The Financial Seminary
Please note, this article represents Class Seven of a series. Other Classes are available for viewing under the “Classes” tab.
“The Lunatic You Work For: If the corporation were a person, would that person be a psychopath? Like all psychopaths, the firm is singularly self-interested: its purpose is to create wealth for its shareholders. And, like all psychopaths, the firm is irresponsible, because it puts others at risk to satisfy its profit-maximizing goal, harming employees and customers, and damaging the environment. It has no empathy, refusing to accept responsibility for its actions and feels no remorse…[And], the modern state has the capacity to behave, even in evolved western democracies, as a more dangerous psychopath.”
About a decade ago, I received a call from a friend who is a minister. He had married the daughter of another minister who, by decades of being very thrifty and astute investing, had left a nice trust fund to his widow. After he died, she had taken it to a lady broker as she was more comfortable with ladies than men. (Ladies, there’s a lesson here: You want head and heart regardless of the sex of your advisor.) The broker worked at one of America’s best known investment firms that dealt with retail, or mom and pop, investors. (Lesson: If size was important, we’d all have been at AIG.) Like most of my parents’ generation, she was ignorant about investing as her husband had taken total responsibility for it over the years. (Men, teach your wives to be widows.) Though the widow was elderly and ignorant about investing, the broker put a heavily over-weighted portion of the trust into technology stocks as they had been soaring during the late nineties. (Read Lesson Four again and again if necessary!) The broker justified that as she had simply chatted with the widow’s son, who was nearly as ignorant and emotional about investing, over the phone. Of course, it ended very sadly.
That’s when the widow’s son-in-law minister called to ask me what they should do. (Lesson: As with doctors, there’s nothing wrong with getting two opinions before disaster strikes.) I simply suggested they consult with an attorney friend who had once managed a substantial pension fund for a public company. He, in turn, suggested they take the investment firm to arbitration. While that’s a simpler process than a lawsuit, it’s a very stressful procedure for elderly novices in investing. I’ve since believed with all my heart that the widow died during the process as she was “so ashamed of her stewardship of her husband’s trust,” as she often told me while crying. As I had gotten to know her during all this, her children asked me to be a professional witness on their behalf. I agreed to share what I knew.
The investment firm sent a sharp young attorney from New York. He had done his homework by reading the website of The Financial Seminary. He began by asking if I thought brokers have a responsibility to do what is appropriate for the client. I replied that ever since I had been in the business, the cardinal rule had been we were to always make recommendations that are “suitable” to the individual, no matter what. That is, if a desperate elderly client wanted to speculate in commodities with his last few dollars, we should suggest a CD instead as that’s the professional thing to do. (Lesson: As in medicine, the client isn’t always right when it comes to money.)
The attorney asked if it would surprise me if the securities regulators disagreed with me. I replied that would surprise me greatly. He then uncovered a flip-chart with a quote on it from one of the very top regulators of the industry. It said brokers may indeed not have a responsibility to clients. The arbitration panel, which is largely industry professionals (yep, another lesson), must have been impressed with the argument as they denied the claim of the widow’s estate. And absent that responsibility on the part of brokers dealing with retail investors, I might have denied it too. But of course, I later discovered the quote had been taken out of context by the attorney. The regulator had responded to a question about whether the new discount internet brokerage firms that never have personal contact with clients have any responsibility to keep clients from bankrupting themselves when trading.
My clients never really understood what had happened to their mother. (Pastors really can’t understand how Wall Street thinks.) They had certainly never seen an ad or brochure from the firm about it not having any responsibility to clients. But their mother was simply a pioneer in the issue that nearly destroyed Wall Street the past couple of years. The firm she had used was forced to merge as it was going bankrupt. (Lesson for Wall Street: We still reap what we sow.) It is the reason major Wall Street firms have increasingly utilized money invested by Main Street to create hedge funds and proprietary trading desks that compete with Main Street for profits. It is the issue being explored by the federal commission headed by Phil Angelides to determine the causes of the credit crisis of ’08 and recession of ’09. It’s why the CEO of Goldman Sachs testified his firm could manufacture mortgage-backed investments for clients while the firm bet against those same investments with the firm’s capital.
That issue is neatly summarized in the teaching of Nobel-economist Milton Friedman that: “The only social responsibility of a corporation is to make money. Period.” In the mid-nineties, one of my books quoted British social critic David Selbourne as saying: “Milton Friedman has done more damage to the concept of civic good than any previous political or economic philosopher. You cannot remoralize citizen behavior when the civic order itself is being sold.” It then quoted Peter Drucker as saying: “It is futile to argue, as does Nobel laureate Milton Friedman, that a business has only one responsibility: economic performance.” Friedman’s teaching is why, on the day Goldman Sachs reported record earnings after taking public money in a federal bailout only a year earlier, The Wall Street Journal reported Goldman’s CEO in Germany had just told a group of business students: “Banks do not have an obligation to promote the public good.” Such thinking obviously encourages political liberals, like President Obama, to wonder why he should supply them with public money.
