Beyond the bubble of Wall Street and the City of London, the banking industry still does not have the best of reputations. Christmas - when extended families assemble for food and alcohol - is an occasion when banking's not so good reputation can be pressed upon its practitioners by the likes of emboldened, inebriated, relatives.
Take the experience of Goldman Sachs CFO Marty Chavez. During a Thanksgiving dinner, someone hit him with: “Marty, how can you work for that company? How do you look at yourself in the mirror?.” Chavez obfuscated by saying that he didn't work for Lehman Brothers (thereby intimating that he was exonerated from causing the financial crisis), and the questioner let it drop. Chavez could, however, have said something else: he could have claimed he was a "virtuous agent" leading a "worthy human life" by working in finance, and elaborated further upon request.
So suggests a new paper published in the Journal of Business Ethics by academics at the Università della Santa Croce in Italy and the Universidad de Navarra in Spain. Intended as a refutation of an earlier paper decrying the morality of people with careers in trading, it sets out why traders in particular deserve a break. Chavez isn't a trader, but the argument might be adapted for anyone in finance. The main points are as these:
1. Finance has a valid social role - you just haven't realized it
"Finance came into being to make possible inter-generational projects that serve the well-being of persons and communities," say the academics. "Part of present-day finance is still aimed at the realization of long-term projects—e.g., providing a mortgage to buy a family home, borrowing to make it possible to go to college, securing funding for building a school, saving for a pension, making available easy and secure ways of making monetary transactions, and many other activities." Finance has a broader human purpose.
2. Traders keep prices at fair levels
A lot of trading is about arbitrage - buying and selling on different markets and benefiting from price differences. Arbitrage trading is less easy in the age of algorithms, but the principle remains sound. Because arbitrageurs continuously monitor price differentials, their activity keeps prices at a fair level. They detect and combat price manipulation.
3. Speculation is unavoidable in life
The academics define speculation as, "the activity of performing high-risk financial transactions having on the one hand the possibility of big losses and on the other hand the possibility of huge gains." They note that speculation can be subject to "reckless misuse," but this doesn't necessarily make it evil.
They point out that every choice involving a risk that cannot be controlled involves speculation. Similarly, any choice made in a situation of incomplete information about the future is necessarily speculative. They suggest that speculation should only be criticized when the associated risks are disproportionately large, or when they involve a moral defect like a clear conflict of interest between the trader and her client.
4. And it's entirely natural that speculators should be rewarded
Because speculators are assuming risk, the academics say it's justifiable that they should benefit if the risk pays off. "Clearly, it would be unfair to expect a person who risks his assets on a project to incur large losses in the event that the project goes “south” but not benefit economically in the event that the project is successful."
5. Trading is a specialized and necessary skill in itself
Traders have a purpose. Agency traders act on behalf of clients who don't have the time or capability to place effective trades of their own. Without traders, many transactions would simply never take place.
6. Traders can be as virtuous, responsible and righteous as the next man or woman
Lastly, the academics suggest that it's perfectly possible to be "good" as a trader (in the same way that it's possible to be bad.) They define a virtuous trader as someone in possession of, "practical, executable knowledge about financial trading, being familiar with its purposes and knowing how to apply its techniques successfully." They describe a righteous trader (a trader "of integrity") as someone who exhibits, “a wholehearted, responsible, and stable commitment to integrate his desires, activities and projects into a meaningful and worthy life,” plus, "a steadfast commitment to avoid accepting “double standards” or rationalizing unethical behavior for “special” circumstances or social contexts." And they describe a responsible trader as someone, "able to engage in responsible adaptation: he adapts to the rules of the game in a critical and selective spirit, harnessing them to his or her own legitimate purposes..."
Try repeating this at the Christmas dinner table.
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