In a city built on faith and finance, there's an unaddressed tension between the two.
Charlotte, the country's second-largest banking center, is also a city where top bank executives teach Sunday school, serve as deacons and mention church at employee rallies. It's the kind of place where Hugh McColl Jr. says he got inspired to buy BankAmerica while singing a hymn at the early service.
And yet there's rarely a public conversation about what is ethically right and wrong in the banking industry, and how that contributed to the financial meltdown still roiling national economies. Although bankers acknowledge that "mistakes" were made or there were "cognitive failures," they are often loath to dwell on their industry's ethical breaches.
It's an uncomfortable conversation but a necessary one, many believe. Without it, they say, we will only find ourselves in another financial crisis.
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Richard Boyce, the mayor of Belmont and a Presbyterian minister who teaches seminary students in Charlotte, said he's concerned that the city's bankers haven't clearly addressed the issues of right and wrong in their industry.
"We've all benefited from the success of the banks in Charlotte," he said. "It's not like any of our hands are clean. ... What frustrates me is here in this banking center, we don't seem to be talking to one another much about how we decide what is proper and improper in terms of banking practices today."
Although the industry faces sweeping new rules and regulations, legality is not the same thing as morality. In some corridors of banking, people turned a blind eye to troubling practices as long as they were technically legal, or rationalized away their qualms by telling themselves that it was just the way business was done. There was a fragmented code of ethics in some corners, current and former bankers say, where behaviors that people wouldn't tolerate in their personal lives were considered acceptable as long as they were confined to business.
The Observer broached the topic of banking and ethics with more than 50 people, almost all of them bankers or former bankers. Only 10 of the bankers agreed to be interviewed on the record. Some said they would speak only under anonymity because they feared retaliation from their employers. Others said they didn't want to talk because they disagreed with the idea that there had been ethical lapses in banking.
Before the financial crisis came to full force in 2008, shifts in the industry and society set the stage for temptation.
The 1999 repeal of the Glass-Steagall Act broke down the walls between retail and investment banking, allowing banks that take consumers' deposits to also engage in risky Wall Street-style gambles. At the same time, the government was aggressively promoting home ownership. And in 2004, regulators bowed to industry pressure to loosen rules about the reserves that investment banks had to hold, allowing them to take on more risk.
In response, bankers issued mortgages to people who couldn't prove their income, making more money as they made more loans. The banks repackaged home loans into investment products and sold them off to pension funds and other investors, giving them less incentive to worry about whether the loans were good or bad.
The banking industry became a big profit center in itself, not just a tool for moving money through the economy. The rewards got too big, too fast and too seductive, many industry insiders agree.
The banks' compensation structures made it difficult for employees to speak up if they saw anything that made them uneasy, current and former bankers said.
Bonuses were rewarded partly on team performance, so people were disinclined to object to questionable practices. Banks emphasized teamwork to the extreme, so people who spoke up could be seen as disloyal. The units that churned out the most revenue held the most sway with executives and other decision makers.
"To throw a flag in the sand and say, 'I'm not sure about this' - you're not having a philosophical discussion with your priest, you're saying to the guy in the next cubicle, 'I'm not sure you should be making as much money as you're making,'" said William Atwood, executive director of the Illinois State Board of Investment, an investor in major banks.
Maryann Bruce, the former president of Wachovia's Evergreen Investment Services, said the banks are often dominated by a message from the top of "Do as I say."
"There's a culture of groupthink, there's a culture of 'Don't speak out unless you have a few other people who agree with your opinion,'" she said. "You always like to believe that people have integrity, but it takes courage."
Bruce left Wachovia in 2007, the same year the bank paid more than $32 million to settle federal allegations that it had mishandled an Evergreen mutual fund, allowing questionable "market timing" trading at the expense of investors. Regulators also found that Bruce had banned such trading in 2000, though another executive went behind her back to do it.
