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ETHICS ON WALL STREET.
Term Paper ID:19155
Essay Subject:
Reasons for fraud & corruption in stock market, case studies of Salomon Brothers, Michael Milken & Ivan Boesky.... More...
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Paper Abstract:
Reasons for fraud & corruption in stock market, case studies of Salomon Brothers, Michael Milken & Ivan Boesky.
Paper Introduction:
This study will present an investigation of ethics on Wall Street, focusing on the decidedly unethical behavior involved in cases featuring the Salomon Brothers, Michael Milken, and Ivan Boesky.
The first basic question which must be asked has to do with the special circumstances of Wall Street: Is Wall Street so different from other areas of American capitalist enterprise? Is not corruption as much a part of every other facet of American business activities as it is a part of Wall Street? The answers to these questions might have some light shed on them by referring to a famous bank robber who was asked why he robbed banks. He said he robbed banks because that was where the money was. The same can be said of Wall Street --- it is an especially corrupt realm because there is so much money there. The men and
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Boesky was the man who tried to make riskarbitrage respectable on Wall Street. D1). In the immediate aftermath of such scandals as thoseinvolving the Salomon Brothers, Millken, Boesky and others, it is clearthat such unethical if not illegal shenanigans will diminish as theunethical lie low, but sooner or later the coast will be declared clear,and the same activities will resume again. April Fools: An Insider's Account of the Rise and Collapse of Drexel Burnham. It had minimal supervision, minimalcontrols, and no position limits" (Lewis, 199 , pp. Unless sold to customers,they could cost Salomon a great deal of money. This would be asking too much. To many,such as Boesky, Milken and others, the potential profits are worth therisk. . In any case, Lewis came to recognize that money was not the highestvalue in life: "The belief in the meaning of making dollars crumbled; theproposition that the more money you earn, the better the life you areleading was refuted by too much hard evidence to the contrary. The joy of havingthe upper hand swept over me. It is not a place where thoughtful individuals take much timeand energy to consider the ethics of a certain situation and then take theethical position or action. How, the question must be asked, could such unethical traders asMilken and Boesky get away with their activities for as long as they did?The answer is that those who would otherwise have informed on suchunethical culprits were themselves making money from their proximity to theculprits: "Regardless of how many of us in the firm felt about Milken, nottoo many questioned his success or his tactics. D3). ." (Stone, 199 , p. Boesky tried to raise greed to the level of a virtue: "I think greedis healthy," he said in a speech to the students of the Columbia BusinessSchool: "You can be greedy and still feel good about yourself" (Stone,199 , p. . For example, Cross writes ofthe 1987 barring of three ex-officials of the firm of Bevill, Bresler &Schulman from ever dealing again in the securities industry. .The Salomon trading floor was unique. And withoutthat belief, I lost the need to make huge sums of money. They were loans made by savings banks that were never supposed toleave the savings banks. The answers to these questions might have some light shedon them by referring to a famous bank robber who was asked why he robbedbanks. . The lust for money is one source of Wall Street illegalities, but thelust for power should not be overlooked or minimized in any analysis of thelack of ethics in the market. Hylton writes, with respect to the aftermath of the Salomon Brothersscandal, that Wall Street is shaking and quaking as other firms try to makecertain that they are not themselves swept into the scandal: "The SalomonBrothers scandal has sent tremors along Wall Street, as firms rush to cleanhouse and distance themselves from employees who may have violatedsecurities laws. Rather than buying cheap and selling dear, they were underpressure to outguess what everyone else would be selling or buying. Speculation, the cause of much trouble and unethicalbehavior on Wall Street, is another factor which removes the participantsfurther from non-Wall Street reality. As Crosswrites, "The chairman, former treasurer, and former executive vicepresident settled with the SEC without either admitting or denyingallegations that they had engineered a complex fraud that cost scores ofbanks, thrifts, and municipalities about $15 million. They had alreadybeen convicted on criminal charges stemming from the fraud, which involvedselling nonexistent securities, or the same securities to more than onecustomer" (Cross, 1988, p. The "customer" of Wall Street does not understand that his ownfinancial well-being is not always the priority of the firm with whom hetrades. For example, when the interests of the firm and the interests ofthe customer clash, the firm will always sacrifice the customer to achieveits own desired ends. .' He'd say, 'Whothe fuck are you working for anyway; are you working for Drexel or the SEC(Securities and Exchange Commission)?' . . This is clearly an unethical principle, and shows that not merelyindividuals but entire firms operated on the basis of a lack of ethics.Lewis writes in the epilogue to his book that the primary lesson he learnedfrom his stay at Salomon Brothers was that money is not the be-all and end-all of life, that there are other, higher, and more ethical values. He said he robbed banks because that was where the money was. This little addition to the priority has managed to muck up theprocess" (Stone, 199 , p. Why would he do anything that stupid?" (Stone, 199 , p.64). . . As Stone writes, Boesky wrote a book named Merger Mania, "withthe intriguing subtitle: 'Arbitrage: Wall Street's Best Kept Money-MakingSecret.' Not surprisingly, he neglected to mention that the secretingredient of the best kept secret was inside information .... Such an individual would not be drawn to WallStreet in the first place. Risk arbitrage was a riskyaction, but it could have potentially high returns. At other placesmanagement says, 'Well, gee, fellas, do we really want to bet the ranch onthis deal?' (A big trader at Salomon Brothers, on the other hand,) was notonly willing to bet the ranch. 135). When Texaco teeteredon the brink of bankruptcy, for example, Salomon Brothers owned about onehundred million dollars' worth of bonds in the company. His brilliance andforesight, and even ambition, should have been the best defense against himbreaking the law. . Thesame can be said of Wall Street --- it is an especially corrupt realmbecause there is so much money there. Lewis writes, for example, that at Salomon Brothers there was a"phenomenon" known as a "priority." A priority "was a huge number of bondsor stocks that had to be sold, either because selling them would make usrich or because not selling them would make us poor. (Chairman John) Gutfreund took the pulse of the place by simplywandering around it and asking questions of the traders .... Wall Street will never be amonastery where saints meet to contemplate and discuss virtue and ethics.It is a hardball-business where the ruthless prosper the most--until theyare caught and punished. Stone quotes one senior East Coast investment banker on Milken:"Without exception, everything that he wanted to do was with a view towardscrewing the client . . Some of the unethical behavior on Wall Street, however, is so blatantthat it is impossible to say that it is merely the result of not having anexternal ethical reference point. The rich man, on theother hand, or the man who is willing to do whatever he needs to do tobecome rich, is seen as strong, willful, determined, hard-working, asuccess. To people and businesses which see being rich as a sign ofsuccess, as a sign of being a full human being, it is inevitable perhapsthat being rich --- and, therefore, trying to be rich, or richer--thenbecomes the equivalent of being ethical. Lewis quotes one of the senior traders at SalomonBrothers: "The attitude at Salomon was always, 'If you believe in it, gowith it, but if it doesn't work, you're fucked.'. 86). 248). It is unlikely that we can ever know for sure the inner workings ofan individual who becomes drunk, in a sense, on his own power, on his owngreed, and on the awe that he inspires from those around him who envy andfear him. Lewis writes: "The problem was more fundamental than a disdain forMiddle America. As Stone writes, "In any three-month period, stocks will rise or fallfor many reasons, only one of which involves valuation. He was willing to hire people and let thembet the ranch, too. Mortgages were not tradable pieces of paper; they were notbonds. For example, the new leader of the firm'strading desk "has had more pressing concerns than the drop in hisdepartment's revenues. Lewis introduces us to this overriding sense of fear when hedescribes the presence of the chairman of Salomon Brothers: "At any givenmoment on the trading floor billions of dollars were being risked by bondtraders. As Lewis writes, when he made his move tosave himself, it was as much a move for power: " . . His attitude was: 'Sure, what the fuck, it's only aranch.' In other shops, he'd have had to write a two-hundred-page memo fora committee that wanted to be sure that what he was doing was safe . However, it is clear that Wall Street is a breeding ground forsuch minds, for such personalities, because it is a realm where ethics arenot central, where the ruthless profit most and most quickly, and wherethose profits are exceptional. The speed of transactions and