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8 Law & Fin. Mkt. Rev. 1 (2014)

handle is hein.journals/lawfinancmr8 and id is 1 raw text is: DOI:10.5235/17521440.8.1.1

Editorial

Culture, codes of conduct and limits of
enforcement
By late 2011 bankers on both sides of the Atlantic had main-
tained that the time for apologies was over. The then Chief
Executive of Barclays, Bob Diamond, used a public lecture to
issue the following warnining: [I]t sounds controversial to
suggest banks must take risk, in the wake of a near collapse of
the financial system, but banks serve little economic or social
purpose unless they do so.' In New York, his counterpart
at JP Morgan Chase, Jamie Dimon, complained bitterly that
plans to restrict proprietary trading were being championed
by those who did not understand capital markets.2 Within
months the reputations of both executives and their respec-
tive institutions were to go into free fall.
Radical departures from internal procedures at JP Mor-
gan's London-based Chief Investment Office severely
compromised Dimon's assertion that the bank could and did
control risk. Initially dismissed by the bank as a tempest in a
teacup, a subsequent Congressional investigation found that
inadequate derivative valuation practices enabled traders
to hide substantial losses for months at a time; lax hedging
practices obscured whether derivatives were being used to
offset risk or take risk; risk limit breaches were routinely
disregarded; risk evaluation models were manipulated to
downplay risk; inadequate regulatory oversight was too
easily dodged or stonewalled; and derivative trading and
financial results were misrepresented to investors, regula-
tors, policymakers, and the taxpaying public who, when
banks lose big, may be required to finance multi-billion-
dollar bailouts. 3
Dimon has, to date, survived the controversy and even secured
a major pay increase notwithstanding a multibillion-dollar
settlement with US regulatory authorities. Bob Diamond was
not so fortunate.
Following the revelation of systematic attempts to manip-
ulate the London Interbank Offered Rate (Libor), for which
Barclays negotiated a settlement in July 2012 without admit-
ting liability, Diamond was forced to resign. He was seen as
primarily responsible for driving a culture within Barclays
that privileged the transactional over the relational. His defi-
nition of culture in the BBC lecture as being how people
behave when no-one is watching was treated with derision
in scathing reports issued by the Treasury Select Committee4
and the Parliamentary Commission on Banking Standards.5
The manner in which the banking industry conceives of
culture, however, remains exceptionally vague and self-
interested. This calls into question whether self-referential
reports on improving practice are in themselves sufficient to
rebuild trust. In May 2013, for example, the major NewYork

investment bank Goldman Sachs published the results of its
Business Standards Committee Impact Report. Goldman
Sachs' intention was to present to the markets a reframed
conception of business ethics and accountability. The gravity
of the task was indicated by the prodigious workload under-
taken. Goldman Sachs claimed that its report was the result of
tens of thousands of hours of discussion, analysis, planning
and execution, and importantly training and development,
which alone totaled approximately 100,000 hours.6
Drawing upon the bank's experience of the global financial
crisis (GFC), the report begins with a stated recalibration of
the firm's strategy. It emphasises the need to put the interests of
clients first.Two additional drivers are also referenced, namely
reputational sensitivity and awareness and the individual and
collective accountability of our people.7 Curiously, there is
no mention of the fact that the stated commitment to reform
derives from a settlement agreement with the Securities and
Exchange Commission.The settlement dealt with allegations
that the pre-existing standards and practices at the bank in
relation to the design, marketing, and sale of complex finan-
cial products violated each of these noble objectives.8 While
the bank settled, the Securities and Exchange Commission
pressed ahead with a civil case against one of the low-level
bankers involved, Fabrice Fabulous FabTourre.
In August 2013 Tourre, was found guilty of violating secu-
rities law by failing to disclose to investors the identity of
the counterparty in the notorious Abacus transaction. The
transaction involved the construction of a basket of referent
securities chosen in part by a hedge fund controlled by John
Paulson. It was not disclosed to investors that Paulson's fund
was betting that the investment would fail. One of the most
remarkable aspects of the court proceedings,which this author
attended, was the open characterisation by both prosecution
and defence of the collateralised debt obligation market as a
speculative gamble devoid of real economic benefit. On 12
March 2014 Tourre was fined $650,000 for his role in the
transaction and ordered to repay $175,000 of a $1.5 million
bonus paid in 2007, deemed by the court to be an accurate
calculation of how the Abacus transaction impacted on his
overall compensation that year. Goldman Sachs, which had
funded the defence case, has been prohibited from paying
the fine on his behalf Judge Katherine Forrest held that the
fallen investment banker had shown no remorse or contri-
tion, thus justifying the severity of the fine and the need to
prohibit Goldman from reimbursing its former employee.9
Notwithstanding the punishment, neither Tourre nor
Goldman Sachs were the only offenders in the securitisation
market.The GFC demonstrated in startling detail the exter-
nalities caused by emasculated conceptions of responsibility
and accountability. The consequences for market integrity
were and remain profound.

Law and Financia Marlkes Review

1

March 2014

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