One of the major problems in the banks, Bruce and others said, is that executives were terrified by the thought of their company falling off the list of top banks. Like their peers at most publicly traded companies, they were under extreme pressure to raise earnings each quarter, and a "keeping up with the Joneses" obsession drove them to make questionable decisions.
"We had people who were determined to be the biggest, not the best, and they surrounded themselves with people just like them," said Bruce, citing Wachovia's 2006 purchase of Golden West Financial as one such regrettable decision. Golden West, a California lender that made unconventional mortgage loans, propelled Wachovia into a major player in the mortgage scene, but it also played a big part in the bank's near-collapse two years later.
John Owens, CEO of Charlotte-based Ameritrust, which used to make both prime and higher-rate mortgage loans through independent brokers, said he had reservations about some of the mortgage products touted to him by New York traders beginning around 2003. He used some of them anyway because he didn't want to lose market share.
"We had to make a choice. If we don't do it, somebody else will," said Owens, who is now selling prime mortgages and other products directly to consumers.
He said he lost millions, but he doesn't believe that the traders, or anyone else, had any ill intentions.
"I don't think ethically anything went wrong," Owens said. "... We were just relying on people who we thought were the smartest people in the room."
John Allison, the retired CEO of BB&T, said his bank faced the same pressure to offer negative-amortization mortgages several years ago. Those mortgages let borrowers pay less than the interest owed every month and can lead to them owing more over time, not less. Allison said he was criticized for not offering the loans because the banks that did were booking big fees every time they sold one, but he thought those loans would end up hurting his customers - which would only end up hurting him too, he said.
"Absolutely never do anything that is bad for your client," Allison said. "Maybe you'll make a profit in the short term, but it will come back to haunt you. ... We knew that housing prices wouldn't go up forever, and we were setting up a lot of young people to have serious economic problems."
Did meltdown have to be?
To be sure, many bank employees were unaware of any wrongdoing at their organizations. They make middle-class salaries and are tired of being painted with the same brush as rich executives.
It's also true that there are many parties, not just the banks, that deserve blame for the global financial meltdown: Consumers took out loans they couldn't afford. Regulators failed to understand or got too cozy with the businesses they were supposed to be overseeing. Lawmakers encouraged home ownership even for risky borrowers and lifted banking restrictions. Credit rating agencies compromised their reporting so they could make more money.
But wrongdoing by the banks is a topic that resonates in a country where people are struggling with nearly 10 percent unemployment and yet continue to hear about big payouts on Wall Street for "fat-cat bankers," as President Barack Obama called them. Twenty-three percent of Americans rate the honesty and ethical standards of bankers as "high" or "very high," according to just-released data from Gallup, down from a high of 41 percent in 2005.
The Financial Trust Index, created by professors at the University of Chicago and Northwestern University, asked more than 1,000 people what they thought was the main cause of the financial crisis in the index's initial poll in late 2008. About 11 percent said excessive government intervention. About 32 percent said lack of oversight or regulation. And 50.5 percent said managers' greed and poor corporate governance.
But few individual bankers have been prosecuted. Rather, it's "the industry" that usually shoulders the blame for the financial meltdown. And it's the corporations, not the executives in charge, who often foot the bill when regulators slap them with fines.
Even calling the meltdown a "crisis" instead of a "scandal" seems a way to release individuals from moral culpability, Kevin T. Jackson, a business ethics professor at Fordham University, wrote this spring in the Harvard Journal of Law and Public Policy.
The nomenclature makes the financial meltdown seem like an inevitable act of nature, when really it was caused at least in part by human actions, Jackson contends. "Economics is becoming so excessively mathematic that its human element is being eclipsed," he wrote. "Yet the human dimension is precisely where we must look to achieve moral and cultural reform."
Ken Lewis, the former CEO of Bank of America, and Joe Price, another bank executive, are two of the few individuals to be singled out. In February, New York Attorney General Andrew Cuomo sued them and the bank, saying they purposely misled shareholders about massive losses at Merrill Lynch before buying it. Lewis, Price and the bank have all adamantly denied the civil charges.
