As the global financial crisis receded in 2012 there was another banking scandal. We learned that London banks had been systematically lying about LIBOR, the London Inter-bank Offered Rate, which is an index used to price loans around the world. The lies distorted the value of billions of dollars of securities and also distorted the costs of loans to corporations and consumers around the world. The banks involved profited: they could buy securities and then manipulate LIBOR to increase the value of those securities. James Suroweicki noted at the time, “the track record of the banking industry over the past two decades doesn’t inspire confidence in its devotion to the truth or to the public interest. The Barclays traders, for instance, sent e-mails casually thanking their colleagues for lying [about the rates they paid, distorting LIBOR], and sometimes talked with their supervisors about their plans [to profit from such lies], revealing a culture in which deception was simply part of how things got done” (2012: 25). Regulators had assumed that banks would be honest to protect their reputations, and many in the finance industry did the same, but concern for reputation did not have that effect. Therefore, according to Suroweicki, we need “intrusive and overbearing” regulation and aggressive enforcement that “would make it harder for bankers to do what they want” (2012: 25). And, of course, implicit here is the further assumption that regulation will need to evolve as products and contexts change.

Capital Failure: Rebuilding Trust in Financial Services is a collection of fourteen essays (along with an introduction and conclusion) about the global financial crisis, written by very distinguished, mostly British academics. The first four chapters (after the introduction) provide an account of the crisis focused on Great Britain and the conditions leading up to it. Against that background, the volume as a whole suggests an approach different from Suroweicki’s: it provides a roadmap for fostering trustworthy behavior on the part of those in the financial services industry. This reviewer is skeptical about the prospects for doing so (for the reasons outlined in a moment). Ironically, some of the essays in Capital Failure support this skepticism. And, a number of very interesting chapters outline legal and regulatory responses to the crisis—which would make it unnecessary to rely on those in finance to be more trustworthy—even though this is not how the editors present those contributions.

Two chapters form the theoretical core of the book. First, Natalie Gold’s contribution, “Trustworthiness and Motivations,” relies on Hawley’s (2012) definitions of trust and trustworthiness: person A trusts person B to do x when A relies on B to fulfill B’s commitment to do x, B acts in a trustworthy way when B fulfills B’s commitment to x. Given these definitions, weak trustworthiness, for Gold, involves only self-interested motivations on the part of B (the trustworthy person). Strong trustworthiness, in contrast, must include non-self-regarding motivation on the part of B. So, when we build a regulatory scheme to punish persons for misconduct, we rely on weak trustworthiness, but “[t]rustworthy behavior that is only compelled by a desire to avoid punishment [that is, weak trustworthiness] will no longer be trustworthy in the absence of that punishment” (139). We need strong trust, instead, because it is “more stable,” meaning, not susceptible to the problem just mentioned (changes in regulatory schemes, or lack of enforcement), and because it is “more demanding” (139). We need strong trust in finance, in particular, because of information asymmetries (between firms and customers) and because of asymmetry in expertise (regulators might not understand products well enough to assess their risks/safety). It is, however, not clear that strong trust is more stable or more robust; to be sure, weak trust can depend on certain structural factors (like regulation, which can impose costs for untrustworthy behavior) and, as Gold notes, those structural factors could shift. But the intrinsic, non-self-regarding motivations supporting strong trust could themselves change too. They might be equally, or even more, unstable. (A more technical comment: Gold claims that “[t]here is widespread agreement amongst philosophers that behavior motivated by the pursuit of rewards or the avoidance of punishment is reliable rather than trustworthy” (136), but this is not clear to me, even though Hawley’s conceptualization of trust very much tracks my own work (see Cohen Reference Cohen2014). And more generally, Gold would have been well served to situate her account in the broader social science literature, which overwhelmingly does not make reference to commitment in conceptualizations of trust.)

These concerns aside, Gold argues that we can prevent untrustworthy behavior by framing situations correctly. Some persons do deliberately violate another’s trust for personal gain, but a more significant problem, Gold suggests, is that the trustor and the trustee frame a situation differently. So, in the case at hand, the finance professional thinks a transaction is governed by the norm buyer beware and, too often, acts in his or her own interest, exploiting the customer. But the customer expects that professional to act in a trustworthy manner—in the customer’s interests—and as a result, the customer is surprised by the finance professional’s exploitive actions. But, Gold argues, “trustworthiness…can be enhanced by making it clear that the situation is one of strong trust, and furthermore, that it is one where strong trust and trustworthiness are appropriate” (146). Moreover, she suggests that we should resist regulatory responses because regulation could undermine strong trustworthiness: “sanction is a signal that the relationship is not governed by strong trust” (146) and, as a result, when there is regulation, persons are more likely to act on self-regarding, rather than strongly trustworthy motivations.

This line of argument is grounded in the experimental literature and it is philosophically compelling. But this reviewer finds it lacking as a response to the financial crisis. For Gold, regulation is “only a partial solution” because regulation can be gamed, and because it could be very difficult to determine the level of risk involved in some products. That is why we need to rebuild strong trust and strong trustworthiness. This is the volume’s central claim. But if we can’t weakly trust finance professionals to abide by regulation, and if we can’t trust finance professionals to honestly disclose risks, how is Gold going to convince those same finance professionals to re-frame their work and acknowledge an obligation to their customers? To be sure, if the leaders of financial services firms consistently expressed disapproval of untrustworthy behavior, or if there were significant social sanctions involved—when the investment banker calls to invite us to his or her house in the Hamptons, will we decline?—then this could encourage a cultural shift toward strong trustworthiness within the finance industry. But what reason do we have to expect that this will occur? And, when Gold suggests that financial services firms should “chang[e] the composition of their organizations” to hire those who are more trust-responsive, why should we think that there is any prospect for such a change? These are questions the volume as a whole fails to address.

