No we shouldn't

Bank misdeeds show lack of 'should we'

Have bankers already forgotten Eliot Spitzer? Citigroup is to pay $15 million to settle allegations that its research analysts shared information selectively with clients, helped companies prepare documents for initial public offerings and even collaborated with the bank's traders. This may have been a gray area before the former New York attorney general forced a $1.4-billion settlement out of 10 banks in 2003, but such rules have been crystal clear ever since.

It's also drummed into every banker that client business is strictly confidential. Yet the US Justice Department is investigating allegations that an HSBC trader leaked secret information about an impending foreign exchange transaction to a big hedge fund. If that happened, it was pure and simple rule-breaking.

Misdeeds of this kind highlight the cultural problem identified by Bill Dudley, the president of the New York Federal Reserve, in a speech last month: people asking themselves the question "could we" instead of "should we." This isn't to cast all bankers as dishonest. On the other hand, Dudley doesn't accept that it's just a few bad apples - he believes there's a cultural problem that starts at the top of some financial firms.

An experiment reported last week in the journal Nature seems to bear this out. In tests in which subjects won more money if they cheated, researchers found bankers were more dishonest than control groups. That only became clear, though, after they were primed to think about their professional roles.

Breakingviews' Edward Hadas, a former bank analyst, explained it this way: "The problem was not my co-workers' ill will or poor character. It was that the standards of success for our businesses were impossibly distant from what was good for our clients."

That in turn is why Dudley, among others, wants to change pay structures to reward bankers for doing the right thing rather than whatever they can get away with. The effort would also promote collective over individual responsibility - a throwback in some ways to investment banking's traditional partnership model, which put the reputation and the wealth of all partners at risk in every transaction. With memories evidently so short in the industry, it will be an uphill struggle.