the mass desire for big profits in ashort period of time create a world which becomes unreal, hallucinatory, inthe sense that no outside reference to Wall Street transactions occurs; itis an insulated world with its own "reality." This "reality" is made evenmore isolated from the external world by the fact that the transactionsthemselves are often irrational, and in any case are based not on productsor services but rather on money, itself a symbol, itself removed fromsubstantial reality. wanted to poke around suburbs to findout whether the homeowner to whom he had just lent money was creditworthy.For the home mortgages to become a bond, it had to be depersonalized. Perhaps, but Boesky certainly did not feel good about himself when hewas convicted of a felony involving insider information and was fined $1 million. These have included overseeing the installation ofa computerized bidding system; the carrying out of internal complianceguidelines outlined in Congressional testimony," and other matters (Gilpin,1991, p. Clearly, such fear does not lend itself to the trader's placingethical considerations at the top of his list of priorities. Whether the business willreturn depends in large part on what is uncovered in a wide-ranginginvestigation of Salomon's activities by the SEC and the JusticeDepartment" (Gilpin, 1991, p. Homewood, Illinois: Dow-Jones Irwin, 1988.Stone, Dan G. As Cross writes, "It is ironic thatbonds, which have long been considered very conservative financialinstruments, have emerged as problem children in the world of swindles andscams. Gutfreund! or was illegal. He didn't need to. It is areasonable goal, however, to seek to force those individuals and firmsdealing on Wall Street to engage in more ethical behavior, by threat ofpunishments and penalties that would up the risk of illegal and unethicalbehavior to a level where Wall Street gamblers might take notice. As Lewis writes with respect to this sort of unethical opportunitiesmade available by Salomon Brothers, "With all the noise that is made aboutthe danger of junk bonds and the leveraging of American industry, it is awonder that more attention is not paid to the daily leveraging that occurswithin investors' portfolios. Clearly, again, such circumstances breed the possibility, thelikelihood, for unethical behavior. Is not corruption as much apart of every other facet of American business activities as it is a partof Wall Street? This unawareness was likely generated by the fact that everybody withwhom Lewis did business on a daily basis felt the same way that he didabout the pursuit of money, so that there was no external reference pointby which a member of Wall Street could get his ethical bearings. Themessage is, in effect, that Wall Street sees its behavior not as unethicalat all. In fact, many if not most of theworkers at such businesses suffer as much as or more than outside investorshurt by the scandal. 135-136; 137). 67). It is not the most hopeful scenario to see Wall Street moving towardmore ethical behavior only at the point of a legal gun, but at the momentthat seems to be the reality of the situation. And if such an individual were indeed drawn there for some reason, hewould either be changed by the hectic greed of the place, or he would becrushed as he tried to apply ethical principles to what is at best anamoral realm. As Stone writes, "The mostbizarre aspect of Wall Street is that it has managed to attract the bestand the brightest to the challenge and then forced them to play under a setof conditions that almost guarantees lousy results . It'sas if they found themselves in a car race in which all the drivers watchedeach other instead of the track" (Stone, 199 , p. He never had a single honestthought . . . . Manyfraudulent operations are intricate, difficult to track down, andchallenging to prosecute. Lewis writes of his experiences at Salomon Brothers and the pressuresof the environment which create an atmosphere where unethical behaviorbecomes the norm. It would be utterly naive tobelieve that Wall Street has now and forever-more eliminated from its ranksindividuals or firms which are willing to do whatever they have to do togenerate monumental revenues, whether unethical or illegal acts arecommitted or not. . It is easier, in otherwords, to engage in unethical behavior if the potential loser is a largecorporation or a bank than it would be if the potential loser were anindividual with a name and a family and a house. And investment bankers, traders and analysts say somefirms are overreacting as they try to make sure they are not hit by thekinds of troubles that have engulfed Salomon. 