Integrity and the financial crisis

by Rob Tiller

What good is integrity? Why shouldn’t you, or me, or anybody always act according to what feels good at the moment? Our brains are wired to seek pleasure, so it’s not surprising when people act selfishly. The interesting thing is that we usually act with a view to other values and concerns, like the welfare of others. What would happen if that were not true?

We now know what happens to a financial system: the financial crisis of 2008 to the present. And we need to understand more about the crisis to prevent a recurrence. The new report this week of the Financial Crisis Inquiry Commission is not a bad place to start. From the sections I’ve had a chance to read, the report is highly readable, and available for free at

Tens of millions have lost their jobs, and millions more have lost their homes. Still more millions have lost billions of their life savings. It’s hard to comprehend the scope of the financial crisis, but it was and is, in human terms, a disaster. The stock market just this week got back to the pre-crisis level, and economic confidence is increasing. Maybe the worst is behind us, but unemployment is still high. But we haven’t made much progress in understanding the reasons for the crisis, which we need to do if we want a systematic fix.

The problem is, it’s complicated. I’ve read a fair bit on the subject, and know a lot more about mortgage-backed securities and credit default swaps than I did before the crisis (which was close to nothing). Two books I found particularly interesting and helpful were The Big Short by Michael Lewis and 13 Bankers by Simon Johnson and James Kwak.

But at the end of the day, there are so many facets that it’s extremely hard to grasp. The connections between the housing market, interests rates, mortgage lending, household debt, securitization, bank policies, over-the-counter derivatives, and financial regulation are complex. Those best positioned to understand the complexity as it arose (such as investment professionals and financial regulators) were those most responsible for causing it. For the most part, they didn’t didn’t grasp the big picture any better than the rest of us.

But they didn’t really want to understand. Their value system was corrupted. Some were blinded by greed, and others were made complacent by ideology. Those who were making unbelievable amounts of money had no motive to question the viability of sub-prime mortgages backed securities, not to mention synthetic derivatives and related credit default swaps. Those in charge of regulating markets abdicated their authority and justified themselves with the half-baked theory that markets required no regulation. Many borrowed more than they could afford without thinking through the possible consequences. The rest of us happily tagged along as our retirement accounts grew and housing prices increased. There was a culture of heedlessness. This was a massive failure of integrity.

So what is to be done? We can start by recognizing that there was a massive ethical failure, and that ethical conduct is vital to the health of our economic system. I was pleasantly surprised that the Financial Crisis Inquiry Commission’s report seems to have done just that, among other things. The report is 500-some pages, but if that’s too much of a good thing (very possible), it’s worthwhile to read the 14-page conclusion, which does a good job of summing up the issues.

I quote: “The integrity of our financial markets and the public’s trust in those markets are essential to the economic well-being of our nation. The soundness and the sustained prosperity of the financial system and our economy rely on the notions of fair dealing, responsibility, and transparency. In our economy, we expect businesses and individuals to pursue profits, at the same time that they produce products and services of quality and conduct themselves well. Unfortunately . . . we witnessed an erosion of standards and ethics that exacerbated the financial crisis.”