Rossa reports in on a recent speech made by financial historian Niall Ferguson on ethics in the financial markets. Ferguson simultaneously holds a professorship at Harvard and senior research fellowships at Stanford and Oxford, and is the author of numerous best-selling books, several on the history of finance. His latest book is High Financier: The Lives and Time of Siegmund Warburg.

Is there a need for more morality as well as better ethics in the financial world? What is the difference? Although in modern English the two words are sometimes used interchangeably, they are usually taken to mean the opposite of the nuances suggested by their respective roots. The word “moral” is derived from the Latin mos, meaning custom, while the word “ethic” comes from the Greek ethos, meaning character or personal disposition. Nowadays, morals have come to mean personal beliefs about right and wrong, while ethics are taken to mean the customary standards of behaviour of a society or field of activity, such as medicine, law and – to an increasing extent – finance.

In the context of the more common modern meanings of these words, public calls for higher ethical standards in finance and investment have increased in the wake of the unprecedented financial crisis of the past three years. At the roots of the crises were numerous and widespread incidents of unethical and reckless lending and investment practices. Increasingly the current popular mantra among better managed firms is that good ethics is good business. However, commendable as that approach may be, it does to some extent beg the questions: what is meant by good ethics and, if ethics were not good for business, would there still be an emphasis on them? Should we not expect high morals from bankers and financial professionals as well as adherence to a set of prescribed ethical standards?

The historian Niall Ferguson addressed this topic recently in a speech “Men, Money and Morality”, given to more than two thousand investment bankers and other finance professionals. The location for Ferguson’s speech was very unusual but arguably uniquely fitting: the nave of St. Paul’s Cathedral in the heart of the City of London. At the end of a volatile trading day in the world’s capital markets, Ferguson, describing himself as a Scottish atheist lecturing in an Anglican cathedral on a German-born Jew, asked his audience of prominent international financiers to reflect on the life of the legendary Siegmund Warburg (1902-1982), founder of the famous firm S. G. Warburg & Co. in London in the 1930s. Warburg was one of the last great “relationship” bankers before the age of “transactional” finance was ushered in by the Big Bang, when firms’ valued clients turned into mere “counter-parties”.

Investment professionals need to ask themselves always, as Siegmund Warburg did, “am I doing the right thing?”, not just “does it meet the rules?” or “can I get away with it?”

Ferguson noted that the real lesson of history in finance is that regulations and rules alone are not enough to ensure financial stability. Indeed, over-complicated box-ticking compliance in place of moral judgment can create a false sense of comfort that all is well. Investment professionals need to ask themselves always, as Siegmund Warburg did, “am I doing the right thing?”, not just “does it meet the rules?” or “can I get away with it?” Ferguson quoted from a speech Warburg made to associates and directors of his firm in 1959, in which he said “success from the financial and from the prestige points of view is not enough—what matters even more is constructive achievement and adherence to high moral and aesthetic standards in the way we do our work.” It is hard to imagine the CEOs of very many financial services institutions saying such words today. Ferguson contrasted them with the comments of a well-known modern day investment banker, now forever wedded to his ironic turn of phrase who claimed to be just “doing God’s work”—an unfortunate quip at a time when the world was crying out for serious, literal explanations of the world’s acute financial problems.

Warburg had gone on to say “we must follow a policy of establishing new values and new procedures rather than acting mainly as traders and sellers of securities.” He believed strongly in the economic and social good that finance could achieve by financing worthy, thriving enterprises and by earning attractive returns for their investors. He had little regard for those who “spent their time in market speculation“ and disparagingly referred to them as “Boersianers”. He observed that “the reputation of an investment banking firm for integrity, generosity and thorough service is its most important asset, more important than any financial item. Moreover, the reputation of a firm is like a very delicate living organism which can easily be damaged and which has to be taken care of incessantly, being mainly a matter of human behaviour and standards. Never do anything that would bring Warburg into disrepute.” Some modern CEOs might make such statements but how many would act upon them? Warburg stuck to his principles forgoing business and parting with partners when these principles were compromised.

Warburg believed that his firm should only do what was in its clients’ best interest even if its clients wanted it to do otherwise. He believed that business schools should teach their students to aspire to more than “maximizing shareholder value” – in Ferguson’s words a code phrase for driving up the share price by any possible means.

Ferguson commented that most people in the financial industry today know little or nothing of the period before their careers began. He suggested that more financial history might be taught at business schools and less financial engineering. He also suggested a kind of Hippocratic Oath for financiers that borrowed from the principles of investment bankers of the past, such as Warburg. Taking the words from the medical profession’s oath “do no harm” would not be inappropriate.

Like those of many other financiers who built their firms on reputations and moral capital more than financial capital, the Warburg name has been replaced by abstract names and acronyms. But many would agree that the time is ripe for bringing back their concept of “high finance” to replace some of the lower forms of finance that have surfaced in recent years. Many financial institutions have undergone financial re-capitalizations in the post-crisis world but arguably there are just as many instances in which a measure of moral recapitalization would also serve the institutions and their customers well and would provide a more sound footing on which to help rebuild the global financial system and the economy it supports.