'That's why everyone turned their heads,' he argued" (Stone, 199 ,pp. However, some of the "unethical" behavior of Wall Street goes waybeyond any question of mere "mismanagement". He was the last person a nerve-racked trader wanted to see .... The most well-known source or cause of unethical behavior on WallStreet, however, is the junk bond. As Gilpin writes in that context, "Salomon's admission on August 9,1991, that it exceeded bidding limits established by the Treasurydepartment at four separate securities auctions since 199 has sent anumber of clients to other primary dealers. For the purpose (of doing his foe in), I foundMachiavellian resources I hadn't known I possessed .... 67). The most successful trading firms --- such as Salomon Brothers orDrexel Burnham --- were those which took the most risks and came out withthe greatest profits. one such example is the career of MichaelMilken. 239). No trader . Wall Street is not a place where individuals goto work their ethical muscles; it is a place where people go to make money. . . 'There were rapacious people who just raped the place,' saidone salesman, 'but there were also secretaries and clerks and other folkswhose nest eggs went up in smoke.' And while The Great Acquisitor receivedmore in January 199 bonuses than the average family will earn in onehundred years, thousands of regular people took overnight losses thattotaled in the hundreds of millions" (Stone, 199 , p. 179). It appears that such housecleaning excursions are cyclical, however,just as the scandals themselves are cyclical. Ifeverybody is corrupted by the mad pursuit of money, it seems, to the innercircle, then nobody is corrupt and nobody is mad. There is simply too much money to be made on Wall Street, and,whatever the risks, there will always be individuals and firms willing totake those risks. The desire of riskarbitrageurs such as Boesky was to reduce the risk as much as possible. It is the same sort of "unethical behavior" that one might sayLas Vegas tempts from its "customers" by tempting them with big profitpossibilities, as long as they are willing to risk the rent money, themortgage payment, or even the children's education money. Apocalypse on Wall Street. Say I wanted my customer to buy thirtymillion dollars' worth of AT&T bonds. "Salomon Executive Has An Agenda . New York: Penguin, 199 .McLain, David. Even if he had no cash at hisdisposal, he could pledge the AT&T bonds as collateral and borrow the moneyfrom Salomon Brothers to buy the bonds. Clearly, the goal is not to make saints of the traders and otheremployees on Wall Street. It is to say, however, that the temptation to engagein unethical behavior for the sake of big, quick profits is greater on WallStreet than in any other realm of American capitalist enterprise. The process of turning mortgages into bonds on Wall Street, saysLewis, is a process which sanitizes the deal so that the risks of the man-on-the-street are camouflaged from the trader. The investments that all theemployees had in their firm, the shares of stock that they had earned inDrexel's profit-sharing plan or bought each year with their savings, weredestroyed. . The same sort of puzzled questions mark Stone's investigation ofMilken and his psyche: "Why would Milken cheat, especially in the mostregulated business in the world? 53). Unethical behavior can consist in notnecessarily breaking the law outright, but rather in putting people insituations which are dangerous financially, psychologically, and, finally,morally. A single home mortgage was a messy investment forWall Street . An alarmshrieked in your head: Gutfreund! Ethics takes time, and time was not at a surplus inWall Street in the 198 s, a time when most of the scandalous activitiestook place there. . Instead of being uneasy or anxious or angry,I suddenly relished the thought of calculated confrontation" (Lewis, 199 ,p. Gutfreund!" (Lewis, 199 , p.13). . It must be noted, however, that whatever the individual unethicalactivities of Boesky or Milken were, they could not have done what they didwithout either the overt or tacit approval of those around them, withoutthe presence of an environment in which such incredibly unethical andillegal activities could have flourished. Risk arbitrage was a "twist"involved in the takeover frenzy of the 198 s. There were reasons, somebetter than others. The poor man is the man who hasfailed, who is weak, who is lazy, who has no guts. . 85). When we read of the collapse of Drexel Burnham or the scandal ofSalomon Brothers, we should keep in mind that not all the employees at suchfirms are involved in the scandal. Ivan Boesky is perhaps, if possible, even more blatantly unethical,or at least amoral, than Milken. . AsStone writes, "The occasional arbitrageur takes this (risk-reducing)process a step too far, steering a shortcut through the law by seeking outthe most accurate information out there: inside information" (Stone, 199 ,p. The folks who give the advice and manage the money, however,have created the problem by adding one requirement: They want to make moneyquickly. " The NewYork Times, September 11, 1991, D3.Hylton, Richard. The first basic question which must be asked has to do with thespecial circumstances of Wall Street: Is Wall Street so different fromother areas of American capitalist enterprise? 