1) Throughout this class we have discussed the conduct of the major players at financial institutions and their role in leading their companies to the brink of failure, and in some cases have been successful (Bear Stearns, Lehman & AIG). With that as a starting point how important is character and ethics? What role(s) do you think boards of directors should play and did they exercise their fiduciary responsibilities to the shareholders and employees?

Money is an important character in various financial institutions, but by itself is not necessarily evil. Rather, it is something that is used to trade goods and services. We call it "currency", and it allows us to do business between organizations. Unfortunately, that is the sterile dictionary-type definition but it does not capture all the issues that are involved with finances. In corporate life, just like in many other realms, money causes all sorts of problems. People make incredibly bad decisions because of money, and plenty of people have gone to prison because of their money-related behavior. This is why people always approach money with a certain amount of uneasiness. Here are a few thoughts on why financial management ethics are important. The numbers do not have a soul, so they cannot govern themselves. They must be managed by people.
Ethics are important because finances make people do some strange things. The spreadsheet does not have a conscience, and the goal of working with spreadsheets is to make numbers add up in a way that is pleasing to the organizations and its constituents. Unfortunately, people can move around numbers in all sorts of ways to make them sum up "correctly." Because of this, companies need to adopt management ethics in order to have an outside source of guidance. People are afraid (and rightly so) that without a moral barometer, anything is possible on a spreadsheet.
Financial management ethics are also important because of history. Just say "Enron" and people either laugh or get very serious. The trouble with Enron is that everyone was happy as long as the numbers kept looking good. However, much mischief was afoot at Enron and the company was running fast and loose with ethical principles. Enron is a textbook example of why financial ethics are important. Without ethics, there are truly no boundaries when it comes to organizational culture.
Countries like the United States are built around many great things but they also flirt with danger on a regular basis. In a post-modern world, capitalism can quickly dissolve into greed and villainy. Again, companies that do not have any sort of moral code or ethical principles are really free to do whatever they want. This is because shareholders and financial markets have impossibly high demands on certain companies - executives feel somewhat forced to make moral compromises. Before people know it, Enron appears again and again. Why? Because people are not clear on their own ethical viewpoints and they are left to make decisions based on a reactionary environment. Therefore, if people are serious about living life a certain way, they must write a strict moral code and be willing to follow it, no matter what happens in the financial market. United States is a country that family businesses have disappeared almost completely. Almost all of the big companies are open to the public. Already the growth of corporations is not really possible without the public’s view. When the family companies open up to public, the control of the families on the companies diminishes or ends (completely). So, as in other countries, not 30 per cent of the average public-bay close to 100 percent of the market. Therefore, in an environment in which there is not a belongingness that would characterize the company’s performance and practices as the ‘family honor’, professional managers are in a key position.
The one important role is that of the boards of directors who try to maximize the values of equity partners, shareholders and employees, rather than to maximize their own wealth. They should keep holding the company’s value and imagine high. The managers to have a voice in their industry sector policies need to be very structured and creative. The Company's management considers the interests of shareholders are required to act under a framework, and full transparency.
I think they did not exercise their fiduciary responsibilities to the shareholders and employees because if they did, Enron scandal would not have happened. Enron company executives, largely through the salary, bonus or stock options order to increase their own wealth had entered illegal or immoral behavior; these companies on behalf of the investors to supervise or be responsible for following the independent audit firms, rating agencies and stock analysts who have left their duties. All of this system of protecting and regulating public institutions were caught in a desperate situation.
With Enron up and down at the same time, the emergence of similar problems at Global Crossing's telecommunications company occurred. There was a crisis of confidence because of falling stock markets - stock prices led to attracting more attention. In addition, many experts, these two companies in an intense way the law and unethical practices in other companies is also very common to express, before the public and investors needed further expanded the dimensions of concern.

