Fortunately, Psycho-Ethical Testing Associates has been hard at work developing an Ethical Assessment Examination that they believe predicts the relative predisposition to the erosion of one's ethical values, with obvious use by boards and (D&O Underwriters!)in assessing the risk of future malfeasance.
I have been lucky enough to obtain a copy of their beta-examination (tuned for the financial sector) which I re-print for your perusal below.
Ethical Assessment Examination:
Instructions: Please read the questions thoroughly, and circle the letter of your chosen response. And NO CHEATING!!
1. A mortgage broker known to you only as "Big Mo'" offers you a package of loans for your securitisation operations. Your wife is high maintenance, and your kids' Exeter fees are due next week. Select the statement that best identifies your first sentiments
(a) "AIG will insure it for WHAT?!?!"
(b) The spotty kid at S&P says they're AAA.
(c) "How close are we to our budgeted P&L"
(d) "Who did the property valuations, how were they compensated, what percentage of the purchasers actually have jobs, who will these be on-sold to, and what representations will be made?"
(e) "Has anyone aggregated the retrospective underlying values over the past decade?
2. The Head of Investment Banking has asked the Director of Research to ask the Senior Energy Co. Analyst to ask you prepare an upbeat research report on "Blackhole Oil Exploration Ltd.", a company you've discovered is owned by the brother-in-law of the IB Head's sister, and which his wife is an interested party. Which statement best summarizes your sentiments:
(a) "Hellooooo promotion!"
(b) "Will my Porsche be "Fire-engine red" or or Silver like my words?"
(c) "This will make a great short for my brother's Hedge Fund - let me call him now"
(d) "Ummmm, wasn't this the guy who received the Wells Notice from the SEC?
(e) "The Peace Corps in Bangui or Ouagadagu would be a welcome change"
3. For your summer job, you have secured a gig selling ice cream on a three-quarter-mile-long beach. The position is "mobile" meaning you get to set-up whereever you want and you get a share of the profits above the cost of the goods. There are two other ice-cream sellers from other competing companies also permitted to sell on the beach. Where would you choose to locate?
(a) adjacent to the other ice cream sellers in order to collude and fix the highest tenable prices with the minimum amount of walking.
(b) nearest to the hippies to whom you might flog some higher-margin "weed"
(c) nearest to the group of sorority girls sunbathing by the entrance
(d) closest to the crowds to achieve highest volumes
(e) keep moving to stay fit and provide the best service for potential customers
4. You are a wealth manager. You discover that even when you're late putting in buy or sell orders for certain mutual funds, your orders are accepted - even AFTER the cutoff time which is meant to protect existing investors from being predated by new investors taking advantage of market-moving information. What is the best course of action?
(a)Set up a hedge fund to exploit the opportunity until it goes away.
(b) take advantage of the loophole infrequently, but in a big way, so you can profit but at the same time maintain plausible criminal deniability.
(c) trade frequently and in smaller size so as to not attract undue attention, but allow you to profit continuously.
(c) Anonymously inform the SEC to assuage your conscience, while simultaneously doing it from time to time.
(d) Just say No!, but don't be a whistle-blowing sissy.
(e) Call a reporter at the Wall Street Journal with a scoop.
5. You are a small-cap fund manager running a reasonably large-sized fund with a 60-odd stock portfolio. Many names are less-liquid and trading activity definitely impacts the price due their small cap and prodigious front-running by market-makers and micro-structure "arbs". Every month, quarter and year-end, you observe that many of your holdings, being value or contrarian plays, suffer from getting "whacked" and smashed into these critical valuation periods, causing your performance to be elevated during mid-month, but unnecessarily hurt during the times that matter causing your firm to lose bragging rights, and you, to lose performance bonus. Do you:
(a) use your power to buy more and attempt too offset the selling pressure
(b) ramp other stocks you hold to offset the negative performance of the ones being smashed
(c) Leave large "market-on-close" sell orders with several of your brokers and then cancel them 25 minutes before the close.
(d) Join the Pat Byrne Anti-Short-Selling Holders Organization for Long Equity Speculators (acronym =....)
(e) Don't sweat. Be content with being honest and poorer for it.
6. As a retail stock-broker you are paid a percentage of your customers transactions, and trailing commission of varying degrees depending upon what you flog and at what price. Your mother-in-law, who is objectively an unpleasant person, is looking for a conservative large-cap growth fund. You have 25 different funds to choose from. What do you recommend to her?
