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COMMENTARY: Code of the West Could Spur Needed Change on Wall Street

In the last several months, headlines in financial publications such as the Wall Street Journal have reported on the result of the “casual corruption” on Wall Street, as large brokerage houses are under scrutiny by FINRA and other regulatory agencies. There were several examples of this in June.

The Wall Street Journal reported June 21 that J.P. Morgan Securities LLC structured synthetic collateralized debt obligations without informing investors that a hedge fund helped select the assets in the CDO portfolio and that the fund had a short position in more than half of those assets. “J.P., Morgan faces as much as $30 billion in legal claims from investors, regulators and other entities over similar deals. It is estimated half of that is due to deals underwritten by Bear Stearns Cos., which J.P. Morgan acquired in March 2008,” the paper said.

The Financial Times reported June 21 that, “…the SEC is probing Merrill Lynch for a sale it structured for Magnetar … regulators are looking into whether Merrill mispriced assets for the $1.5 billion collateralized debt obligation and whether Merrill told buyers that Magnetar helped select the assets included in the CDO and bet against those same assets, citing unnamed sources.”

More Settlements

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The Wall Street Journal reported June 23 that, “Morgan Keegan & Co. has agreed to a $200 million settlement with the Financial Industry Regulatory Authority and five state securities regulators that resolves a civil case brought against the firm last year accusing top executives of defrauding investors by artificially inflating the value of mortgage-backed securities in several of its mortgage bond funds.”

The Wall Street Journal reported June 28 that, “BofA is close to an agreement to pay $8.5 billion to settle claims by a group of high-profile investors who lost money on mortgage-backed securities purchased before the U.S. housing

collapse.”

Of course, the heads of these firms all claim their own organizations were also damaged in these transactions and that the leaders personally had no knowledge that this activity was occurring on their watches.

What has happened to ethical business behavior on Wall Street? Does the rampant greed and malfeasance among investment professionals signal the demise of integrity and the end to putting the client/investor first? I hope that the answer is no.

Words of Wisdom

If my magic wand worked, I would make it mandatory reading for every person in the financial and investment community to read a short but meaningful book “Cowboy Ethics: What Wall Street can Learn from the Code of the West” by James P. Owen, a Wall Street veteran of 40 years. A client gave my colleague a copy of this book about two months ago. Since then, the colleague has ordered several copies to send to his peers in the financial planning and investment advisory community with the hope that each of us can continue to raise the level of professionalism and ethics in the industry. The response has been heartwarming.

Now, we need to spread the code to more than just those of us who do practice ethically and who do put the client first.

In the preface to his book which contains gorgeous photographs of the West and of cowboy life, Owen writes, “Not so many years ago, the denizens of Wall Street inspired awe and envy. But after a wave of scandals exposed a dark side of the industry, I found myself mourning what had been lost. I would only wonder: How did we get to this sorry state? When did we stop caring about our principles and the well-being of our clients? And most importantly, how could we begin to redeem ourselves and earn back the trust of investors and regulators? A little more than a year ago, almost by accident, my troubled musings on the state of our industry came together with my lifelong interest in the Old West and the era of the open range. Suddenly, I found my source of inspiration: the real-life working cowboy. I spent the next year exploring the life and code of the working cowboy and distilling the principles of what I call ‘Cowboy Ethics.’ ”

Before he outlines the Code of the West, Owen says that the fundamental problem on Wall Street “is that we have confused rules with principles. Rules can always be bent, but principles cannot.” He says that we don’t need more regulations; rather, we need inspiration from heroes who will touch the best parts of us and encourage us to be better people than who we are now.

The code of the range that Owen lists in his book is not full of standard rules — it reflects more what a person does when no one is looking and when things get tough, forcing one to rely on one’s own integrity and character.

Here are Owen’s “ten timeless principles to live by,” The Code of the West.

Live each day with courage.

Take pride in your work.

Always finish what you start.

Do what has to be done.

Be tough, but fair.

When you make a promise, keep it.

Ride for the brand.

Talk less and say more.

Remember that some things aren’t for sale.

Know where to draw the line.

Facing Adversity

I particularly liked how he elaborated on the third principle telling about cattle trail drives and how tough they were on the cowboys. “But on days when things seem especially rough, I think about what it must have been like on the open range in the middle of a blizzard, and I tell myself, ‘cowboy up.’ When you’re riding through hell, keep riding.”

Even though regulators are making some progress prosecuting individuals and organizations who took advantage of easy money and investors, undoubtedly there are still individuals who are conjuring up the next investment scheme which may create another bubble or credit crisis. What is needed now is great leadership in financial firms and organizations which creates a culture of doing the right things.

Owen ends his book with the following exhortation: “You may feel that the Cowboy’s Code of the West does not fit our times, and it is true that few of us will ever be called to test our courage against perils anything like a raging blizzard or a runaway herd of cattle. But we can have the courage to give clients an honest account of bad news, or to confront a business practice that does not put the client first. Every time we make a decision, we can ask ourselves, ‘Is it right?’ ‘Is it fair?’ We decide that our honor and our reputations are not for sale.”

Please feel free to share this piece with individuals in the investment community. Lastly, please make sure that your financial professional always puts your interests first.

Peggy Eddy, a certified financial planner, is president of Creative Capital Management Inc., a fee only investment and financial advisory firm in San Diego, and co-founder of the Family Business Forum at the University of San Diego.

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