Economic slump: Ethics loom large
Compared with previous recessions, the last two downturns can be pinned more on greed.
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"Individuals get carried away," says David DeRosa, a finance professor at the Yale School of Management in New Haven, Conn. As he sees it, the housing problem lies more in reckless unwise decisions on home financing. In the case of financial derivatives that have got major banking firms in trouble (such as Lehman Brothers Holdings last week), part of the difficulty arose from poor risk assessment, using new financial models, he says.Skip to next paragraph
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In 1993, religious institutional investors began making "eerily prophetic warnings" of an impending subprime mortgage debacle in the US, says Laura Berry, executive director of the Interfaith Center on Corporate Responsibility. The ICCR represents nearly 300 faith-based institutional investors managing more than $100 billion in assets.
These firms long ago voiced concerns in regard to predatory lending practices, inappropriate underwriting standards, and the potential consequences of securitization of debt instruments, that is, the packaging of bundles of mortgages and other loans into a big single investment for sale to pension funds and other investors around the world. If the early warnings had been heeded, the world "would have avoided the kind of meltdown we are experiencing today," she says.
Ms. Berry argues that ethical investing practices, such as those strived for by ICCR members, are less likely to lead to catastrophic losses. She notes that investment funds compliant with Muslim sharia rules, including strict prohibition of investments tied to collection of interest, have performed extremely well in the current down market. Berry holds that the "old rules," the rules of ethics set out ages ago by Christian, Muslim, and other leaders, are still in place.
ICCR members often strive to encourage corporate executives to follow good governance rules, using their investment money as leverage. Corporations were created in the first place hundreds of years ago "for the public good," Berry says, not merely to benefit managers or shareholders alone. This goal gives them "their license to operate," she says.
But the former Citigroup money manager cautions that the globalization of finance and the ability to move money and financial information with great speed through modern communications has multiplied the dangers from poor and unethical investment decisions.
"We have moved from arithmetic to calculus," she says.