(a) The Smithfield New Century Growth which has bottom quartile performance over ten years but a 5% load of which you get 2.5 PLUS a 1% trail ad infinitum.
(b) The Fidelity Benchmark-Hugger Fund which has a reasonable trail, AND 50th percentile performance, for which your mother-in-law cannot find additional fault with you for in the future.
(c) A Fairfield-Sentry (Note: her house is fully-paid off and won't need to move in with you)
(d) You offer to manage it yourself (note: equal to 3 or 4% per annum in self-generated commissions)
(e) Vangaurd Windsor no-load 30bp mgmt fee, low expense ratio, but no trail.
(7) You are a senior trade-executor at a large buy-side money-manager. Your trades are often of significant size, and as such have enormous value to anyone apprised of them such as executing brokers who can front-run them or quietly pass the information to other hedge fund clients who pay premium commissions to the broker precisely for such information. Which statement best summarizes how you know your broker is being honest with your orders?
(a) He was a fraternity brother. He would NEVER do that.
(b) He allocated me lots of Hot Issues during the boom-times.
(c) He scored Miley Cyrus tickets for my daughter's birthday party in the Deluxe Box and even arranged pony rides for them IN THE BOX!.
(d) I've got dirt on him like the photos from that time he showed-up with those Russian hookers...
(e) We have our own post-trade analytics that factor-analyze the outcomes.
(8) Imagine you are a Fund-of-Funds manager, and you have the good fortune to get in early on "great" manager who has demonstrated stable returns and who is so amicable and magnanimous that he doesn't even charge management or performance fees despite his libor + 600 record. Even though you originally invested in good faith, you begin to suspect that all may not be as it seems. However, you get a 5% load on every new investment, and seemingly quite "real" management and performance fees of $182,000,000 PER YEAR. Yes, PER YEAR!!, for doing precious little. What is the best course of action for your suspicions?
(a) Never admit to suspecting anything. There is a statute of limitations and they won't be able to take all of it from you.
(b) Act surprised. Make sure you've the BEST lawyer on retainer.
(c) Payout as much as possible to family and friends as payroll for work undertaken. It will be hard to get that back.
(d) Kill the Golden Goose, and insure, at least, you won't go to the Big House.
(e) Seppuku with one of the samurai swords you've been collecting
9. As the Senior Manager of a large and highly profitable debt trading group within a bank, it is November and you discover an error in one of your traders pricing models and the accounting system that tracks it, causing it to overstate profit by a large margin. It is the same model and trader that was responsible for your $12mm bonus last year and the year before, and one you've been a champion of at the firm. With bonus season almost here, do you:
(a) Stay quiet. Take the money. Resign for "personal reasons"; Hire a good lawyer.
(b) Express shock and indignation and blame it on someone else.
(c) Express shock and horror when its discovered and take responsibility.
(d)'fess-up, take the lumps, claim you "lost" the money on the ponies.
(e)'fess-up, take the lumps, give back the money from prior years
10. As a successful hedge fund manager, you made 100% gross last year with leveraged concentrated bets in risky securities. Your family, friends, and alma-mater (whose new building at the business school is named after you) are invested. You collected NINE-DIGIT compensation (through a Cypriot holding company of a Maltese offshore Trust) tax-free. This year however, you were down 65% - not only wiping out all the "gains" but incurring significant losses. You've decided to liquidate the fund since the high-water mark is so far away, there is little motivation to make the journey from CT to NYC and since YOU don't want to be left with the illiquid crap you can't sell after you open the gate. Should you rebate investors the "performance" fees you earned last year, since, philosophically speaking, you didn't really earn them?
(a) No way Jose. My kids, and my kids' kids will forever fly private!
(b) No, last year was LAST year. THIS year. And in any event, it wasn't my fault, it was "a perfect storm".
(c) maybe, ummmmm, dunno really.
(d) Yes, but only to family, friends, and perhaps alma-maters.
(e) Yes. because kharma's a bitch if not properly tended.
11. As the Chief of a Global Insurance concern that you've built with sweat and cunning, you're company is very profitable. But, despite strong feelings to the contrary, you are not God, you cannot control the fact that occasionally "shit happens" that will negatively impact P&L. You've had a good run and your shareholders have come to love your above-average returns. They value stability, even if manufactured. You've had an embarrassingly good year on the heels of several prior outrageously good years. Do you:
(a) call an ART specialist and ask him to help you keep some for a rainy day?
