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Why Such an Ethical Swamp?

Each of the scandals just described has been widely covered in the general and financial press. But what hasn't been so much commented on is the pattern of behavior, the cascade of scandal upon scandal, the consistency of ethical lapse unknown in any other industry.

I've spent considerable chunks of my professional career in other industries—law, business, the foundation world, and so on—so I can say from firsthand experience that the private moral character of financial industry professionals is no better or worse than that of people in any other industry. So why is the financial industry so prone to scandals, such a positive disgrace to American industry and the free market system in general? It's a bit of a mystery, to be sure, but here are some suggestions.

Hedge Fund Wannabees

Investment banks are, technically, broker-dealers, and for roughly a century the emphasis was decidedly on the broker aspect. A broker isn't a principal in a transaction, but an intermediary, a facilitator. If a Merrill Lynch broker convinced his customer to sell IBM and buy GE, he made a commission on the transaction but wasn't a principal in it. IBM, GE, and the customer could all go broke and the broker wouldn't be affected.

But by 1975, customers had had enough and commissions became negotiable. With the advent of competition, overall commission rates declined,⁵ as did the revenue broker-dealers received from that source. In 1965, for example, broker-dealers earned 61 percent ...