Behavioral Economics for Leaders

CHAPTER 46A Bad Corporate Culture Can Turn Honest People into Liars

The financial crisis that began in 2007 and is still palpable today shattered trust in the financial industry and its bankers permanently. Taking uncontrolled risks, the opaque design of financial products, and dubious advice given to customers revealed that something had gone awfully wrong in the financial sector. Does this have anything to do with the corporate culture in this industry?

In Anne and Even Holt’s German thriller Ventricular Fibrillation, Otto Schultz is a top manager in a company that produces implantable defibrillators. He has lost more than $100 million on the stock market because before the onset of the great financial crisis that culminated in the crash of Lehman Brothers, he’d invested everything he had in so‐called CDOs (collateralized debt obligations), which became suddenly worthless in the crisis. To get back on his feet, Otto Schultz tries to make up for his losses through criminal activities and speculation. The fact that people with pacemakers are killed is only collateral damage to him (the investigation of the deaths caused by him is the actual content of the thriller). So much for fiction.

In reality, the collateral damage caused by CDOs has also been enormous. In simplified terms, CDOs are securities essentially made up of stocks that are untradeable or are difficult to trade. It’s not the underlying securities that are sold but the cash flows arising from them, for example, ...