The Pathologies of Banking Business As Usual
University of Pennsylvania Journal of Business Law, Vol. 17, p. 861, 2015
64 Pages Posted: 8 Oct 2013 Last revised: 7 Jul 2015
Date Written: 2015
Abstract
The Wolf of Wall Street’s Jordan Belfort is the latest popular culture depiction of the “banker behaving badly” we love to hate. However, the Jordan Belforts of the world do not cause financial crises – the reality is far less sexy. This Article argues that financial crises are caused by ordinary financial industry personnel engaging in everyday behavior that is not fraudulent, but nonetheless has the potential to generate huge social problems in its quest for short-term profits. In particular, this Article focuses on the destabilizing potential of complex innovation and leverage – two pathologies of banking business as usual. This Article argues that criminal law, private litigation and command-and-control regulation are all limited in their ability to restrain these non-fraudulent but destabilizing behaviors, and so we must also address the prevailing “Wall Street” culture that promotes these behaviors with little regard for their social costs.
Many proponents of financial regulatory reform have ignored the issue of industry culture – perhaps because the problem often seems intractable. Instead, most reform efforts have tinkered around the edges of destabilizing behaviors, with the tacit understanding that the industry will constantly arbitrage regulations in an endless cat-and-mouse game. However, we need not be entirely fatalistic about financial industry culture: there is a large empirical literature that demonstrates that people often do make sacrifices for the public good, and this Article is the first to use this “prosocial” literature to inform proposals for financial industry reform.
It would be pretty shallow to attribute the cultural pathologies of Wall Street at their roots to bad people working there. The trouble, instead, is that the structural conditions of the financial industry have fostered certain cultural norms. If you are designing policies to fix Wall Street, you need to take into account how they will shape that culture.
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