I think the financial industry has lost its way and become a rogue industry. It’s out of control.
These are the comments with which Jeremy Grantham, co-founder and chief strategist of GMO opened “The Ethical Hole in Finance” part of his presentation to the CFA Institute’s annual conference on May 17.
Grantham criticized the decline of ethics in investment banking since the golden years of the 1960s. Back then head of investment banks would never have permitted today’s unethical practices. “They would have shot you,” said Grantham.
“The ethical standard today is ‘Don’t go to jail if you can possibly help it,’ ” said Grantham.
Grantham said the shift from partnerships to public companies has accelerated the decline in investment banks’ ethics. It would help to return to partnerships, but that isn’t going to happen, he said. A more practical step is to require investment banks to spin off their hedge funds.
Grantham suggested that investment management firms should shift their business to more ethical companies. However, he admitted, GMO has not made this change. Grantham said that if you take business away from the firm that does business one-quarter point cheaper, that’s not in the short-term interests of your clients, even though it’s in their long-term interests. There’s a “creative tension” between these two forces,” he said.
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