Comey’s “Higher Loyalty” and Its Message for Wall Street

In his controversial book, A Higher Loyalty: Truth, Lies, and Leadership, the former FBI director James Comey – in a much-quoted opening “Author’s Note” – says, “We are experiencing a dangerous time…” a time in which “basic facts are disputed, fundamental truth is questioned, lying is normalized, and unethical behaviour is ignored, excused, or rewarded… It is a troubling trend that has touched institutions across America and around the world – boardrooms of major companies, newsrooms, university campuses, the entertainment industry, and professional and Olympic sports.” This diagnosis would elicit broad agreement across the political spectrum. What has precipitated this disastrous ethical decline?

I will argue that as much as anything, it is Wall Street.

Wall Street (by that term, meaning the financial industry not only in Wall Street but in the City of London and other financial centers) routinely lives numerous lies. Increasingly over recent decades, it has become well known in the finance field that the search for verifiably effective investment management in pursuit of the goal of outperforming the market average is highly likely to be futile. Nevertheless, pension and endowment fund consultants and money managers cynically pretend that it is a very important pursuit requiring expensive expert services, such as their own. Accordingly, they construct arbitrary and ineffectual but technical-sounding methods for doing it, without fully informing their clients, the public, or investors who are in their care of the likely futility and expense of the whole exercise.

Before lying became normalized in politics, it became normalized in finance. It is well known that in an infamous transaction known as the ABACUS deal, Goldman Sachs contrived to sell a collateralized debt obligation (CDO) to one set of clients in order to enable another major client, John Paulson, to select securities to include in the CDO, the better to short it. This most surely required that Goldman salespeople, representing the CDO to the buyers, not tell them the truth. When questioned in 2010 by Senate subcommittee chairman Carl Levin whether this was unethical and a conflict of interest, Goldman CEO Lloyd Blankfein said, “In the context of market making that is not a conflict.”

Can such a response be justified? Up to a point it can. The economic philosopher Israel Kirzner wrote several books arguing cogently that entrepreneurs need to keep certain information away from their clients, in order to be able to reap a profit from their entrepreneurship. Is there a point at which keeping information away from clients crosses the border into lying? There surely is. And there is another reason why Kirzner’s argument does not apply well to the financial industry, which I will take up later.

This lying is winked at, and even admired by the finance profession. In an article covering a talk by Seth Klarman, founder of the Boston-based Baupost Group, at a CFA Institute annual conference shortly after the Goldman revelations, Advisor Perspectives CEO Robert Huebscher wrote that “Klarman was more forgiving than most of Goldman Sachs.” As justification for that forgiveness, Klarman said, “I know Wall Street will always try to rip our eyeballs out.” This is representative of the normalization of – and even begrudging admiration of – Wall Street’s lying.