Prosecuting wrongdoing in the financial crisis is difficult and complex. Many of the practices that are now under fire were never clearly illegal. In a case of alleged securities fraud or failure to disclose, there may be rampant suspicious activity, but there's rarely conclusive evidence to prove criminal intent, legal experts say. Last year, a jury acquitted two Bear Stearns hedge fund managers who told investors they were optimistic about certain subprime-backed funds while privately worrying they were about to collapse. Defense attorneys convinced jurors that the traders weren't being intentionally misleading, but were merely putting a positive spin on poor returns.
Countrywide Financial CEO Angelo Mozilo settled when the Securities and Exchange Commission accused him of insider trading and misleading investors about the risks on Countrywide's books. Countrywide was bought in 2008 by Bank of America, which covered part of Mozilo's fines because of provisions in his employment contract. Goldman Sachs also settled when it was accused of misleading investors by selling mortgage securities while also betting against them.
No high-profile bankers have gone to jail, and there has been no large-scale attempt to recover the giant bonuses awarded to executives of failed or nearly failed institutions. The Federal Deposit Insurance Corporation has filed just two lawsuits related to the 300-plus bank failures in the past three years, although it has said it is conducting 50 criminal investigations. It also plans lawsuits against individual executives and directors.
Bank executives often say that no one could have predicted the financial meltdown, that it was instead a culmination of market forces - although many experts now disagree.
"The people in the backroom at Citigroup, they had to see this coming," said former BB&T chief Allison. He was referring to the risky subprime business of the New York bank that eventually needed $45 billion in bailout loans from the government. "They had enough information to know a disaster was coming, they were smart enough to know a disaster was coming, and they did the ultimate psychological sin. They evaded (reality), because they were going to make a lot less money."
Said Denis Arnold, a UNC Charlotte business ethics professor: "You can't tell me that a senior executive at a major Wall Street institution ... couldn't step back and bring together his or her leadership team and say, 'This is not the right path for our organization.'"
"It's not a pipe dream, it's not implausible, it's a perfectly reasonable expectation of senior leadership," said Arnold, who hosted a 2009 conference called "Business Ethics and the Credit Crisis."
Stephen Green, former CEO of banking giant HSBC and an ordained priest in the Church of England, has spoken of the need for fundamental values of suitability, fairness and rightness of banking products in promoting his book "Good Value: Reflections on Money, Morality, and an Uncertain World."
Pope Benedict XVI, in his June 2009 "Charity in Truth" encyclical, noted the misuse of financial methods that "wreaked such havoc on the real economy."
He added: "Financiers must rediscover the genuinely ethical foundation of their activity, so as not to abuse the sophisticated instruments which can serve to betray the interests of savers."
Conversation isn't happening
David Chadwick, pastor of Forest Hill Church in Charlotte, said the dominant conversation he hears in banking is how to navigate in a tattered economy, rather than a discussion of ethics.
"Everybody's searching for the new normal. I think their quest for the new normal has more or less squelched the conversation about how this happened," Chadwick said.
Boyce, the mayor who also teaches seminary students on the Queens University of Charlotte campus, said: "A lot of times the bankers will say, 'Look at all the money we gave away,' and that's good and I applaud that. But I'm interested in what they're doing during all the rest of their time."
James Howell, senior pastor of Myers Park United Methodist Church in Charlotte, said that his concern is not just with banking. "I don't hear - and you'd think I would - a lot of discussion about ethics, period," Howell said. "We admire people who get ahead, we admire people who succeed. I never hear people saying, 'Well, Fred has so much integrity.'"
Part of the problem is a disconnect between the code of ethics on Wall Street and on Main Street, said Lawrence Baxter, a former top executive at Wachovia who now teaches at Duke Law School.