2) The issue of regulation of the industry has also been discussed. And from the readings it would appear that we have sufficient regulatory oversight via the many government agencies at both the federal and state levels that should have been able to identify deficiencies early on and take action to protect the public. I would ask that you take a retrospective look at the regulatory environment beginning with Glass-Steagall, Sarbanes-Oxley and Congress’s most recent Financial Regulatory efforts to curb abuses. Do we need more regulation or just enforcement? Do you think the repeal of Glass-Steagall contributed to the crises?

A lot of the discussion in the past was about how to fix the financial system. There was a lot of disagreement about what needed to be done, the ideological divide was basically between those who said it was their problems which came from too much government involvement in the economy and those who said it was from not. But this year the recession and particularly the responses to it are largely taken as given and all but complete, and it is more about how things have changed, which of the changes will survive, and how to thrive in the new environment.
Unfortunately, in my view the problems are still with us. For example, we need to build on the weak regulatory foundation that Dodd-Frank gave us, not weaken it further but most eyes seem focused on the future rather than on the big problems that are still with us. How can policymakers fix the financial system to reduce the risk of another economic crisis and yet more bailouts? Congress is considering comprehensive new regulations along with a mandatory “resolution” regime for systematically important financial institutions which near insolvency, and access to federal funding to cover the cost.
But these steps would make the financial system worse, not better. And while claiming to make financial bailouts a thing of the past, it would actually make them more likely, to create a permanent TARP program. More government regulation and pre-funded bailouts will not fix the system. Instead, the focus should be on establishing an effective bankruptcy system for large financial firms to allow failures to be addressed in the same way failure is addressed in other industries, while improving capital standards.
Firstly, we need to know what Glass-Steagall is. The Glass-Steagall Act of 1933 established the Federal Deposit Insurance Corporation (FDIC) in the United States and included banking reforms, some of which were designed to control speculation. Some provisions such as Regulation Q, which allowed the Federal Reserve to regulate interest rates in savings accounts, were repealed by the Depository Institutions Deregulation and Monetary Control Act of 1980. Provisions that prohibit a bank holding company from owning other financial companies were repealed on November 12, 1999, by the GrammLeach-Bliley Act.”1
Secondly, how effected the repeal of the Glass-Steagall act and the current financial crisis? The causes of the Great Depression are still being debated today, more than 80 years after the stock market crash of 1929. Therefore, the causes of the current Great Recession will certainly be debated for many years to come. A key part of the present discussion has centered on the repeal of the Glass-Steagall Act. Some analysts and legislators view the repeal as one of the main causes of the financial collapse, while others believe the repeal blunted the effects of the collapse.
Now, we can take a look at some politicians' and economists’ speeches; In November 2009, Senator Byron Dorgan said, “I thought reversing Glass-Steagall would set us up for dramatic failure and that is exactly what has happened. To fuse together the investment banking functions with the F.D.I.C. banking function has proven to be a profound mistake.”2
Demos, a nonpartisan public policy and research organization, wrote a report entitled “A Brief History of Glass-Steagall” addressing the impact of the repeal on the current day crisis. The report concedes that much of the current financial damage was done by pure investment banks which would not have been constrained by the Glass-Steagall Act. However, Demos believes that commercial banks’ securities activities may have made financial collapse worse and necessitated federal intervention. The report states, “...commercial banks played a crucial role as buyers and sellers of mortgage-backed securities and credit default swaps, and other explosive financial derivatives. Without the watering down and ultimate repeal of Glass-Steagall, the banks would have been barred from most of these activities. The market’s appetite for derivatives would then have been far smaller and Washington might not have felt the need to rescue the institutional victims.”3 In a March 27, 2008 speech at Cooper Union, presidential candidate Barack Obama said, “A regulatory structure set up for banks in the 1930‟s needed to change. But by the time the Glass-Steagall Act was repealed in 1999, the $300 million lobbying effort that drove deregulation was more about facilitating mergers than creating an efficient regulatory framework. . . Unfortunately, instead of establishing a 21st century regulatory framework, we simply dismantled the old one., thereby encouraging a winner take all, anything goes environment that helped foster devastating dislocations in our economy.”4