(b) get a subordinate to do it with no audit trail to you, and deny all knowledge if depositioned?
(c) do nothing, and blame "a perfect storm" if the shit hits the fan?
(d) reserve as aggressively as possible within plausible limits of scrutiny?
(e) in the event "shit does happen", take your lumps and try to communicate to shareholders, as diplomatically as possible, that elevated returns come with elevated attendant risks?
12. You are the CFO of a profitable software company. The market has always valued your shares highly due the firm's attractive returns on equity and stellar growth. As a result, the company's shares remain eye-wateringly expensive, though according to bulls "justified" due to growth prospects. All the senior management team (who are your friends too) have large soon-to-vest options in addition to large additional stock option awards pegged to your firm's EPS growth. You foresee small delays in new a product launch that you forecast will cause the company to be light for the quarter causing the shares to torpedo, and for your award grants to be be reduced, and net-worth halved. Which of the following most closely describes the best course of action?
(a) Obviously implement an aggressive stock buyback plan to squeeze the float to make your numbers.
(b) offer aggressive discounts as required to "channel stuff" in order to crystallize awards and give management time to sell stock
(c) hedge by structuring a "collar" on your holdings to lock-in outrageously valued paper wealth bypassing SEC filing requirements
(d) To be safe do A, B & C, then phone a friend (from a payphone) at a hedge fund in which you are invested.
(e) Do nothing and update your CV.
13. As the COO of a bulge-bracket firm who makes copious amounts of money from securities lending and prime brokerage, the CEO is demanding growth growth growth. One of your MDs has pointed out that the "uptick" rule is real nuisance, and that its abolition would increase turnover, short balances and net profits to your firm. How do you proceed with this apparently savvy observation?
(a) enagage powerful lobbysists to campaign for repeal or amendment of historical "impediments" to maximizing profits
(b) increase campaign contributions to friendly lawmakers who can turn the screws on the SEC
(c) both A & B
(d) Let your customers know, off-the-record, you will no longer be policing current regulations
(e) Let independent unbiased academic researchers have access to all your (and exchange data) and let good science assist in the making of public policy.
14. You are a well-connected CEO and CIO of a major-league hedge fund. Your circle of influential and important friends extends far and wide, so you are privileged to much material non-public information about takeovers, business prospects, and other market-moving news. You take your responsibility of delivering above-market returns to your investors very seriously. Your firm has acted on such information and profited handsomely as a result, but insider-trader investigations have caused the regulators to begin asking uncomfortable questions. Do you:
(a) Publicly deny and dismiss any and all allegations
(b) Instruct staff to destroy email records
(c) Call Bill to call Charlie to have him call off the dogs
(d) Hire a former senior SEC counsel with dirt on the investigators to head your newly-beefed up Compliance Department
(e) Admit unintentional transgressions, pay the fine. Be more careful in future.
(15) You are the manager of a large and successful hedge fund. As a result you are one of the most important customers of a bulge-bracket firm with whom you prime, and can always be counted on to trade upon their ideas, where such ideas are based upon reasonably sound information, generating commissions for the brokerage firm, increasing debit balances, and contributing further to the fund's returns that will attract new subscriptions, and virtuously increase the debit balances and commissions at the brokerage firm. (Note: some of the employees in the brokerage firm also invest personally in the fund). One day, you receive a call saying one of the brokerage firm's less important, (and admittedly more embarrassing) clients) is **highly** leveraged, and concentrated in a handful of long and short names which they (wink wink nod nod) kindly supply to you. Do you:
(a) "gun them hard", pushing the market-to-market on positions through the margin threshold, forcing liquidation which the broker then kindly offers to you to close out your shorts
(b) "gun them hard", pushing the market-to-market on positions through the margin threshold, forcing liquidation which the broker then kindly offers to you to close out your shorts
(c) Both A & B
(d) thank them politely, but do nothing.
(e) thank them politely, call the FSA, who will do nothing and think about retirement.
Calculate your total using a=5 b=4 c=3 d=2 e=1
Ethics & malfeasance forecast potential:
15-17 = Very Low - Dalai Lama, Mother Theresa, Bishop Tutu etc.
18-20 = Low - Eliot Spitzer (Do as I say, not as I do...)
20-30 = Medium - Ken Lay (Who knows what one will until faced with the heat of the moment)
30-35 = Elevated - Bernie Ebbers cellmate potential
35-45 = Very High - I **heart** Jeff Skilling!