Tag: financial services

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Compliance in popular culture

Selected documentaries on the 2008 global financial crisis

The Great Recession, which began in 2007-2008 with the collapse of the subprime mortgage market and led to an international banking crisis, offers many lessons for compliance practitioners and enthusiasts alike. Many documentaries have been produced in the ensuing years to offer new insights on the crisis and its causes.

  • American Casino and the origins of the subprime collapse – The filmmakers of American Casino started their work in 2008 with a theory that the housing market was in trouble. Over the year that they filmed, this idea took root in reality and unfolded before them. The 2009 documentary that resulted offers a vivid explanation of how the subprime mortgage market evolved and then fell apart. The stories of average Americans who held the mortgages that were underlying the bonds created by big investment firms humanize the origins of the crisis and help to ground the actions in the financial markets by connecting them to the many people that were affected.

  • Inside Job and non-disclosure of conflicts of interest – This 2010 documentary reaches back into the international origins of the financial crisis, to begin with an look at the collapse of the Icelandic banking system. One of the movie’s principal assertions is that academics and scholars who are professors at many of the prominent educational institutions have conflicts of interest due to their financial ties to firms such as Goldman Sachs and other large market makers. The film’s argument suggests that these conflicts of interest are not subject to mandatory disclosure and so the economists express opinions about investments and financial systems which cannot be transparently evaluated.

  • Capitalism: A Love Story and the dangers of deregulatory trends – Michael Moore’s 2009 documentary takes a wide view on general contemporary economic conditions in the United States, ethically questionable practices of major corporations, and the status of the American worker in modern capitalism. Germane to the subject of the 2008 global financial crisis, Moore takes a look at the lending practices of Countrywide, one of the main players in the subprime lending practices that led to the market collapse and ensuing crisis. Countrywide operated in an generation of regulatory relaxation, leading to unduly risky practices of giving loans to people who could not reasonably afford them as well as giving discounts and special deals to politicians and regulators in hopes of keeping the good times rolling.

  • The Flaw and the evolving state of modern American capitalism – A good companion movie to Capitalism: A Love Story, this 2011 documentary focuses on explaining how the consumer society in the United States has a symbiotic relationship with the markets, at the expense of the American citizen whose main value in society becomes determined by spending power.   In this dynamic, the rich get richer while the poor stay poor and the middle class drifts ever downward, with interventions such as the easier extension of lending in the pre-2008 years only seem to present a possibility for upward mobility for them, but rather just create financial crises where they bear the brunt of the losses.

  • Money for Nothing: Inside the Federal Reserve and the cyclicality of major financial crises – The ebb and flow of regulatory pressures in the United States are enabled by the lack of understanding most Americans have about what the Federal Reserve System is and how its policies impact the economy and the markets. This 2013 documentary suggests that these policies had a major role in the 2008 financial crisis and will continue to contribute to the creation of bubbles that culminate in future crises. The firm suggests that awareness of the public and citizens’ engagement in activism for more accountability and greater transparency by the Federal Reserve System are critical for protecting society from ever-greater financial crisis in the future.

These are just a few examples of documentaries which can provide an informative and compelling view into the events of the 2008 global financial crisis. For years to come there will surely be many more such documentaries to add further insights to the historical record on the Great Recession.

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Compliance in popular culture

Margin Call and unethical crisis management in the financial services industry

The 2011 movie Margin Call focuses on the conduct of the employees of an investment bank in disaster mode. The movie takes place in the prelude to the 2008 global financial crisis. During a reduction in workforce, an analyst reveals that the firm’s predictive models are showing that its portfolio of mortgage-backed securities will soon experience losses which will exceed the highly-leveraged value of the firm and lead to its bankruptcy.

The rest of the movie centers on the behavior of the firm’s employees and senior management and the choices they make in handling this discovery. Unsurprisingly, many of them model unethical decision-making and provide cautionary examples from which governance and compliance structures can take advice for what to prevent.

  • Key man dependency and lack of transparency – The entire movie revolves around the too-late discovery of the projected losses by an analyst. His boss was working on a project to try to figure out what was wrong with the firm’s models, but he was laid off before he finished his analysis. This scenario suggests the conclusion that if the boss had not been working alone or had been sharing his work in progress sufficiently, then the problems could have been discovered earlier and the entire dilemma could have been avoided or at least mitigated. An insecure overdependence on the work of one vulnerable man and a lack of honest disclosure led to this firm’s undoing from the very start.

  • Corporate code of ethics and culture drivers – A firm’s compliance program sets a tone and provides a rules-based structure for employees. Ultimately each individual still has the freedom to make unethical or inappropriate decision for his or herself, but the choice architecture provided by a firm’s governance controls matters for setting expectations. Corporate enablement of immoral or ethical behavior starts at its simplest practices, such as reimbursement of expenses, especially in a business where the financial upside for compensation is immense. In a firm where an anything goes culture reigns, the downside of this culture is also immense.

  • Tone at the top and unethical executive decision-making – In a series of overnight meetings, the firm’s senior management decides to hold a “fire sale” and dump their toxic assets to limit their own exposure by dispersing the risk through the markets and ripping off their counterparty broker-dealers. They also know that their customers will quickly realize what they are doing and be disenchanted by the deceptive sale of only their troubled mortgage-backed securities holdings. Senior management justifies and solidifies their choice to destabilize the entire market and subject counterparties and clients to losses to avoid their own bankruptcy.

  • Lack of business sustainability due to dishonest practices – By selling the toxic mortgage-backed securities to the counterparty firms which should be their trusted partners, the traders end their careers, as no one will do business with them again in the future. They are compensated handsomely with promised bonus pay-outs, but there is another large reduction in workforce once their dirty work is done. The principals of the firm plan to profit from the coming financial crisis, but their business as it was, as an investment bank, is over.

  • “It’s just money” – moral relativism as justification of unethical behavior – The CEO and chairman of the board takes an apparent long view on the actions of his firm, seeing their choice to deceptively unload toxic assets on the market in order to stem their own losses by kicking off systemic disorder, as a mere reaction. “It’s just money” is a wilful disconnection from the human and integrity costs; believing that the entire economic system is a historic construct makes wrongdoing within it blameless. However, this is not reality; financial crises have real impacts and victims, and money is not just “pieces of paper with pictures on it.”

At every turn, Margin Call exemplifies bad corporate conduct, insufficient compliance and governance controls, and unethical decision-making. This movie provides a primer as to the devolving organizational accountability that set the stage for the 2008 financial crisis.

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Trends in business compliance

Round-up on developments in client due diligence in the financial services industry

Client due diligence and related processes in financial services – client acceptance, know your customer, anti-money laundering, sanctions monitoring – are central to modernizing and improving compliance programs. Current trends indicate that cultural differences, technological advances, and cooperation of enforcement authorities are all driving investigation and improvement.

In the ever-increasingly complicated global marketplace, client due diligence as a practice will continue to involve, taking into account local practices, changes in technology, and shifting regulatory priorities.