Have Wall Street Ethics Slipped?

'IF you want to be ethical, join the clergy."That's what a cynical Wall Streeter told Robert Sobel, a business historian at Hofstra University. Of course, such a statement slanders the many investment bankers, brokers, bond dealers and others in finance who maintain a great deal of integrity in their dealings. Nonetheless, there is a widespread suspicion among professors of business ethics and other observers that the standard of ethics has deteriorated on Wall Street. The bond-buying scandal that prompted the resignation of three top officials at Salomon Brothers Inc. Aug. 18. has reinforced such opinions. Salomon, the world's fourth-largest underwriter of securities, has admitted repeatedly violating Treasury rules against buying more than 35 percent of a Treasury issue of securities at an auction. Several theories are offered to explain the rash of scandals that have rocked the financial community in recent years, symbolized by such names as Michael Milken, Ivan Boesky, and Dennis Levine. One theory is that financial booms, such as occurred in the 1980s, draw in greedy, ruthless types willing to cut corners. "Every long boom in which there is a lot of money to be made in securities transactions has some odor connected to it," says Robert Fogel, professor of American institutions at the University of Chicago's Graduate School of Business. There were major scandals in other boom eras - the 1920s and 1880s, for example. During the last decade, Wall Street employment grew by 30 percent as investment bankers, lawyers, and others helped finance and plan the restructuring of perhaps one-quarter to one-third of United States industry. "A lot of those people came from the provinces," says Mr. Sobel, who wrote an authorized history of Salomon Brothers covering the years 1910 to 1985. These newcomers sometimes "lack a moral compass." As a result, in some firms a culture of toughness has developed where making a profit overrides consideration for others, he says.

Gentlemanly traditions In the early 1960s, the typical American financier was likely a WASP and belonged to a country club. His father was possibly in the business, having managed to survive the hard times in the 1930s. The rules of the game were gentlemanly, with ostracism facing those who broke the rules. Gradually the securities industry become more diverse. Jews, Italians, even a few blacks and women won positions of power. They were less likely to be familiar with the best of Wall Street traditions, Sobel notes. Many "allowed power to go to their heads," says James Kuhn, a professor of business at Columbia Business School. Another thesis is that Wall Street has become far more competitive since the weakening of the clubby atmosphere and with deregulation, particularly the end of fixed commissions on stock trades in the 1970s. Institutional trading, such as by pension funds and mutual funds, became far more important. A variety of new financial instruments were created. Sophisticated techniques of hedging and arbitrage became popular. Markets became global. "A lot of the old white-shoe values went by the wayside," says Andrew Singer, editor of Ethikos, a bimonthly magazine dealing with business ethics. Whereas in the simpler days, those with a liberal arts education could easily thrive on Wall Street, in the 1970s and 1980s they were joined by those with MBAs or higher mathematical skills. These new groups often had weaker backgrounds in history and ethics. One Wall Street recruiter for bond houses in the 1980s looked for two key qualifications in candidates - good mathematical skills and a super-keen interest in making money. A third related theory is that the availability of too much money has corrupted many on Wall Street. "Compensation levels have soared," notes William Freund, an economics professor at Pace University's School of Business on Manhattan and a former chief economist of the New York Stock Exchange. "The kind of compensation levels achieved by some traders were not heard of in the 1960s. It may be that compensation levels got out of hand."

Pay levels too high? Traders are often given a share of the profits made by their activities. This can amount to millions of dollars a year. Some traders, says Mr. Freund, may be tempted thereby to "kite the profits." "Historically, corruption, unethical behavior, is unfortunately an integral part of the financial world," says Daniel Diamond, dean of the undergraduate school at the Stern School of Business, New York University. He holds that because those in the financial world are primarily dealing with "representations of value," such as stocks, and the opportunity for financial gain is so substantive, that the temptation to act unethically may be greater. Says Mr. Sobel: "There is no canon of ethics in the US securities industry."