Professor Curtis C. Verschoor of DePaul University stated, in a 2009 article in Strategic Finance, “Freed from the restrictions of the Glass-Steagall Act, giant bank holding companies appeared to have been focused more on meeting the expectations of Wall Street analysts than on protecting depositors‟ funds from risk.”5
In testimony before Congress in 2007, Robert Kutner said, “Since the repeal of Glass-Steagall in 1999, after more than a decade of de facto inroads, super-banks have been able to re-enact the same kinds of structural conflicts of interest that were endemic in the 1920‟s, lending to speculators, packaging and securitizing credits and then selling them off, wholesale or retail, and extracting fees at every step along the way... The repeal of Glass-Steagall coincided with low interest rates that put pressure on financial institutions to seek returns through more arcane financial instruments. Wall Street investment banks, with their appetite for risk, led the charge.”6
Mark Tran, in the Guardian.co.uk, opined, “U.S. banks, particularly investment banks, are in difficulty because they were granted what they wished for. Left to their own devices, several managed to ruin themselves and create havoc in the international financial system. Wall street Bankers may be wishing that regulators had kept them on a shorter leach, not least, because fewer of them would be out of a job today.”7
Several prominent bankers who were at the forefront of the repeal of Glass-Steagall have publicly expressed regret over their involvement. David Komansky, former Merrill Lynch & Co. Chief Executive Officer, stated in an interview with Bloomberg News, “Unfortunately, I was one of the people who led the charge to get Glass-Steagall repealed. I regret those activities and wish we hadn’t done that.” John Reed, Chairman of Citicorp, during the Citicorp-Travelers merger, stated, “U.S. lawmakers were wrong to repeal Glass-Steagall.”8
Perhaps Camden Fine, the president of a Washington trade group that represents 5,000 small banks, summed up the anti-appeal position best when he said, “We cruise along for 80 years without a major calamity infecting the entire financial system and then less than eight years after the repeal of Glass-Steagall, we have a financial meltdown in this country... That’s no accident.”9
Robert Pozen of Forbes believes, “The repeal of Glass-Steagall was, at most, a minor factor leading up to the financial crisis, and its repeal was instrumental in resolving the liquidity squeeze on Wall Street”. Pozen opined that... “The wall between commercial and investment banking was long filled with holes.” He argues that most of the securities transactions that the commercial banks engaged in would have been permissible without the repeal of Glass-Steagall. He believes that it was the underwriting of mortgage-backed securities that caused the crisis and that for the large banks; this was not a significant cause of losses. In fact, he said, “...the big banks held mortgage securities with the highest ratings, which they would have been permitted to hold under Glass-Steagall.” Pozen believes that “...the repeal facilitated the rescue of the four large investment banks and thereby reduced the severity of the financial crisis”.10
Charles W. Calomiris of the Wall Street Journal agrees with Robert Posen’s position. In an October 2008 article, Calomiris stated, “Wasn’t it the ability of commercial banks and investment banks to merge a major stabilizer of the financial system?” He argues, “Subprime lending, securitization and dealing in swaps were all activities that banks and other financial institutions have had the ability to engage in all along. There is no connection between any of these and deregulation.” Calomiris believes that the major cause of the crisis was the inability to accurately measure risk on the part of the banks and the credit rating agencies. He believes this inability was caused by misaligned incentives, “. . . those that measured risk profited from underestimating it and earned large fees in doing so.”11
According to Calomiris, contributing factors to the financial crisis were loose monetary policy from 2002-2005 and government subsidies for leverage in real estate. ”12
Although Professor Curtis C. Verschoor of DePaul University believes that the repeal of the Glass-Steagall Act was a major contributor to the current financial crisis. He also believes that flawed work by the credit rating agencies was a major contributor. When analyzing the failures at Citigroup, Verschoor stated, “Citi’s risk efforts relied heavily on the flawed work of credit rating agencies. It believed that the possibility of troubles with collateralized debt obligations was so tiny (less than 1/100 of 1%) that it excluded them from their risk analysis, even after Bear-Stearns ran into serious subprime trouble in the summer of 2007.”13
