted now by government and society before the economy suffers further damage. Legislative and regulatory reforms are needed to curb current abuses and preserve the soundness of our financial system. Investment banker Rohatyn has made several proposals in this regard that would promote responsible behavior. These include limiting the number of junk bonds that can be acquired by federal- and state-insured institutions, and specifying to company directors and officers that achieving the best short-term investment returns is not their main fiduciary responsibility. As Rohatyn acknowledges, these reforms will be opposed by powerful lobbies. It would be good to see the churches advancing such reforms through their public policy offices, along with their more traditional support for anti-poverty measures.
There is in addition to this political work, as the Harvard Business School dean suggested, the task of shaping the culture's moral ethos, of reconnecting religious and ethical values to the pursuit of wealth so that it has a genuinely economic purpose. One hopes the churches will have a constructive role here. The Roman Catholic bishops' and several Protestant denominations' recent papers dealing with the relationship between Christian faith and economic life have begun this work. These. proposals can help us to develop suitable understandings of economic responsibility through the end of the 20th century. Unfortunately, however, this admirable work is being undermined by the churches them selves. There is a dichotomy between the churches' teaching on public issues where the concept of obligation is emphasized, and the churches' approach to pastoral ministry that in effect encourages personal irresponsibility.
I have in mind here the criticism offered by Don Browning of the University of Chicago Divinity School. In Religious Ethics and Pastoral Care (Fortress, 1983), he argues that in an effort to avoid moralism, the churches have capitulated to models of humanistic psychology in their approach to pastoral care. These models, such as that of Carl Rogers, embody ethical egoism and reduce morality to the satisfaction of one's own personal needs. While Christianity emphasizes the importance of responsible individual action, the Protestant churches in practice have "taken simplistic and unsophisticated stances with regard to openness and expressiveness." Browning continues:
They have in general maintained a low profile on a wide range of practical moral issues, taking no position and offering no real guidance. In a pluralistic and rapidly changing society, there are strong pressures on all institutions-especially churches-to maintain a broad common denominator on practical issues. It is easy for the ethics of "do your own thing" to pervade even the province of organized religion [The Moral Context of Pastoral Care (Westminster, 1976), p. 1291.]
The churches like to take what they call a "prophetic stance" toward economic and political issues. denouncing injustice and calling for change. But perhaps their first order of business should be repentance for having helped to foster a national moral environment that features a laissez-faire approach to moral decision making, that serves in turn to perpetuate economic irresponsibility.
Michael Thomas, a former Lehman Brothers partner, characterizes Wall Street's current mentality with a reference to Charles Dickens's Martin Chuzzlewit. Young Martin inquires of a man he meets on the streets of New York City, "Pray, Sir ' what is the source of all virtue?" The man replies: "The source of virtue? Dollars, Sir! Dollars!" The Protestant ethic had the power for much of U.S. history to keep America's financial establishment from taking such foolishness with perfect seriousness. It infused the financial system with a working moral capital, with the understanding, in Cotton Mather's words, that business must be "beneficial to human society" as well as profitable. Now that this capital is almost exhausted, one wonders, to borrow a favorite biblical phrase from the Puritan preachers, if the "day of trouble" may be close at hand. Will our financial temples have to fall on our heads, as Galbraith predicts, before we are brought back to our senses?