by Steve Priest, President of Ethical Leadership Group, a Global Compliance Company

I have been trying to make sense of the financial meltdown for the past six months.
Last week the long time head of audit for a TARP receiving bank crystallized my thoughts. “We lost our ethical compass” he moaned, trying to make sense of the chaos he faces.

Unfortunately, this auditor’s perspective is not yet widely shared by bank executives, by Wall Street, or by Washington DC. He described a recent risk management meeting in which executives discussed what they perceived to be the bank’s major risks. When his turn came, he told his colleagues “Our culture is our greatest risk.” They looked at him as if he were a bearded sociology professor rather than a hard nosed auditor. “We are not the bank we used to be. We care less about the institution and more about ourselves. And we are all about the short term.”

Just about every government with a major economy is about to implement a tsunami of new regulations intended to wipe out any chance of an economic crisis like we are now in from reoccurring. The problem is that these regulations will be designed by lawyers and policy makers who believe that laws and policies will fix what ails us. They won’t.

Our audit leader is right. We didn’t lose our compliance compass. (Well, ok, Bernie Madoff and Allen Stanford did.) But the mortgage brokers, bankers, credit analysts, derivatives merchants, home buyers, etc., etc., did not, for the most part, violate laws or regulations.

They lost their ethical compass. And until all of us—corporations, government officials, citizens—recognize this, the regulatory medicine we are about to receive will not cure the disease, and may make it worse.