Halloween and Insider Trading

It does not fail. Each time I teach insider trading there is a piece by a libertarian intended to show why it is harmless and hence should not be made illegal. This op-ed by Tim Harford (The Undercover Economist) appeared in the Financial Times last week: What’s so scary about insider trading?

"It was Halloween on Thursday, so let’s meet a frightening ghoul who haunts our financial markets: the insider trader. The Halloween metaphor is not mine but that of economist Donald Boudreaux, who asks if the insider trader is a genuinely dangerous monster or a comical apparition in a fright mask, fit only for the scaring of children."

This is a summary of the reasons why insider trading should not be illegal according to Prof. Boudreaux:

1. despite intensive monitoring, it’s hard to detect and even harder to prove. People with inside information can profit by not taking action and that is undetectable.
2. market prices are supposed to reflect all available information, the better to allocate capital and insider trades simply accelerate the process. 
3. insider trading is a crime without a victim

Some arguments in favor of banning insider trading are more compelling, though. Take a look at Prof. Strudler's piece on the law of insider trading (click here).

Honesty and honest behavior

The Financial Times is inadvertently endorsing virtue ethics in business (at least today). The "excuse" is the failure of the Co-operative Group in the UK. The bank is announcing a restructuring. The restructured company’s articles of association will include a commitment to moral behavior. The justification, in the end, is that honesty is the best policy. But the FT reporter (here) is skeptical about it. He writes:
"The slogan that good business is profitable business is superficial – an attempt to make moral dilemmas dissolve in a warm bath of goodwill. When the right thing to do is also in your own self interest, you do not need advice from philosophers and theologians. Ethics are about what to do when good behaviour and profitable business are not necessarily the same thing."
And then he goes to make a difference between honesty and honest behavior:
"the difference between the honest man and the man for whom honesty is the best policy. When you deal with the man for whom honesty is the best policy, you never know when it might be the occasion on which honesty is no longer the best policy. Bankers, not bishops, deliver lectures extolling their own personal integrity; the man who repeatedly reminds us how honest he is rarely acquires, or deserves, our trust. The integrity we value is a personal or organisational characteristic, not a business strategy."
So, he concludes, "if honesty is the best policy then the best policy is to be honest from conviction."

Courage

A moving story about courage and kindness at the BBC website (here).
Back in 1996, Keshia Thomas, then a teenager saved the life of a man believed to be a white supremacist affiliated with the KKK from an angry mob (see the pic above). Her explanation is revealing: "When people are in a crowd they are more likely to do things they would never do as an individual. Someone had to step out of the pack and say, 'This isn't right.'"
Today, Keshia keeps committed to make a difference:
"The biggest thing you can do is just be kind to another human being. It can come down to eye contact, or a smile. It doesn't have to be a huge monumental act."

Investing in or giving back?

According to this NYT report, Goldman Sachs gave $241.3 million to charity, making the firm the fourth-largest corporate giver in America. Goldman Sachs has been one of the leading corporate philanthropists in the last five years. Since 2008, the firm has given away more than $1.6 billion, in a remarkable effort to change its tarnished reputation. Whether that works or not is something to be decided but, apparently, it is creating bad feelings between the bank - which has been cutting back sharply on expenses - and the Goldman Sachs Foundation- which is giving the money away. Communication is also an issue: an employee is quoted saying that the philanthropy program is “run as if it’s a Broadway show,” against Goldman Sachs' culture of discretion.
Another, major, concern is voiced  by Warren Buffett, whose holding company is one of Goldman’s largest shareholders. He is troubled by the principle of large-scale corporate philanthropy because, as Milton Friedman used to say, this money comes out of shareholders’ pockets. Buffett reportedly added that "he didn’t look up how much Goldman gave to charity when he bought a giant stake in the firm during the depths of the financial crisis, and that Goldman’s generosity — or lack of it — has never factored into any investment decision he has made." The firm is giving to charity much more than before the real estate collapse now that corporate charitable donations are going down in the USA.
Motivations? This is what the reporter tells us:
"At the time Goldman started the program it made no public connection between the largest single charitable contribution in its history and public anger over its role in the financial crisis, but it was clear the money was part of the price of reputation reclamation."
Results? We need to wait a bit more but apparently it does help bolstering the firm's reputation. Malene Barnett, who graduated from one of the prograns funded by Goldman Sachs, has changed her opinion about Goldman: “All I knew before was a lot of people there made a lot of money... Now I see they are trying to give back. Before I didn’t have that impression but I believe now they are really trying.”

