How to Risk-Adjust the Culture of Global Finance

 The concept of "culture" is traditionally connected to the idea of national or ethnic culture. But culture is also referred to in a large range of financial areas. Changing that culture is critical to risk-adjusting the financial system.

In business terms, we hear about corporate culture; in risk terms, we speak of the risk culture of the organization. In traded capital and contract markets, we speak of the culture of participants in behavioral finance terms. In those same markets, we also speak of the market makers and client-facing representatives as having a sales culture. In general, we see the culture of finance on all sides as a culture of fear in one case and greed in the other.

The bifurcation of culture into these two opposing forces – fear and greed – is what gives us a buyer for every seller and a winner for every loser. It also creates the liquidity necessary in market pricing. The rapid transformation of one view of fear and the other of greed is transitory, moving at a different pace in each human player. It also gives us arbitrage opportunities across asset classes, across geographies and between markets, helping to keep economic equilibrium.

When either fear or greed is universally shared, it gives us gridlock - no buyer for any seller, no price discovery, no values for our intangible financial assets and no liquidity. Worse, it leaves us in financial crisis, with a universal fear that the global economy is badly broken. That is our current state.

Culture is a product of shared beliefs that get played out every day in one's life, whether privately or professionally. The optimal state of a culture is to be common to both of those lives. That this culture cannot be created overnight is obvious. It's the result of a consistent, multiyear, open exchange of views, healthy skepticism and questioning of widely held beliefs. It gets played out in a parent shaping a child's national or ethnic culture, in a coach or dance instructor teaching discipline, in a pastor or rabbi instilling moral and ethical values and in a mentor shaping an apprentice's corporate culture.

What skews culture in the financial industry is a widely held belief that winning is all that matters. That greed has no counterpoint in fear. That if I get to the finish line by any means I can take the money off the table and never look back. In Nick Dunbar's great book "The Devil's Derivatives," he talks about this as the transformation of a bank culture from "hate to lose" to "love to win."

The personification of the greed culture was described in a New York Times op-ed piece by Greg Smith, a young investment banking recruit of 14 years' vintage. He announced publicly that he believed the decline in Goldman Sach's moral fiber, attributed to the leaders of the company, represented the single most serious threat to its long-run survival.

I too lived in a century-old private partnership as it grew and became global. My partners and I increasingly became globe-trotting rainmakers. We became increasingly detached, ever so slowly, from the personal mentoring that was so critical to communicating a culture across decades let alone generations.

We kept pace with our clients' globalization aspirations spending less time in preserving the culture we had inherited. We recognized this change and hired professionals to teach ethics and imbue our culture, but it wasn't the same. We weren't alone. Our clients, great financial institutions steeped in centuries-long "vision and values" cultures, hired the same outside mentors and tried similar programs.