Bad Apples or Bad Bushel? Ethics, Efficiency and Capital Market Integrity

Popular interpretation of the recent financial scandals describes the individuals and firms charged with wrongdoing as ‘bad apples’ while retaining a sanguine view of the capital markets overall. The system-wide reach of the revealed malfeasance, however, suggests that the root cause of the scandals resides instead in the capital markets’ institutional norms. Specifically, we argue that norms have developed that promulgate the selfenrichment of the intermediaries who facilitate capital transactions at the expense of the principal parties to the transactions. This not only represents an ethical breakdown of the system, but also implies a simultaneous loss of efficiency, since professional integrity is the fundamental value proposition of financial intermediaries. To set the stage, we establish the holistic and systematic interdependence of the capital markets and clarify the broad roles they require. As increasing numbers of business scandals are brought to light, it becomes ever clearer that the ‘problem’ facing the capital markets is pervasive throughout financial intermediaries, shifting the relevant questions from ones of how to deal with the few ‘bad apples’ to questions about the ‘bushel’ that contains them. The widespread and systematically interconnected nature of these ethical lapses threatens the markets in a fundamental way.