I attended Saturday night’s showing of ‘Inside Job’, along with www.delawareliberal.net contributors Cassandra_M and Unstable_Isotope, and a pretty full Theatre N. As I work in the financial industry, there weren’t too many aha moments for me, but there were for many in the audience. The film does a nice job of presenting some pretty advanced financial shenanigans in a clear manner. The part that alarmed me the most was the indictment of the academic institutions, where some leading universities appear to have no conflict of interest policies, and turn a blind eye when their senior faculty publish ‘research’ paid for by those being ‘researched.’ It is quite reminiscent of the anti-global climate change research paid for by Exxon Mobil, and anti-lung cancer research paid for by big tobacco.
However what alarmed me more than the film itself were some of the concerns raised by the audience during the discussion that followed the film on Saturday night. One woman asked “don’t banks have a fiduciary responsibility to ensure that a mortgage loan can be handled by the borrower?” That night I offered two comments. First, banks don’t worry about this when they have no plans to retain the mortgage on their books, if they plan to sell it off immediately afterwards. Secondly, I noted that, just as brokers, bankers (loan officers) are likely held to a ‘suitability standard’ rather than a ‘fiduciary standard.’
Fiduciary, per Wikipedia, is the ‘highest standard of care at either equity or law.’ http://www.knoxnews.com/news/2011/jan/31/future-uncertain-proposed-fiduciary-standard-broke/ compares this to the suitability standard (which in the case of brokers, means that ‘they must suggest investments that are appropriate for their clients, but could pick a suitable investment that also happens to earn them the highest commission’).
Now that 24 hours has passed, I recognized what a teaching opportunity I failed to utilize. Here is what I wished that I said
Bankers, and mortgage brokers do have a fiduciary responsibility, but not to the borrower, but rather to their shareholders. They are responsible to do their best to enable the company to earn the most money. If this means selling a high commission/high fee mortgage that would be flipped to an investment bank the next day, and which the borrower would be unable to afford in two years when the teaser rate expires, so be it.
Similarly, the over-leveraged investment banks such as Goldman Sachs, Bear Stearns, and Lehman Brothers, had a fiduciary responsibility to their owners, not to the investors they ‘serve’ (by selling products to).
This is the fundamental premise of capitalism, that businesses operate to make profits for their owners. In many cases it is in their economic interest to make their customers happy, and in many cases it is in their economic interest to make their employees happy. However job 1 is maximizing profits.
Capitalism is fine, as long as its strengths and weaknesses are understood, and its weaknesses are addressed in other venues.
This is why we have government, to rein in the excesses that such single-minded focus on business profits can have over the welfare of consumers. The carmakers can make incredibly fast cars, however the government makes rules that ensure that all cars sold to our citizens are ‘street safe’.
The Financial Reform Law was an attempt to better rein in the excesses of Wall Street. This is why it is critical that this law, with its many, many weaknesses, is fully funded, and why we need to remind Congress that failing to fund the new regulations will shorten the time until the next Wall Street-led meltdown.