In 2008, the routine gambles of Wall Street almost brought down global capitalism and yet, so far, nothing fundamentally has changed.
Restoring long-term confidence in the financial services industry requires more than individual banks changing their behavior or even governments intervening with new rules. The industry needs a new modus operandi, where all of the key players (banks, insurers, investment brokers, rating agencies and regulators) adopt the three facets of collaboration: integrity, transparency, and embracing the commons.
Integrity. Trust is the expectation that the other party will act with integrity – be honest, considerate, and abide by its commitments. To re-establish trust, the financial services industry needs to have integrity as part of its DNA.
But the cavalier manner in which many banking executives violated integrity was stunning. For example, they gave subprime mortgages to people who could never make the payments; bundled them into securities and convinced rating agencies to classify them as AAA, and insurance companies to insure them. They then sold these to unsuspecting investors. They violated all the values of Integrity.
Companies need to act with integrity – not just to secure a healthy business environment, but for their own sustainability and competitive advantage. Increasingly, firms that exhibit ethical values and candor have discovered that they can build trust with customers, employees, shareholders and business partners. This makes them more competitive and profitable.
Transparency. One of the reasons companies have to have integrity is that they operate in an unprecedented, hyper-transparent world. Customers use the Internet to help evaluate the true worth of products. Employees share formerly secret information about corporate strategy, management and challenges. To collaborate effectively, companies share intimate knowledge with one another. And in a world of instant communications, whistleblowers, inquisitive media, and Google, citizens and communities routinely put firms under the microscope. So if corporations are going to be naked – and they really have no choice in the matter – they had better be buff.
But the financial services industry has a history of being opaque and secretive. One Goldman Sachs executive told me off the record: "We’re a very private company. The less people know about us and pay attention to us, the better." Commenting on the U.S. government’s
If Wall Street had been fully transparent during the past decade, the subprime debacle would not have occurred. In the future, investors, rating agencies and insurance companies should be able to drill down into securities such as collateralized debt obligations and analyse the underlying assets. With full data, they could have readily assessed the payment history, and correlate information such as employment histories, property values, location, neighborhood pricings, delinquency patterns, and so on. Potential investors would have quickly realized a CDO’s junk quality and refused to buy it. Since banks wouldn’t have been able to offload subprime assets, they wouldn’t have created them in the first place.
The industry needs to resolve, immediately, that it understands that sunlight is the best disinfectant.
Embracing the Commons. Wall Street companies need to overcome their obsession with proprietary ownership of their intellectual property and learn to share certain information. For example, there are still more than $1 trillion in questionable mortgage backed securities out there, according to Federal Reserve
Banks should open up financial modeling and make pertinent assumptions and data transparent to all interested parties. We need to build a global community of experts dedicated to establishing credible valuation and risk assessments for credit securities and contracts such as CDOs, credit default swaps, or other derivatives. Using an open process, and consulting academics, industry experts, and quantitative analysts, banks and investors could collaborate to determine such securities’ worth.
Unlike a three-letter rating system that few still trust, this approach would allow participants to input their assumptions on future economic activity and do the what-if analysis necessary to price these assets consistent with their market assumptions.
Exposing complex financial instruments to the vetting of thousands of experts could help restore trust in banks and lay the foundation for a new and stronger financial services industry.
The paramount role of banks is not to create shareholder value and enrich their executives. They exist to provide a safe place for people and organizations to store their money and get credit. They exist to execute myriad transactions, make capital markets and are central to our economy. We charter them with a license to operate so that they can perform these functions, but the recent repeated crises show they have violated their pact with society.
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Don Tapscott is an Adjunct Professor of Management for the Rotman School of Management at the University of Toronto, and the