He pointed to the SEC's charges against Goldman Sachs in April as an example, when the SEC accused the bank of selling mortgage securities while simultaneously betting against them. The SEC saw securities fraud; Goldman saw a standard business practice.
At a Senate hearing that month, Goldman executives contended they had no legal duty to disclose their bets. "Regret to me is something that you did wrong, and I don't have that," testified Dan Sparks, the former mortgage department head. Other executives conceded that they felt bad about the housing crash, but said they weren't to blame.
"We would not tolerate that kind of misrepresentation from a used car dealer, but on Wall Street everyone is supposed to be looking out for themselves," Baxter said. "...It makes the rest of the country say, 'We didn't know they conducted themselves in that way,' and Wall Street is saying, 'You're not sophisticated enough to understand it.'"
Baxter and others say new regulations can't solve all of banking's problems, because there will always be ways - legal, if nuanced ways - to get around them.
The glue that holds markets together is a sense of trust and self-regulation among the participants, Baxter said in a recent speech in Johannesburg, South Africa. "Mutual understanding endures only on the basis of a deep and widespread commitment to moral integrity within a market," he said. "So even though it has lately been unfashionable to focus on market morality and ethics, we ignore the moral dimensions at our own peril."
Baxter points out that Adam Smith, the 18th-century economist, wrote an ethics book, "The Theory of Moral Sentiments," years before he wrote his famous free-market manifesto, "The Wealth of Nations."
Where do we go from here?
So what can be done?
Jackson, at Fordham University, said it's critical for companies to realize that ethics and good business are not mutually exclusive. The negative-amortization loans, in which borrowers were allowed to pay less than the interest owed, are a telling example. BB&T decided not to offer them and is now one of the top 10 U.S.-based banks. Wachovia dove into them, and it teetered near collapse before being bought out.
Shareholders, for their part, cannot expect the banks to offer the huge returns and dividends that they did several years ago, while also expecting them to abide by strict ethical boundaries, bankers said. Banks and the public have to reach a mutual understanding of what is right and what is wrong, which can be a difficult task. A study by the Pew Research Center in May 2009 found that 67 percent of Americans believe that "Wall Street only cares about making money for itself." Yet 63 percent agree that "Wall Street makes an important contribution to the American economy."
The way that bankers are compensated also needs to change, many bankers and outside experts said. Bonuses could be rewarded over a longer term; for example, a trader who sells a securitized loan would not get a bonus on it until three to five years later, and only if the loan had not gone into default.
There have to be consequences for wrongdoing or even just for poor performance, which precludes "golden parachute" severance packages and, many say, government bailouts.
There is also a push for banking to become a smaller, simpler, less-profitable industry. Banking's original purpose was to take in deposits and make loans so that the rest of the economy could function, but it became an industry focused on making profits for itself through esoteric products with questionable usefulness. John Mack, the retired CEO of Morgan Stanley, said at a speech in Charlotte this year that the banking industry needs to return to its roots. "We've created instruments that are too complicated," he said. "...It doesn't create any value other than (for) the trader."
Rank-and-file employees, as well as executives, need to feel comfortable speaking up when they have concerns about bank practices. CEOs, who are key to setting the culture in top-down industries such as banking, must choose lieutenants and a board of directors with courage to question management, experts said.
It's easy for CEOs of big banks to lose touch with reality, current and former bankers said. Their subordinates might be afraid to bring them bad news, they're often showered with industry awards, and they sometimes make so much money that they become deadened to the economic consequences of their actions. At his talk in Charlotte, Mack told business students at Queens that "the most important thing you can do is say what's on your mind."
But Baxter, who believes the banks have plenty to atone for, doesn't release from responsibility the shareholders who wanted bigger and bigger returns, and the borrowers who wanted bigger and bigger houses, and the communities that benefited when the banks thrived.
"It's so easy to be judgmental, (but) I'm very cognizant - I was in there up to my eyeballs believing we had endless prosperity," Baxter said.
"At the heart of it, I hate to say it, but we have seen the enemy and it is us."