The financial world has been shaken this month with reports that a number of British banks may be guilty of fixing London Interbank Offered Rates (LIBOR) for their own gain. As LIBOR rates are an international benchmark to which hundreds of trillions of dollars in loans are tied, this is a very big deal that may amount to massive fraud affecting the entire international financial system.The more information that comes out on this story, the worse it looks. Rather than being the actions one rogue bank, the fixing seems to have been conducted across a wide number of British banks. The full extent of the fixing is still unknown. Nor was the rate-fixing simply the actions of a few sneaky traders; the sheer brazenness of the recently-released Barclays emails suggests that such fixing was widespread and at least tacitly accepted. And the scandal doesn’t stop there. Recent emails from company executives suggest that representatives of the British government may have colluded with the banks to keep rates low and project an image of stability.A new piece in the New York Times worries that the LIBOR scandal and other high-profile cases of corporate corruption are eroding our faith in the honesty of our professional elite:
We should be alarmed that corporate wrongdoing has come to be seen as such a routine occurrence. Capitalism cannot function without trust. As the Nobel laureate Kenneth Arrow observed, “Virtually every commercial transaction has within itself an element of trust.”The parade of financiers accused of misdeeds, booted from the executive suite and even occasionally jailed, is undermining this essential element. Have corporations lost whatever ethical compass they once had? Or does it just look that way because we are paying more attention than we used to?
On this point, at least, the Times is right. The problems go beyond far beyond LIBOR and seem to affect much of our financial and business elite. The Wall Street Journal reports on the similar but unrelated story of PFGBest, a company whose CEO attempted suicide after reports of his mishandling of client money came to light. Much like former New Jersey Governor Jon Corzine, PFGBest’s Russell Wasendorf, Sr. was unable to account for hundreds of millions of dollars that were likely (and illegally) used to make risky trades. Now the company is headed for bankruptcy, and customers may be out by $200 million:
Regulators said Tuesday Mr. Wasendorf had deceived authorities to hide his misuse of customer money for more than two years before the alleged fraud was exposed. Problems were uncovered only after a regulator moved to start verifying customer assets electronically, rather than relying on paper statements that authorities now believe Mr. Wasendorf used to cover the misappropriation, according to people familiar with details of the investigation.PFGBest’s main business is a brokerage. Its clients—many of them farmers and other individual investors—place trades through it on the commodities and currency markets. The company also operates an asset-management arm and offers commodity market analysis. Regulators say that more than $200 million that Peregrine Financial should have held on behalf of those clients is missing.
Clearly, these scandals go far beyond London and Wall Street. The decline in the personal morality of America’s elite is a fundamental threat to American freedom and prosperity. Religion is not the only force that can improve the morality of the social class, but few forces are as effective. Top business and institutional leadership in the U.S. and UK cannot long succeed unless there is a revival of serious personal morality among elites.We need a new generation of religious, spiritual and personal leaders. Otherwise we will see a cycle of decline. Weak, immoral and greedy business leaders will make bad choices. Society will pass stricter and stricter laws in the effort to control this behavior. The laws will become less and less effective as the influence of money grows and people lose self restraint.This vicious cycle has already begun. The only question is, how far down the spiral will it take us? Much of our national business elite is losing its morality. A generation ago, it lost its faith. Unless something changes, loss of freedom will follow.[Update: An earlier version of this post incorrectly referred to New Jersey’s former Governor as James Corzine rather than Jon. This error has been corrected.]