Friedman’s teaching has been at the heart of the so-called Chicago School of Economics the past three decades, during which the Judeo-Christian concept of stewardship has been shredded. It is now more identified with Nobel-economist Gary Becker. I actually found Gary to be quite charming when I sat next to him at a Templeton Foundation symposium on “spiritual capital” at Harvard. And like Friedman, Gary has some good ideas. For example, I asked him if we didn’t need a broader definition of well-being than simple GDP and he surprised me by saying we do. The Chicago School is often associated with the concept of homo economicus, which suggests we are primarily economic rather than spiritual beings. And Gary does a great blog at http://www.becker-posner-blog.com. Its archive contains a blog from July 24, 2005 where he seems to delete the “period” in Friedman’s teaching. While his basic answer remains “no,” corporations do not have social responsibilities, he acknowledges “although maximizing value, meeting contracts, and obeying laws help achieve many of the goals by those claiming corporations should be “socially responsible” by taking care of the environment, considering the effects of their behavior on other stakeholders, and contributing to good causes.”
To use Christian language, Gary might suggest that corporations avoid doing harm by obeying the Law of Moses. As Adam Smith observed when talking about bakers, they often do good by simply pursuing their own economic interests. Yet Gary might also suggest corporate leaders stop short of the Spirit of Christ that compels human beings to consciously do good. As modern corporations often engage in activities hardly as beneficial as baking bread, I’d suggest a dose of that Christ consciousness is a crucial complement to our laws. That seems particularly important now that corporate leaders trained in Friedman’s philosophy are creating enormously complicated investments even Ph.D.’s can’t understand while the Supreme Court has just decided CEO’s can utilize unlimited corporate resources to shape our laws by lobbying Washington.
Ok, enough “philosophizing,” as my son calls it. What does all this mean to you and your financial future? Very simply, barring a miracle in Washington that would rival Moses’ work in Egypt, you should expect to live with “the serpents” that Christ promised for some time to come. The challenge is to be just as cunning, while being as gentle as a dove. So a good first step may be to assure you are invested in corporations that exhibit a consciousness in line with your goals. A good first step might be to consider “socially responsible” or “biblically responsible” mutual funds when investing in corporate America. They typically seek to not only avoid doing harm but actively seek to do some good. I’d offer one caution for conservatives considering “biblically responsible” funds however. Conservative Christianity has been heavily influenced by so-called “prosperity theology.” That is, it’s no longer sure that greed is still a sin. So when I recently explored a BRI portfolio that was managed by someone supposedly investing as Jesus would, I discovered substantial holdings in Goldman Sachs and AIG. If you believe greed on the part of investment firms is still a sin, you might have to explore some other funds.
You can exercise similar responsibility when putting your money in commercial banks. Rather than lend money to hedge funds, as The Wall Street Journal recently reported mega-banks are increasingly doing again, some banks primarily lend money to lower-income people who want to rehabilitate affordable housing and escape government projects. That creates jobs in poorer rural and inner-city areas. Then people can afford to shop at small businesses. Yes, some of those have struggled lately as the past decade has been particularly hard on lower-income Americans. Should they disappear, which I don’t anticipate, know the money went to good causes rather than huge bonuses, speculation that impoverished Main Street, and so on.
But what if you’re also interested in prophetically performing that miracle in Washington? Well, I’d suggest you be realistic. America is pluralist. Most of the elite educated at institutions like the University of Chicago who are now running Washington and Wall Street will never embrace the Christ consciousness. Christ intimated that when he simply asked us to be “salt,” or a preservative, for the whole of society rather than turn society into salt, preaching the Great Commission not withstanding. At least until Constantine, the Christian faith had no interest, or expectation, whatsoever of utilizing the coercion of the state to turn the Spirit of Christ into law. I don’t believe we should either. But I do believe the state could play a major role in helping the followers of Christ, Ayn Rand, Milton Friedman, and so on live in greater harmony.
That might be as simple as having CEO’s declare the philosophy by which his or her company is managed. If the CEO of Goldman wants his internal hedge funds, proprietary traders and mortgage brokers to be free of responsibilities to clients, as Alan Greenspan once told Congress they should be, he might simply notify current and potential clients that Goldman is, for example, a “T,” or transactional, firm. If the firm that managed the widow’s money wants to advertise it is a “R” firm that accepts responsibility for clients, particularly mom and pop clients and especially widows and orphans, it should inform its legal department of the fact, live up to its responsibilities or pay the price. And if firms want it both ways, as they all do, they might declare they are a “TR,” mixed firm; but then identify each client relationship or even activity as being conducted on a “T” or “R” basis.
That is likely what Peter Drucker had in mind in Post-Capitalist Society when he prophesied responsibility will be the concept that organizes our post-capitalist society. I agree that most of the confusion on Wall Street and in corporate America would disappear overnight. Ayn Rand’s Objectivists, Friedmanites and Christ’s disciples would be happy conducting business in diametrically opposed fashions. Investors would again have confidence they know what’s going on. And perhaps best of all, we’d all have fewer reasons to “invest” in politicians and they would have more time to attend to legitimate affairs of state rather than fund-raise.
Of course, that’s precisely why this simple plan will take a miracle of biblical proportions to occur. If this old political science graduate turned stewardship advocate were you, I’d focus most of my resources on exercising personal responsibility rather than expecting politicians to save us.
Gary Moore has a degree in political science and thirty years of Wall Street experience. He once thought of attending seminary to study the moral and spiritual foundations of political-economy but discovered they don’t teach it anymore, which is why churches rarely mention the subject. He is a published author on moral finance. He is affiliated with NPC Of America, member FINRA/SIPC, but these ideas are his alone. See financialseminary.org.
Gary Moore is an investment counselor affiliated with NPC Of America, member FINRA/SIPC. The views expressed are his alone.
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