If there's anything that Warren Buffett has prized more than his billions, it's his company's reputation. Which is why there was a collective gasp of betrayal when Buffett's onetime heir apparent, David Sokol, resigned in the aftermath of pocketing $3 million from trading in the stock of a chemical company Berkshire was acquiring. Buffett furiously spun the departure, insisting nothing "unlawful" transpired. In a Reuters survey of 23 top bankers, 21 said Sokol's trades looked ethically wrong to them, yet only one in five expected any insider-trading charges to be brought. The incident has raised the question, yet again, about what it takes to succeed in finance. Do bankers think of the law as something to be scoffed at and ethics as only for suckers? Increasingly, even veteran investors say the answer is an outraged "yes."
"What you're seeing on Wall Street is disgusting," says Vanguard Group founder John Bogle. "Not so many years ago there were some things one simply didn't do. Period. And that's evolved into moral relativism, into 'When everybody else is doing it, I can do it too.' I've only been in this business 60 years," adds Bogle, and it is "absolutely" worse now than before. He believes that "we have a societal problem, not just a Wall Street problem. But like other problems it gets magnified beyond belief on Wall Street, where the money is." Former Goldman Sachs chief John Whitehead also told Newsweek that ethical standards have slipped, as did former PaineWebber CEO Donald Marron. "We're dealing with more difficult problems than ever before, and it's simply harder to maintain standards of ethics and doing business," says Whitehead, who ran Goldman until 1984. Both Whitehead and Marron say most players are honest. "The vast majority of business," says Marron, "is done at very high ethical standards."
And yet, if you wanted to design a psychology experiment to tempt otherwise honest people to cross an ethical line, it would be hard to beat Wall Street. "It's the culture of success," says Jeffrey Leeds, president of Leeds Equity Partners, a private-equity fund. "Where people are playing for super-high stakes and where you're attracting alpha men and women, you're going to see more people tend to bend the rules, because what you get for success is out of proportion." Perhaps in no other business is there more tension between the rules and the incentives. For starters, investors are both banned from trading on nonpublic information—and rewarded for getting that information first. "The idea that no one can do anything until it's disclosed to the market—that's really not possible. It's an impossible ethical rule," says Eric Orts, a legal-studies and business-ethics professor at Wharton. At the least, there must be hard-and-fast laws about insider trading, right? Nope. "There are a number of gray areas," says Orts. "One of the problems is that insider trading has never really been defined by Congress."
If you wanted to design a psychology experiment to tempt otherwise honest people to cross an ethical line, it would be hard to beat Wall Street.
Complicating matters is the growth of the financial markets. "The scale of Wall Street is bigger by several orders of magnitude," says Marron. "Many more entities are touched by it: pension funds, endowments, 401(k)s. There's no question that the geometric growth of the money and scope of Wall Street has put a strain on ethics and business." Whitehead says that when he was at Goldman, the firm shunned dubious business practices like financing hostile takeovers. "Goldman Sachs became known for its integrity and not doing the thing that made the most money." And how does he feel about the firm now that it's been cast as an empire of greed? "The damage to their reputation saddens me," he says.
Will anything chasten Wall Street? Oliver Budde, a former Lehman Brothers lawyer, says many bankers "really feel awful about what they do," but "there's this other dynamic of 'Look, if we don't do it, then someone else will do it.' " As he puts it: "Morals, ethics—that's not their job. The view on the Street is that that's Congress's job." Washington, are you listening?
Joanne Lipman founded and was editor in chief of Condé Nast Portfolio, the National Magazine Award-winning business magazine and website. Previously, Lipman was a deputy managing editor of The Wall Street Journal, where she created and was editor in chief of Weekend Journal and created Personal Journal. She is a frequent television commentator on business issues.