Opacity, Complexity, and Self Regulation in Investment Banking

Morrison, Alan and Wilhelm, William (2015) Opacity, Complexity, and Self Regulation in Investment Banking. George Washington Law Review (83). pp. 1-22.

Abstract

We discuss the role of professional standards in investment banking in light of Professor Tuch’s wide-ranging and thought-provoking analysis. Professor Tuch identifies an ethical role for regulation, and suggests that professional examinations should instill ethical standards into investment bankers. We have a good deal of sympathy for this position. Nevertheless, Professor Tuch’s conclusions are contestable. Our analysis hinges upon a discussion of the origins of professional standards in investment banking. We suggest that many standards evolved as responses to complex commitment problems in situations where contract was ineffective. It follows immediately that professional standards naturally change as contracting technologies improve. Regulations that preserve standards that no longer serve an economic purpose therefore come at a cost, which must be justified using another normative criterion. We argue that more foundational work is required before clear moral criteria can be established. In particular, regulations that seek to constrain the choices that bankers and their clients make must justify their interference with the moral good of personal autonomy.

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