Posted by on 09/09/09 in Behavior, Ethics, Government, Sports

Even those who do not follow soccer (or futbol/football as more of the world knows it) are familiar with its most basic premise—move the ball however you can, just don’t use your hands. Three year olds who still travel the field in packs know not to use their hands even if they don’t know which direction they are headed. We would argue that not using your hands is more than a rule—it is an essential element of the game. Indeed, in Italy, soccer is often known as “Calcio” or “Kick it!” The Italians do not call the game “Score at any cost” or “Move the ball however you can.”

So what to make then, of the behavior of French national team captain, Thierry Henry, in a pivotal match between Ireland and France to determine which of the two would qualify for the 2010 World Cup? For those of you who were too busy watching American Football the week before Thanksgiving, let us provide a quick play by play. “Henry is closely guarded near the goal post. He reaches out and palms the ball, then drops it to his feet, passes to his teammate, and…score!” (see:  http://www.youtube.com/watch?v=4QNHlFDbxvY)

Ultimately, that single goal was the difference. Sixty four million French qualified for the World Cup while 4 million Irish will stay home. And should France win the World Cup, there will be an asterix next to their accomplishment, at least in the hearts of many who love the game. Later, in response to questions about his responsibility in the matter, Henry commented, “I will be honest, it was a handball. But I’m not the referee. I played it, the referee allowed it. That’s a question you should ask him.” (WSJ, November 26, 2009)

We would argue however that players, by taking the field in a youth recreational league or in a World Cup Qualifier, actually have a responsibility NOT to use their hands. After all, they are playing soccer, not rugby. The referee is there to help guide compliance with the rules, but lacks the capability to monitor each and every action within the context of a fast moving game ranging over 70,000+ square feet of field. The real question is whether or not the French team captain displayed a blatant disregard for the spirit of the game. In that, there is no question.

So let’s talk about banks (and their directly or indirectly affiliated broker-dealers). If the no-hands rule is the essence of soccer, then what is the essence of banking? We would posit banking serves two primary functions:

  1. To serve as a sound repository for deposits; and
  2. To provide capital to creditworthy borrowers.

Banks can do other things to the degree that they do not jeopardize their ability effect #1 and #2 above. If the officers of these institutions do place those abilities in jeopardy—as so many have over the past decade—then they have failed in fulfilling their most basic responsibilities, just as a soccer professional has failed to serve as a soccer professional if he uses his hands to score—even if he gets away with it.

It is not a matter of whether or not you get caught, it’s a matter of whether or not you fail to honor the spirit of your professional position. The officers of many major financial institutions in the US—and many abroad—failed in fulfilling their most basic responsibilities. It matters less whether or not what they did was illegal or whether malfeasance can be demonstrated; they violated the responsibility of their positions by overleveraging their firms, developing and selling faulty product, failing to effectively disclose conflicts of interest, and often misleading their employees, peers, and clients about their risk positions. These are hardly oversights on the margin; these are core failures to effectively fulfill their fiduciary responsibilities.

Taking it to the next step, we would also argue that it is not job of the Federal Reserve, Treasury Department, Congress, Federal Deposit Insurance Corporation, Securities and Exchange Commission, Financial Industry Regulatory Authority, Office of the Comptroller of the Currency, Consumer Protection Agency, or whatever new regulatory body emerges in the next few months to prevent banks from failing in carrying out their primary functions; it is the banks’ responsibility. It should not be the FDIC insurance that gives bank clients confidence; it should be the bank’s officers and business practices. You can put as many referees on the field as you want, but if the players are rewarded for winning at any cost, then their objective shifts from doing the right thing to doing whatever they must to win (and striving to not get caught along the way). This reality is grounded in basic behavioral finance.

We as a society need to define a clear set of intentions with regards to how our financial institutions operate. Then, when officers or other employees of these institutions violate that spirit, we as a society can call them to account (no pun intended of course). As is, there is no agreed-upon statement of intention that provides meaningful guidance to officers of banks, broker-dealers, money managers, investment bankers, insurance companies, private equity firms or many other financial professionals. There are lots of rules and there may soon be more.  But at the end of the day, in banking as in soccer, there is a great deal of money at stake; and so long as the incentive system rewards lavishly those who score goals or hit quarterly consensus estimates regardless of how they do it, then the abuses we find so frustrating will continue.

Financial industry participants do not need to wait for regulatory change, but can choose to conduct business in a manner that is transparent, clean, free of conflicts of interest, and ethical in every way. France still can refuse to play in the World Cup and offer its position to Ireland. Now THAT would be a move to watch.