Greed Wasn't Enough

"There was too much greed on Wall Street. Greed destroyed us." How many times have we heard that greed was the center of all the ills of Wall Street, Main Street, and Global Street? Can it really be that simple? After all, isn't greed part of the common human condition?

I like to think that Policy Innovations is ahead of the curve. Another case appeared today in the New York Times op-ed section. In an essay titled "The End of the Financial World as We Know It," Michael Lewis and David Einhorn argue that greed is not a sufficient explanation of the current mess. Instead, more robust factors involved were:

1. Misaligned interests of the many
2. The tyranny of the short term has prevented institutions from doing their job
3. Our enlightened self interest was therefore hindered

Here is an excerpt from their essay:

Richard Fuld, the former chief executive of Lehman Brothers, E. Stanley O’Neal, the former chief executive of Merrill Lynch, and Charles O. Prince III, Citigroup’s chief executive, may have paid themselves humongous sums of money at the end of each year, as a result of the bond market bonanza. But if any one of them had set himself up as a whistleblower — had stood up and said “this business is irresponsible and we are not going to participate in it” — he would probably have been fired. Not immediately, perhaps. But a few quarters of earnings that lagged behind those of every other Wall Street firm would invite outrage from subordinates, who would flee for other, less responsible firms, and from shareholders, who would call for his resignation. Eventually he’d be replaced by someone willing to make money from the credit bubble.

OUR financial catastrophe, like Bernard Madoff’s pyramid scheme, required all sorts of important, plugged-in people to sacrifice our collective long-term interests for short-term gain. The pressure to do this in today’s financial markets is immense. Obviously the greater the market pressure to excel in the short term, the greater the need for pressure from outside the market to consider the longer term. But that’s the problem: there is no longer any serious pressure from outside the market. The tyranny of the short term has extended itself with frightening ease into the entities that were meant to, one way or another, discipline Wall Street, and force it to consider its enlightened self-interest.

Lewis and Einhorn suggest empowering people within organizations--so called whistleblowers. Here is part of a Policy Innovations piece by Stanley Goldstein and Frank Plantan from late Dec. 2008:

Peer pressure and standard business usage can nudge the managers of hedge funds to set standards of conduct and ethical behavior out of enlightened self-interest.

Many charities today are adopting whistleblower policies and creating audit committees within their boards of directors. There was no mandate behind this promulgation. Rather it was the questions that grantors had begun to ask that led to their creation. After repeated queries regarding whistleblower and corporate governance policies, charities caught on to the fact that it is better to attend to these issues as a means to attract funding.

The ultimate goal of such behavior is to reap the value of a good reputation. The voluntary adoption of these policies has a direct impact on a charity's ability to instill confidence in funders. Most charities would prefer to avoid such expenditure of time and resources, but consumer and client demands make it a necessity.