Onora O’Neill’s chapter, “Trust, Trustworthiness and Accountability,” describes a shift in the professions and in public service from “cultures of trust, backed by considerable reliance on prescribed process and selective and sparing use of sanctions” (172), to “managerial accountability,” which relies on “managerial methods” such as “setting targets, measuring performance against these targets, and sanctioning defective performance” (174). O’Neill resists that shift and suggests, as an alternative, “an intelligent approach to accountability” (180) measured against the basic obligations associated with particular roles. She writes, “depending on context, it might be appropriate to hold managers accountable by relying variously on democratic or corporate forms of governance, or on legal, financial, or professional forms of accountability” (177). O’Neill’s discussion of managerial accountability is thoughtful. But it only emphasizes the question identified above, namely why think there are prospects for rebuilding strong trustworthiness in finance? According to O’Neill, we must place trust intelligently: “[p]lacing and refusing trust, whether in others’ truth claims or in their commitments, requires judgment of the available evidence, including judgment of their speech acts, their track record, and their likely willingness to live up to their word” (179). But the global financial crisis and the more recent LIBOR scandal both seem to be strong evidence that we cannot trust those in the finance industry.

Where does this leave us? Large investment banks caused much of the global financial crisis; the vast majority of those working in the financial services industry, in contrast, served their customers and were hurt by the economic turmoil. One question (not addressed in this volume) is whether the investment banks as a whole create or destroy value (see Cassidy Reference Cassidy2010). Gold’s chapter addresses a related concern; as mentioned, she wants bankers to reframe their roles to emphasize obligations to customers. Another contribution, “Ethics Management in Banking and Finance,” by Boudewijn de Bruin, argues that banks need ethical culture programs. Both reflect the volume’s central concern, that of “restoring a sense of obligation to others as a means of rebuilding trustworthiness in the financial services industry” (3). But the facts press us to acknowledge that the investment bankers don’t see any of this. They are not concerned to acknowledge obligations to their customers. Justin O’Brien’s chapter, “Professional Obligation, Ethical Awareness and Capital Market Regulation,” supports this conclusion. He provides a careful reading of Goldman Sach’s own internal report from 2013, intended “to present to the markets a reframed conception of business ethics and accountability” after the financial crisis (212). O’Brien concludes that,“[t]he unmistakable message is that Goldman will design, market, and sell [a] product if it thinks it can get away with it, not [based] on whether it is appropriate or socially useful. Plus ca chang, plus c’est la meme chose” (215). So, rather than trying to convince investment bankers to reframe their work and acknowledge obligations to customers, perhaps we are better off reframing the customers’ perspective, to see that bankers cannot—and should not—be trusted to act in their customers’ interests. As a result, again, we need “intrusive and overbearing” regulation and aggressive enforcement. Too much is at stake to think otherwise.

Capital Failure wasn’t intended to make this point, but it makes for rich and thought-provoking reading, and that’s what this reviewer takes away. As Cassidy (Reference Cassidy2010) notes, economic historians describe a period of ‘financial repression’ during the middle of the twentieth century, during which regulators limited the growth of the banking sector and tightly regulated the products offered. Capital investment, productivity and wages all grew while major financial crises were “conspicuously absent.” Compared to the recent scandals, that sounds sort of idyllic.

Consistent with this conclusion, a number of chapters outline legal and regulatory responses to the crisis; these could be taken to support what Gold called weak trust or, further, to actually replace reliance on trust. Four examples are especially noteworthy. First, Joshua Getzler suggests that “Fiduciary law… has enormous power and potential as a body of rules shaping the incentives of managers and creating norms of disinterested service” (200). These laws could be expanded to protect customers: the “costs of forcing many or most parties to bargain around over stringent fiduciary default position are…justified because the pay-off to individuals and society of honest and faithful service is very high” (206). Second, consumer protection has focused on retail financial products because individuals lack knowledge and expertise, and O’Brien (in the chapter mentioned above) argues, relying on an Australian Federal Court decision, that wholesale markets should also be subject to disclosure requirements. Third, in “Systemic Harms and the Limits of Shareholder Value,” John Armour and Jeffrey N. Gordon note that the focus on generating shareholder value can encourage firms to externalize costs, and in the global financial crisis the costs imposed on the economy as a whole were far greater than those born by shareholders. To prevent these outcomes in the future, they propose that bank directors be held personally liable. The legal mechanisms they propose would require that courts make after-the-fact determinations about whether firms took appropriate steps to control conflicts, manage risk, and prevent systematic harm; this would “place court-developed standards at the center of the impetus for change in corporate governance” (242). Fourth, in “Trust, Conflicts of Interest and Fiduciary Duties,” Seamus Miller outlines the Australian government’s efforts to regulate the financial planning industry in Australia. These are all productive starting points for responding to the crisis.