The news that Credit Suisse First Boston (CSFB) is facing dishonesty charges similar to those leveled against and effectively admitted by another top-flight investment bank, Merrill Lynch, should cause concern to investors around the world, whatever the size of their portfolios.
What is alleged at CSFB is that during the frenzied market in Internet stocks, the so-called dot.com boom, the bank’s top management pressured its analysts to produce enthusiastic reports on companies in the sector, particularly those for whom CSFB itself was acting. This in itself would be bad enough, since stock analysts are supposed to be entirely independent, so much so that one European analyst once recommended that his own bank’s share should be a “sell” and despite the embarrassment of his top management, kept his job.
However what happened at Merrill Lynch and is alleged to have occurred again at CSFB is that while the investment bank was with one voice recommending dot.com shares to the world at large, it was warning off its most favored clients from investing in them. The dominant, largely American investment houses are of course no stranger to this sort of scandal. Twenty years ago, similar shenanigans were going on when bank salesmen were deliberately “stuffing” the portfolios of the majority of fund managers with bonds issued by the investment banks on behalf of clients, which they knew to be poor risk. Once again the institution’s really big customers received different treatment and were steered away from such investments.
When bank officers, from the lowest to the highest, are under constant pressure to perform and increase profits sharply, year on year, it is hardly surprising that such duplicitous conduct takes place. Unfortunately, the need for such dishonest behavior seems to have become structural, in that it is now accepted by the banking community. A banker who can make a “smart” deal by pulling the wool over someone else’s eyes can be considered a hero, to be rewarded with a fat bonus at the end of the year. The fact that to make that deal, the man may have lied and cheated no longer matters. The greatest crime, perhaps the only crime, is to be found out.
Of course, chicanery, insider trading and the old boys’ network is nothing new. It has always been part of trading practices and financial markets. But, in the past, there was a basic standard. Institutions and the people who worked for them professed to that standard. When they were caught falling short of it, they endured shame and commercial damage. They, very often never worked in the business again.
In the modern financial markets, honesty and high standards are still talked about but all too often, that is all that ever happens. In a world of spin and publicity, the urgency of the deal and the big profit shove all basic moral precepts aside. Thus grossly dishonest operators like Donald Trump can trick their way to great eminence, aided and abetted by cynical bankers who preferred to do the deal rather than the decent thing. The financial wheelers and dealers who funded him should never have let it be built up in the first place.
If the financial community cannot be trusted with investors’ money, who can?