Professor Michael Perino of St. John’s University thinks that the credit rating agencies played a crucial role in the current financial crisis, particularly their role in the creation of derivatives. ”14
Representative Jim Leach, one of the writers of the Gramm-Leach-Bliley Act, which repealed the Glass-Steagall Act, believes that the repeal made the current crisis much less severe as it allowed commercial banks to take over failing investment banks. In a Time Magazine article of September 17, 2008, he stated, “If you didn’t have commercial banks ready to step in, you’d have a vastly bigger crisis today.”15
Justin Fox of Time believes that transaction-oriented investment banking is the crux of the current financial crisis. Fox believes these transactions, which he refers to as the shadow banking system, “...began slithering its way out of the reach of banking regulators in the 1970’s, more than two decades before the Gramm-Leach-Bliley Act put an end to the Glass-Steagall separation of banks and Wall Street. Some advocates (Jim Leach, in particular) actually saw their legislation as a way to rein in some of the shadow banking nonsense and bring it back under the control of banks and the watchful eye of bank regulators.”16
Eventually, the question of whether or not the repeal of the Glass-Steagall Act caused the current financial crisis cannot be answered definitively. The arguments on both sides are compelling and informative. Through continued debate, the financial community and legislators may determine the factors that contributed to the financial collapse. With this knowledge, they may be able to construct a regulatory reform structure that allows the U.S. financial market to remain a leader on the world stage while being shielded from financial turbulence. In my opinion, with the repeal of the Glass-Steagall Act over a decade ago, the U.S. economy was exposed to an intolerable level of risk, and the recent financial crisis was certainly exacerbated by the removal of these safeguards. I believe that we must limit the potential for future economic collapses by returning to a more prudent banking system in which banks must once again choose between investment activities or commercial lending.

3) With the direction of the above questions directed at the industry and government, let me offer an option that speaks to the consumers and their conduct. Specifically, what responsibility does the consumer bear with regard to bad financial decisions in acquiring mortgages that in all likelihood they would not be qualified for except at teaser rates? Should the government have an obligation to bail these consumers via a lifeline of some sort? Some of the answers to this questions may tie directly back to product offering/regulatory oversight but how would the government control the private sector product offerings? Could they? Should they?

The responsible consumers with a good financial education which can trustworthy buy services at the best prices represent an essential component of a unique efficient market. The consumers’ capacity to take responsible and informed decisions has a positive impact on long term on both economy and society. Consumer buying behavior is a complex phenomenon, which is comprised of a bundle of decision-making processes, economic determinants and market stimuli. Consumer purchasing behavior has been attracting the interest of a great number of academic and commercial parties for many years. The complexity of the processes with which consumer purchasing can be associated has made the phenomenon considerably difficult to be predicted and controlled. However, as consumers are the most essential source of revenue for business organizations, therefore their behavior is of significant importance for achieving market survival and financial prosperity. There can be no doubt that many consumers have been battered by bad decisions that they made about mortgages, credit card debt, auto loans and so on. And there is no doubt that some of these bad decisions were driven by unscrupulous business practices and that alarms should have been raised about certain lending practices that drove the increase in household leverage. Our recent experience raises a legitimate and interesting question--what exactly is the role of the government in protecting people from their own bad decisions? It is important to bear in mind that for 30 years we have been in the midst of a major social transformation in which responsibility for risk management has shifted to individuals. In the past, the government and employers often made financial decisions for households, for example by providing health insurance, defined benefit retirement plans and social security; now households are on their own more than ever. We can't just shrug