Einstein famously said his theory of relativity applied to physics, not ethics. We’re reminded of this quote when reading Nassim Taleb’s blog recently on the Huffington Post.
Taleb tells a story of being pitched a financial product by former Fed Governor Alan Blinder. Blinder was able to use his knowledge and experience as a former regulator to navigate the rules and create a product that took advantage of loopholes.
According to Wikipedia, the 2,300 plus page Dodd-Frank Financial Regulation bill requires that regulators create 243 rules, conduct 67 studies and issue 22 periodic reports. While some benefits are sure to come from these new regulations, only time will tell if this bill will return stability and trust to the financial markets. Taleb says in his blog “the more complex the regulation, the more bureaucratic the network, the more a regulator who knows the loops and glitches would benefit from it later.” This bill could create an entire new industry of post-regulatory agency securities lawyers peddling questionable financial products and services based on their knowledge of the regulations. These products could be legal, but not necessarily ethical.
According to Taleb, when he questioned Blinder about the ethics of the product, Blinder implied that since it was legal, it was ethical. (Along with Taleb, we believe legal and ethical do not mean the same thing.) We always get nervous when someone tells us how ethical they are, but for what it’s worth at Sigma, we have always adhered to a strict code of ethics. In addition, we are held to a fiduciary standard meaning we are legally liable to put our clients’ interests first. We treat this as a moral obligation. Laws will change and loopholes will close. We will continue to serve our clients in an ethical manner.