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Wednesday, 17 September 2014

Follow the compass bearings, Bos’n

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SwissInvest strategist Anthony Peters asks what the fates of Gupta and Kerviel say about the modern finance industry

Anthony Peters, SwissInvest Strategist

UNIVERSITIES GIVE ACADEMIC staff sabbaticals in order to allow them to focus on broadening the mind or for research purposes. In fact, many universities used to (I doubt that they still do) give their academics extended paid leave after so many years of teaching as part of the package. This past week has made me wonder whether we, too, should be kicked out of our banks, brokerages and fund management companies from time to time – if only to help to recalibrate our individual and collective moral compasses.

The sentencing of Rajat Gupta and the failed appeal of Jerome Kerviel is what triggered these thoughts. SG rogue trader Kerviel was really just a silly, silly boy who tried a little too hard to please his bosses. In many respects I have sympathy for him because he was most probably not born bad but was crafted into the person he became by the environment in which he worked and by the managers who created it.

However, Gupta, a former chief of the global consulting firm McKinsey & Co, is a completely different kettle of fish.

He should have known better. He was not the junior corporate finance analyst who passes market-sensitive information on to his sister’s boyfriend who then trades on it, in the hope that enough profit will accrue for them to make a down-payment on a Porsche or even on a first property. We’ve heard the recordings of his conversations with hedge fund boss Raja Rajaratnam and must ask ourselves whether he was dumb enough to believe that the rules of confidentiality no longer applied to someone at his seniority, or whether he was – far worse – so stupid as to believe that confidences shared with a chap who runs a powerful hedge fund would just pass like water down the river?

I GREW UP and learnt my trade in the City of London. I was taught to appreciate “City Rules”, which determined that conversations that might have happened over lunch or dinner in fact never happened.

It is obvious that senior bankers who had risen through the ranks at the same time will have known each other well and at a certain level one needs to speak to peers for advice. The higher you get, the fewer qualified people there are. However, we had moral compasses that worked – I hope mine still does – and that didn’t need to be displayed or legislated around. The tightness of the legislation that straps down our industry today is to me more a sign of moral weakness than of strength.

There have always been the “Chinese Walls” within investment banks that were designed to keep public and private information apart, but they were permeable. However, we acted in a principle-based environment and it was for us to know the difference between right and wrong.

The swamping of London by the rules-based American investment banking invaders largely changed this as everything that was not forbidden must therefore by definition have been allowed. Moral judgement was no longer for the individual and rather than trying to work out how to stay within the norms of acceptable professional behaviour, the daily battle was to test the boundaries of increasingly restrictive rules.

GUPTA’s TWO-YEAR sentence is cheap at the price but not as cheap as is the US$3m fine to a man with a net worth of more than US$120m. To me this is not a case of how criminal his actions might have been. The actus reus is undisputed although the mens rea is up for discussion.

There has been much criticism of the sentence for being too lenient and for not sending a clear enough message to the youngsters on the Street. I fear that those critics are looking for the wrong message. It should not be that if you break the law, the system will throw you into jail but that you must learn to live with a head full of confidential information without the need to spurt it out or to act upon it, that you must not only know what is right or wrong but that you should instinctively choose to do the right thing.

Gupta’s generous philanthropy has been written about at length and it has been brought up in his defence along with dozens of character references from the great and the good. However, if a doctor commits murder, the fact that he has saved so many more lives than the one he has just taken is not really relevant.

THE BOILER ROOM that the Street and the City have now become does much to cloud moral judgement. In the past week I encountered a young bond salesman at a senior investment bank who asked me quite innocently what he should do, going forward. I suggested he should do the job because he loves it and not because he thinks that it will make him rich. The latter is an added bonus. With lesser financial rewards, banking and finance should become a nicer place to work, I suggested. He was shocked.

The moral compasses of Gupta and Kerviel went haywire, for which they will be punished – and quite rightly too. Moral behaviour should be the basis for the law and not the other way round and whoever cannot get his or her head around that has no place in our industry – at any level of seniority.

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