It is really hard to identify when ethics –or the lack thereof –became a social issue of the magnitude that it seems to be now.  When I received my MBA from Tulane in 1978, a course in ethics was required for everyone in the last semester of the two year program.  It was considered the capstone course of the MBA program and our professor utilized the case study format.  Later, when I passed the CPA exam, I had to take an ethics exam in order to obtain my license in the state of Maryland.  In the early years of my career, I remember the Ivan Boesky scandal on Wall Street in the 1980’s.  Boesky took down Mike Milken of Drexel Burnham and a few others.  Of course, most recently, we have seen the fallout from Enron, Bernard Madoff, and others.  But ethical lapses are not limited to businessmen.  Almost all of us can name a few politicians who strayed from the norm like Congressman Dan Rostenkowski, Governor Rod Blagojevich, President Richard Nixon, etc.  We can also name a few government employees who earned notoriety by selling their country’s secrets including Aldrich Ames and Jonathan Pollard.   Baseball fans might think about gamblers like Shoeless Joe Jackson and Pete Rose or steroid users like Jose Canseco, Rafael Palmeiro, and Manny Ramirez.

I don’t know if the omnipresent nature of the media has drawn more attention to ethical lapses of our political, corporate, governmental, and sports figures or if the frequency has, as I suspect, increased.  However, a recent article in the New York Times spurred me to write this piece.  Written by Leslie Wayne, the article mentions that nearly 20 percent of this year’s graduating MBA class at the Harvard Business School have signed a voluntary student oath that pledges to “serve the greater good” and to “act responsibly and ethically.”  MBA programs have not stopped teaching ethics.  In fact, Harvard, Wharton, and Columbia have several ethics classes and Wharton and Columbia have ethics centers.  I think it is good that these students created this pledge.   However, ethics is not just business ethics.  Ethics is ethics.   Good ethics is good for business.  Good ethics should be good for all of our leaders and followers, no matter what their chosen field.

When I attended graduate business school in the late 1970’s, the big “change” in finance was examining cash flow instead of earnings.  After all, the logic went, how can you make fair assessments on leverage and other ratios if you do not have a basic understanding of the underlying cash flow?  A few of us jokingly proposed that the solution to every case study should be the mantra, “cash is king.”

Within a couple of decades, the financial industry seemed to lose focus on examining cash flows and instead focused on earnings, which, in many cases, were generated by exotic financial instruments, some supported by outlandish leverage ratios of 100:1.  Others were backed by merely a guarantee (the credit default swap market and mortgage insurance market).  Evidently, institutions such as AIG and MBIA believed that receiving a one or two percent transaction fee for a guaranty was “easy money.”  It’s too bad that the accountants and the MBA’s weren’t communicating since “risk” has always been a formulation in valuation analysis and the higher the leverage, the higher the risk.

The collapse of the sub-prime lending market earlier this year was just the tip of the iceberg.  The tightening of credit by lenders and the mark-to-market of marketable securities were natural reactions (that should have occurred earlier) and unfortunately, have exacerbated the liquidity crunch.  Even some of the most secure commercial paper has been impacted with the flight to security by individual and corporate investors in a liquidity-strapped market where there are fewer buyers of bonds.

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