63-64). . New York: Donald I. "On Wall St., New Stress on Morality." The New York Times, September 11, 1991, D1; D3.Lewis, Michael. It is clear that under such circumstances, Wall Street is not amonastery. 66). He knew he was a fraud.Were fame and fortune more important than self-respect or were they thebasis for self-respect?" (Stone, 199 , p. Sold to customers, ofcourse, they would cost the customers a great deal of money. . . 7 ). This study will present an investigation of ethics on Wall Street,focusing on the decidedly unethical behavior involved in cases featuringthe Salomon Brothers, Michael Milken, and Ivan Boesky. The funny thingis that I was largely unaware how heavily influenced I was by the moneybelief until it had vanished" (Lewis, 199 , p. The men and women who operate onWall Street are not necessarily more corrupt than men and women working inother realms, but the presence of incredible amounts of money, and thepossibility of making fortunes in a relatively brief time createtemptations which are greater than exist in perhaps any other area ofAmerican capitalist activity. Everything was: 'Here's the way we make the most for Drexel,'and every time I would say, 'But we can't do that, it's against the law;it's against the spirit of the underwriting contract . In that short timeperiod, stocks will sell for what the crowd is willing to pay for them, andthe driving factors may be fear and greed, not logic . . You have towonder: What was going on in this guy's head? One salesman pointed out that Drexel Burnham's stock,owned primarily by its employees, rose about 1 percent between 1982 and1986. Gutfreundseemed able to smell money being lost. To thecontrary, such fear forces the trader to consider profit above every otherconsideration. The risks and temptations which lead to unethical behavior on WallStreet, says Stone, are intensified by the speed of transactions and by thedesire for big profits as quickly as possible. Kansas City: Andrews & McMeel, 1988.Gilpin, Kenneth. Investor Alert! As Stone writes, ".... Liar's Poker. No problem yet; certainly, nosurprise. I think that whatcrossed my mind next would never have done so before I set foot on thetrading floor .... You felt a chill in your bones that Iimagine belongs to the same class of intelligence as the nervous twitch ofa small furry animal at the silent approach of a grizzly bear. 134-135). Some of thebest minds in the country, therefore, were forced to become speculators,trying to make educated guesses on which stocks would rise or fall in thenear future. Nowhere is the old adage 'look before you leap'so important as in the consideration and purchase of bonds, whether theyare junk bonds, zero-coupon bonds, or other instruments whose maturitydates stretch far into the future" (Cross, 1988, pp. Junk bonds, specifically, are "high-yield, low-yield, or non-ratedbonds often associated with takeover bids" and they "became a popular areaof investment in the mid-198 s, inviting a good deal of financial loss onthe part of investors who seemed to feel that they suddenly were able toget something for nothing. We can easily understand the role of greed in thecreation of unethical behavior on Wall Street, but perhaps we are not asfamiliar with the role of fear in that process. Works CitedCross, Wilbur. There was a realdanger that these bonds would become worthless. Where does 'mismanagement' leave off and fraudbegin?" (Cross, 1988, pp. . Texaco bondstherefore became a priority for the Salomon sales force" (Lewis, 199 , p.18 ). 1 8-1 9). 192). The problembegins with the priority: To make money. . Is this formula not a part of the capitalist system, not aproduct of what Max Weber saw as the relationship between wealth and theProtestant work ethic? Atthe very least, a mortgage had to be pooled with other mortgages of otherhomeowners" (Lewis, 199 , p. Some steps have been taken to insure more ethical behavior in thecase of Salomon Brothers. Perhaps the old-line reputation of bonds is what made manyinvestors unwary and willing to make purchases without question. We were genuinely a full-servicecasino---a customer didn't even need money to gamble in our house---Thismeant that even customers with small sums of money could be made to dolarge pieces of business" (Lewis, 199 , p. Fine, 199 .----------------------- 15 D3). This is not to say that every individual or firm on Wall Street is bydefinition unethical. Securities---announced that they hadsuspended or dismissed executives who may have violated securities laws"(Hylton, 1991, p. Last week, two firms ---Shearson Lehman Brothers and U.B.S. The Salomon Brothers scandal has hurt the firm, and it is hoped thatsuch financial suffering will, for at least a reasonable period of time,cause unethical behavior to diminish if not disappear from Wall Street.
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