Contempt for Every Customer

• Posted by DynamicHedge
• on July 12th, 2012

These scandals — this business of blatantly defrauding clients.  This shit has gone on for way too long.  I’m a child of the 80s.  Which means I’ve got the notion engrained in my psyche that greed, for lack of a better word, is good.  Not in the literal sense but in the sense that you shouldn’t feel ashamed for wanting better for yourself and going out and hustling every angle for it.  I’ll tell you what’s not good: stealing money from people who put their LIFE in your hands.  That’s right, when someone gives you control over their financial future, they’re putting their life in your hands.

When Greg Smith wrote his famous op-ed accusing Goldman employees of referring to clients as Muppets I never spoke on it.  Why?  There was no reason to pile onto a story when it appeared that the behavior in question was only related to a few isolated people, or at worst, one shitty department.  Unfortunately, as recent events have proven, this behavior is not isolated.  It seems that people of power and influence within the finance industry do see their clients as Muppets (or worse).

Let’s recap only the immediate pattern of behavior (forgetting the MUCH bigger past issues of mortgage fraud, TARP abuse, etc.):

Libor Fixing Scandal

MF Global

London Whale

PFG Best

In finance, exploiting an opportunity is a good thing.  In fact, if explained correctly, most would agree that exploiting inefficiencies in markets is, on the whole, a productive endeavor.  Unfortunately, the culture of finance takes the concept of this “productive endeavor” far beyond the point of utility.  It’s not good enough to simply look for opportunities in the market because, in a certain perverse outlook, everything is an opportunity.  Therefor, if something can be exploited or manipulated then by virtue of bizarro financial theory it should be exploited or manipulated.

Let’s look at the LIBOR manipulation.  My first thought was: “Of course LIBOR is rigged, look at how they set it up!  You mean they just let the dealers submit their quotes?  ROFL!  What’d they expect?”  Do I think it was wrong?  Yes.  Was I surprised?  No.  Depending on your view, LIBOR rigging is either a near-victimless crime or a universally evil act (if I’m honest, I’m only pissed because it screwed with the predictive power of the TED spread).  To many in finance, because the LIBOR process is flawed it implies that it should be manipulated.  That’s the logic.

Could the circumstances and attitudes that allowed the LIBOR scandal to play out be the same ones that led executives to commit fraud at PFG Best?  When you think about it, clients are a lot like the LIBOR process — flawed and open to manipulation.  Force this to its logical conclusion and, by a certain twisted logic, clients SHOULD be manipulated.   Take that one tiny step further and why not outright stolen from?  They handed over their money and the regulators allowed themselves to be duped!  What did they expect?

The important question is, does theft from clients bring some additional value or magical efficiency to the market that I’m not aware of?  Tell me I’m wrong here!  What am I missing — and more importantly: if I’m being some sort of idealist does that mean that I’m just late to this particular trade?   I’m sure it depends who you ask.

I know people affected by both the MF Global and PFG Best frauds.  For the record, I do not think that clients can be viewed as just another opportunity.  Not everything fits into some bullshit theory of markets and efficiency and price discovery — no matter how far extrapolated.  Some things are still sacred, and client trust is one of them.  The void of leadership and character in the upper echelons of this industry has become shameful.  It pains me to say this because I know a ton of individuals with character and integrity in this field, but for the public, it’s getting harder and harder to trust people in finance.  Scandals and fraud are nothing new, but the trend is up for the scale and frequency.  Something has got to change.

 

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