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Investment banking - a "sin" business?

Most private equity funds are prohibited from investing in so-called sin businesses, i.e. companies involved in activities that are considered unethical, such as alcohol, tobacco, gambling, adult entertainment or weapons. I recently read Dark Towers , in which award winning journalist David Enrich reveals the truth about Deutsche Bank and its epic path of devastation. Tracing the banks history back to its propping up a default prone American developer in the 1880's, helping the Nazi's build Auschwitz, and wooing Eastern bloc authoritarians, he shows how in the 1990's, via a succession of hard-charging executives, Deutsche made a fateful decision to pursue Wall Street riches, often at the expense of ethics and law.

Soon, the bank was manipulating markets, violating international sanctions to aid terrorist regimes, scamming investors, defrauding regulators, and laundering money for Russian oligarchs.

The toxic culture that pervaded Deutsche Bank was driven by insatiable greed of executives at the bank, which filtered down to staff at all levels. Some staff members received annual bonuses of up to $100million.

Some quotes in the book, which provide evidence of this culture are:

  • the agents (two agents conducting federal investigations) didn't think the crimes that occurred throughout the bank were the work of lone low-level employees - they suspected that this was the product of a culture of criminality that pervaded Deutsche

  • in death, Bill Broeksmit (an employee at Deutsche Bank, who committed suicide) became a symbol of what ails Deutsche Bank, of the destructive power of institutional greed. Of how Wall Street lures even well intentioned people away from their moral and ethical principles, of the relentless pressure that bears down on those who stand up for what they believe is right

The sad reality is that this culture of greed seems to be pervasive in most of the investment banks on Wall Street, as was evidenced during the global financial crisis. The Securities and Exchange Commission (SEC) in October 2004 relaxed the net capital requirements for five investment banks—Goldman Sachs (NYSE: GS), Merrill Lynch (NYSE: MER), Lehman Brothers, Bear Stearns, and Morgan Stanley (NYSE: MS). That freed them to leverage their initial investments by up to 30 times or even 40 times. The investment banks packaged sub prime mortgages into what were billed as low-risk financial instruments such as mortgage-backed securities, collateralized debt obligations (CDOs) and credit default swaps. Soon a big secondary market for originating and distributing subprime loans developed. Needless to say, the investment bankers received massive bonuses for "financial engineering", which precipitated the GFC.

In October 2007, Swiss bank UBS became the first major bank to announce losses—$3.4 billion—from sub-prime-related investments. In the coming months, the Federal Reserve and other central banks would take coordinated action to provide billions of dollars in loans to the global credit markets, which were grinding to a halt as asset prices fell. Meanwhile, financial institutions struggled to assess the value of the trillions of dollars worth of now-toxic mortgage-backed securities that were sitting on their books.

Yet the collapse of the venerable Wall Street bank Lehman Brothers in September 2008, marked the largest bankruptcy in U.S. history, and for many became a symbol of the devastation caused by the global financial crisis.

The Fed, the Treasury Department, the White House, and Congress approved a bailout package in the first week of October 2008. The public indignation was widespread. It appeared that bankers were being rewarded for recklessly tanking the economy. The economic damage and human suffering were immense. Unemployment reached 10%. About 3.8 million Americans lost their homes to foreclosures.

The investment bankers who were largely responsible for this crisis, walked away with their massive bonuses, which presumably enabled to continue their lavish lifestyles with luxury yachts, planes, holidays, etc. This pervasive greed continues unpunished and exacerbates the growing inequality between rich and poor. In America alone, a few hundred investment bankers were enriched, at the expense of 3.8 million people, who lost their homes and were devastated!

Does this answer the question?

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