off the problem because if many individuals make bad financial decisions, it creates a negative externality. Many of the most important decisions consumers make in their lifetimes involve financial products: a mortgage to purchase a home, a loan to purchase an automobile, credit to make a large durable purchase, investments for retirement and insurance to keep one's family secure. All of these financial products have become increasingly complex over time and there is a much wider range of product options offered by different providers, making decision-making more complicated. Consumers need to be financially literate in order to make well-informed choices about such complex products. A growing body of evidence suggests that many consumers lack the knowledge they need to evaluate and make decisions about financial instruments. So what is to be done? In my opinion, we can improve welfare through the judicious choice of "default" options. For example, in the choice of mortgages or consumer credit plans, the default option could require financial service providers to include a "plain vanilla" product in their menu. This offering should be easy to understand even for the inexperienced customer. It would also serve as a point of reference in comparison to other products. Default options have to be prudently chosen, since consumers, especially those who are inexperienced, are likely to refrain from active choices. Clearly the best way to protect consumers is to educate them. As a society we don't seem to have figured out how to do that. Financial consumer protection is the shared responsibility of governments, business and consumers, and it would be erroneous to imply that financial service providers should shoulder all of the responsibility. Financial service providers are of course responsible for compliance with the laws and regulations concerning such protection, and often voluntarily establish higher standards of conduct. The government should control the private sector product offerings because the world of investing is fascinating and complex and it can be very fruitful. But unlike the banking world, where deposits are guaranteed by the federal government, stocks, bonds and other securities can lose value. There are no guarantees. The 2008-09 financial crises brought to light many serious challenges, among them issues for consumers caused by certain financial products, and by sometimes-insufficient consumer protection and financial education. In response to these challenges, I believe that appropriate financial regulation should be predictable, clear, transparent and well-targeted, with the central objective of restoring confidence to consumers while strengthening the long-term stability and efficiency of the global financial system. Regulation should ensure that consumers have sufficient information to make informed choices among financial products, while allowing providers flexibility to compete on price and innovation.

References

1."Frontline: The Wall Street Fix: Mr. Weill Goes to Washington: The Long Demise of Glass-Steagall". www.pbs.org. PBS. 2003-05-08. http://www.pbs.org/wgbh/pages/frontline/shows/wallstreet/weill/demise.html.
Retrieved on 2008-10-08.

2. “10 Years Later, Looking at Repeal of Glass-Steagall” The New York Times. 11/12/09.
3. “A Brief History of the Glass Steagall Act”, by James Lardner, Demos Background Paper, 11/10/09
4. “Renewing the American Economy” by Barack Obama, March 27, 2008 speech at Cooper Union, New York Times , 3/28/08.
5. “Did the Repeal of Glass-Steagall for Citigroup Exacerbate the Crisis” by Curtis C. Verschoor, CMA, Strategic Finance, February 2009.
6. “Alarming Parallels between 1929 and 2007” by Robert Kutner: Testimony before the House Finance Committee, 10/2/07.
7. “Wall Street crisis: time to turn back the clock on financial regulation”, by Mark Tran Guardian Co. U.K., September 15, 2008.
8. “Ex-Merrill CEO Komansky Regrets Backing Glass-Steagall Repeal” by Jonathan Erlichman and David Midenberg; Bloomberg.com http://www.bloomberg.com/apps/news?=200670001&sid=auWJO2Uj5tKw.
9. “U.S. Senators Propose Reinstating Glass-Steagall Act” by Alison Vekshin, Bloomberg.com, http://www.bloomberg.com/app/news?pid-206700017sid=aKLUZsCROxRQ.
10. “Stop Pining for Glass-Steagall”, by Robert Pozen; Forbes, 10/05/09; http;//www.forbes.com/2009/1005/opinions-glass-steagall-on-my-mind_print.html.
11. Most Pundits Are Wrong About the Bubble”, Charles W. Calomiris, The Wall Street Journal, 10/18/08.
12. Ibid.
13. “Did the Repeal of Glass-Steagall for Citigroup Exacerbate the Crisis” by Curtis C. Verschoor, CMA, Strategic Finance, February 2009.
14. “Investigating Wall Street”, Bill Moyers Journal, 4/24/09- Transcripts/PBS. http://www.pbs.org/moyers/journal/04242009/transcript1.html
15. “While the Regulators Fiddled . . .” by Justin Fox, Time, 9/17/08 http://www.time.com/printout0,8816,1841981,00.html.
16. “Are Citigroup‟s troubles evidence that Glass-Steagall repeal was a colossal mistake?” by Justin Fox, Time, 12/02/08.