The ethics of employment termination

Legally OK. Morally OK? Why?

Do bankers need biz ethics training?

According to a recent post at the WSJ (click here) 98,000 employees of Deutsche Bank, 13,000 senior bankers at Goldman Sachs and 140,000 staff members at Barclays are being taken through ethics programs, which are aimed at reinforcing codes, values, and behavior. This is in response to the scandals and reputational blows at the three banks. The debate is centrally connected to our discussion on corporate governance and accountability. And it is also about the effectiveness of ethics training in the workplace and in the financial industry.
The report states that if team members at Deutsche Bank score less than 80% in a mandatory online test on compliance, they are red-flagged to their team leader and their career could be affected. And at Goldman Sachs, senior bankers have to spend hours debating a fictional case study about a big player on the brink of collapse.
At Barclays, CEO Antony Jenkins set out the bank’s “Transform” program after the Libor scandal. Sessions for senior leaders "take place in a room at headquarters styled like a Roma agora to encourage open discussion". Staff members start watching this clip (take a look at it). Then, they engage in case studies sessions which echoes the sort of dilemmas they face daily. They are also asked to vote on the best action after watching video scenarios like the ones we examine in class. Barclays’ workshops are reportedly led by 1,500 “values leaders” trained by a faculty of outside experts. Besides training, they need to change the structure of incentives and the organizational culture. They should measure "good conduct" and they should give it weight in bonus decisions, for example.
Mr. Jenkins argues that “I’ve been clear that [this] is a five to 10-year journey, so this isn’t sprinkling a bit of PR magic and life suddenly gets better.” Humm...

Larry Summers, again and again

Here is Larry, again. Before his appointment as Harvard President, when he was chief economist at the World Bank (yes, he never served as a trainee... after all he was the nephew of Paul Samuelson and Kenneth Arrow!) - he wrote the following memo:

“Just between you and me, shouldn’t the World Bank be encouraging more migration of the dirty industries to the less developed countries? I can think of three reasons:
1. The measurement of the costs of health-impairing pollution depends on the foregone earnings from increased morbidity and mortality. From this point of view a given amount of health-impairing pollution should be done in the country with the lowest cost, which will be the country with the lowest wages. I think the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that.
2. The costs of pollution are likely to be non-linear as the initial increments of pollution probably have very low cost ... Only the lamentable facts that so much pollution is generated by non-tradable industries (transport, electrical generation) and that the unit transport costs of solid waste are so high prevent world-welfare enhancing trade in air pollution and waste.
3. The demand for a clean environment for aesthetic and health reasons is likely to have very high income elasticity ... Clearly trade in goods that embody aesthetic pollution concerns could be welfare enhancing.
The problem with the arguments against all of these proposals for more pollution in least developed countries (intrinsic rights to certain goods, social concerns, lack of adequate markets, etc.) could be turned around and used more or less effectively against every Bank proposal for liberalization.”

(quoted from "Economic Analysis, Moral Philosophy and Public Policy" by Daniel Hausman and Michael McPherson).

The memo was intended for internal World Bank use only. It caused a public commotion when The Economist leaked it to the public. And, BTW, no professional economists has seriously questioned the "impeccable" economic logic of this argument. When asked about the memo, Summers responded to the reporter: "I think the best that can be said is to quote La Guardia and say, "When I make a mistake, it’s a whopper.’" Yes. Believe or not, that is what he said.
I will not use adjectives to describe Larry Summers (I may succumb to FAE). I will simply ask you to remember what we learned about the stages of the decision-making process. Remember the first step: moral awareness.