Noted Economist Cites Widespread 'Financial Irresponsibility' as Key Factor Promoting Uncivil, Unethical Behavior on Wall Street

Henry Kaufman Hits Shortcomings in Fed Policies and Flawed Analysis by Economics Profession

Conglomeratization, Securitization, and Depersonalization All Contributed To Climate Producing Recent Economic Collapse

NEW YORK, June 20, 2011 /PRNewswire-USNewswire/ -- "A recurring pattern of financial irresponsibility" was cited today by internationally known economist Henry Kaufman for the increasing incivility and unethical behavior now associated with the world of finance.  

Dr. Kaufman spoke at the Carnegie Council as part of a lecture series on civility in contemporary life jointly sponsored by the Carnegie Council for Ethics in International Affairs and The Dilenschneider Group.

He detailed a litany of controversial practices and strategies that fostered widespread irresponsibility on Wall Street, ranging from conglomeratization, securitization, and unprecedented leveraging to what he labeled "the depersonalization" of markets as public ownership of investment banks replaced traditional private partnerships.  

Kaufman added: "I wish I could assure you that irresponsible behavior in financial markets will abate in the near future, but I cannot.  As we struggle to emerge in the aftermath of the recent financial crisis, far too many financial assets are still not shown on the books in realistic prices and oversight both in Europe and the U.S. remains under par and still has to be agreed upon."

Corporate ownership, he said, has given rise to significantly higher levels of risk-taking while radically altering investment banks' and other financial institutions' interaction with clients.  Many became financial conglomerates, diversified into multiple businesses and grew enormously, he said, resulting in client relationships that became "formalized and depersonalized."

In the wake of the most recent financial crisis –"the worst in 80 years" -- the noted economist stated that present-day financial upheavals stemmed "not only from behavioral and ethical lapses," but also "regulatory failures, historical amnesia, and shortcomings in economic and financial analyses. We seem to have learned shockingly little from past financial crises -- some even dating back centuries."  

Underscoring the fallout from runaway leveraging, Kaufman argued that "were it not for the intervention of the Federal government and the Federal Reserve, however belatedly, many major financial institutions here and abroad would have surely failed since all were thinly capitalized, inter-connected in the markets, and many held huge off-balance-sheet assets."  

The speaker was much more critical of the central bank's role leading up to the crisis.  The Fed, he said, basically took a hands-off approach to managing the credit structure, focusing on the growth of monetary variables instead of restraining debt growth.

He noted that the moderate, regulated, responsible behavior on Wall Street that prevailed after World War II started to change as memories of the Great Depression began to fade.  

Prime developments adding to the recent climate of reckless credit creation and market behavior, he said, were "securitization or the conversion of non-marketable assets into marketable ones, the rapid growth of derivatives, the emergence of huge financial conglomerates, and the growing popularity of quantitative risk analysis."  That securitization was exemplified for many Americans, he pointed out, "by the way home mortgages are financed today, fracturing the immediate relationship between borrower and lender and disastrously lowering credit standards."  

Growing technological inter-connectedness has also greatly fostered the easy-credit outlook, according to Kaufman, allowing financial information to flow globally almost instantaneously.  Many economies around the world, he said, are now directly in the crosshairs of crises that can readily be triggered by financial laxities well outside the boundaries of any particular nation.

Kaufman told his listeners he had long questioned the wisdom of so-called quantitative risk analysis: "Armed with complicated modeling techniques, increasingly powerful computers, and reams of historical market data, a growing number of investors have become entranced with the dream of scientific rectitude. Few recognize, however, that such modeling assumes consistency in market fundamentals. It does not take into account how structural changes in markets will affect prices going forward."  

He also admonished the economics profession for being entranced with modeling economic behavior and for failing to recognize early on the impact that structural changes would have on the marketplace.

Kaufman concluded his remarks on a more hopeful note looking to the future: "We need fundamentally new ways of thinking about market behavior from our economic thinkers and political leaders.  But because it is so difficult for those who have dominated economic thought and political life in recent decades (and still do) to think in fundamentally new ways, the new paradigms almost certainly will emerge – not from the minds of incumbents – but rather from the ranks of tomorrow's leaders."

One of the preeminent economists of our time, Kaufman is president of Henry Kaufman & Company Inc., a firm established in April 1988, specializing in investment management and economic and financial consulting.

For the previous 26 years, Kaufman worked at Salomon Brothers Inc., where he was managing director, member of the executive committee, and in charge of the firm's four research departments. He was also a vice chairman of the parent company, Salomon Inc. Before joining Salomon Brothers, Kaufman served as an economist at the Federal Reserve Bank of New York.

He is the author of "The Road to Financial Reformation: Warnings, Consequences, Reforms."

Kaufman follows a talk by Former Congressmen John Brademas and Mickey Edwards on Civility in Politics. The series of lectures on civility features speakers from politics, the media, finance, business, and other areas. Some of the nation's most insightful minds will explore the crisis and offer their opinion as to how we can restore civility in society.

The Dilenschneider Group, Inc. (http://www.dilenschneider.com) provides to a limited and select few access to the finest communications professionals in the world, with experience in fields ranging from mergers and acquisitions and crisis communications to marketing, government affairs and international media.

The Carnegie Council for Ethics in International Affairs (www.carnegiecouncil.org), established in 1914 by Andrew Carnegie, is an independent, nonpartisan, nonprofit organization dedicated to increasing understanding of the relationship between ethics and international affairs.

SOURCE Carnegie Council for Ethics in International Affairs