Financial scandals, or to put it precisely and more definitionally exact, financial crimes, are fraught in today’s global financial market. Although the line between fraud and excessive risk-taking behaviors is somehow blurred in the financial fraternity, these kinds of misconducts are transparent to the rest of the world outside of the fraternity. Are you comfortable with the recent Swiss bank trader scandal, where a rouge trader in London in the UPS AG’s investment banking division incurred $2 billion of losses that basically lead the firm’s third-quarter financial statement into the red? Or do you think it’s just for Goldman Sachs, the largest and arguably most experienced investment bank in the world, to create an CDO (known as Hudson Mezzanine funding 2006-1) in which the bank cherry-picked all the assets portfolios then sold it to investors, while at the same time making a whopping $1.35 billion profit by betting against the CDO? Simply put, performing a rouse, making money while duping their trusting, unsuspecting, clients.
All these recent happenings above lead us to a core question: Do we still have trust, honesty, and prudence in our financial market, and if the answer is nay, how do we restore or redeem those virtues and values into our financial regulatory reform? Other than traditional prudential regulation, the global regulators pay more attention to an area in which the ethical practices have been ignored for a long time, that is, the “Market Conduct Regulation”.
Almost every market actor and daily transaction could trigger and perpetuate widespread and worldwide systemic risks. Such contagion of systemic risks is even worse in a scenario where those misconducts were created and implemented by the “Super Spreaders” (Means Large and Complex Financial Institutions) in today’s convoluted adaptive financial ecosystem.
But how do we regulate “market conducts”? Through a top-down legal promulgation approach (a very sensible and obvious idea) and naively believes that every regulation is just too good to be circumvented by some ambitious and nasty financial institutions? Instead of trying to design “perfect regulations” or “best practices”, I firmly believe that some correct values and moral cultures should be injected into the blood of every actor within the financial market first and foremost. Those virtues are universally shared values, by those who choose to adhere to these values, such as trust, honesty, and prudence.
To infuse those moral mindsets into financial market, trust basically means a transacting party acts under the assumption that its counter party would not harm them- honesty indicating the transacting party will act in a way not unjust or harmful to its counter party, and prudence standing for the transacting party to proceed in behavior in a cautious way, without intent of deceit by its counter party, any third party, or the market itself. Those values should not be only treated as behavior guidelines, but ought to be constructed, construed, and internalized as “the fundamental business philosophy” that can direct the market actors to behave in an ethical and moral way instinctively.
This brings us to the question: how to achieve the above mentioned goals? Being trustworthy, honest, and prudent is sometimes an inherent performance. Some directors or managers within a corporation are simply moral and virtuous individuals. They seemingly don’t need anyone to tell them how to properly exercise their business judgments or behave properly. The have a moral and ethical compass as well as business acumen. The two do NOT have to be mutually exclusive. For those who were born or raised to behave righteously in their professional lives, they act under the shared experiences, philosophies, histories and values with other counter parties. Nevertheless, there are some actors who perform in a trustworthy, honest, and prudent way based on some calculated assumptions. They act virtuously because they have already considered all the reputational costs, I repeat, REPUTATIONAL COSTS, transactional costs and regulatory costs, and thus decided to follow their conscience. Those values to some extent can be referred to as “cognitive virtues” or “artificial virtues”. And just because it is of an “artificial” or “constructible” nature, I do believe there is some room for the global regulators to adhere to some behavioral philosophies which can and should be incorporated into jurisprudence as well as regulatory formation.
These behavioral philosophies can be traced and redeemed from some ancient wisdom, and one amongst the most suitable is the core Chinese philosophical value system of Confucianism ( some may prefer an evolved version, the Neo-Confucianism). Seems this article is just a preliminary exploration of this new creative regulatory approach. I am not going to delve further into the details about how to apply Confucianism to the formation of financial regulatory philosophy right now. Instead, let’s just take a look at some words and thoughts from the “Confucian Analects”, and to see how these Confucius’ words are so urgently relative for applying to our contemporary financial regulation.
"Riches and honors are what men desire. If it cannot be obtained in the proper way, they should not be held. Poverty and meanness are what men dislike. If it cannot be avoided in the proper way, they should not be avoided.” ~Book IV: Le Jin
"He who acts with a constant view to his own advantage will be much murmured against." ~Book IV: Le Jin
"The mind of the superior man is conversant with righteousness; the mind of the mean man is conversant with gain." ~Book IV: Le Jin
"Riches and honors acquired by unrighteousness are to me as a floating cloud."~ Book VII: Shu R
Those words sound familiar? Yes, that’s where Trust, Honesty and Prudence come from and from where those values should be restored.
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