It’s widely understood that excessive leverage and greed set off the 2008 financial meltdown. But Sallie Krawcheck believes another force was at play: Wall Street’s stark lack of diversity.
Krawcheck, a senior executive at Citigroup (C) and Bank of America (BAC) at the time of the financial crisis, said the white male-dominated trading floors and C-Suites led to groupthink that backfired, badly.
“Can you imagine if it was 50% females? Do you think the financial crisis would have been worse? Nobody does,” Krawcheck told CNN Business on Thursday from the sidelines of the Fortune Brainstorm Finance conference in Montauk, New York.
Krawcheck, now the founder and CEO of Ellevest, an investment platform that caters to women, cited research that shows homogeneous teams trust each other too much and high levels of testosterone can lead to elevated risk taking. And other research, she said, suggests that when there are a majority of one kind, such as white men, they tend to show off for each other.
“I saw a lot of that on Wall Street,” Krawcheck said.
Krawcheck, who left Citigroup in September 2008 a week after the implosion of Lehman Brothers, said Wall Street’s lack of diversity only added to the problems caused by excessive leverage and greed.
“Another cause of the financial crisis is not enough cognitive diversity,” Krawcheck said during a panel conversation at the Fortune conference. “Not enough people with very different backgrounds looking at things in very different ways.”
Women and minorities are under represented in finance
Just 29% of senior-level managers were women in 2015, according to a report published by the Government Accountability Office in late 2017. And minorities represented just 12% of those senior-level positions, the GAO found.
None of the major Wall Street banks have ever been led by a woman.
In April, US Representative Al Green, a Texas Democrat, asked the CEOs of seven major banks — all of them white men — to raise their hands if they believed their “likely successor” will be a woman or a person of color. None of them did.
“Wall Street isn’t interested in changing,” Krawcheck said.
Krawcheck urged the financial industry to diversify because it makes business sense to — but she isn’t optimistic that it will happen.
“One way to reduce the volatility on Wall Street, the research tells us, is to have more women,” she said during the interview.
When will Wall Street’s #MeToo moment arrive?
Krawcheck recalled experiencing sexual harassment firsthand while working in finance. She didn’t report it at the time.
“In the early years, it was rampant,” Krawcheck said. “I was literally told, ‘Sit down and shut up.’ That’s Wall Street.”
After starting as an analyst at Sanford Bernstein, Krawcheck eventually became Citi’s chief financial officer and eventually the CEO of Bank of America’s Merrill Lynch. The sexual harassment faded as she rose up the ranks.
“To be frank, not many people are going to be harassing the CFO of Citigroup. That would have been a career challenge,” Krawcheck said.
While many parts of Corporate America have faced scrutiny during the #MeToo era, Wall Street has for the most part avoided those scandals. Krawcheck said that’s because of the arbitration agreements that employees sign, forcing disputes to be settled confidentially without the public learning about what happened.
“You would believe it’s a completely clean industry. We all know, of course, that it’s not,” she said.
Krawcheck expressed doubt that the Wall Street’s #MeToo moment will ever arrive.
“Why does it have to? Goodness and light doesn’t always win. Positive progress is not always made,” she said.
‘Break the wheel’
Raymond McGuire, Citi’s vice chairman, argued that there has been a significant shift on Wall Street.
“The world is on notice that behavior that was ignored years ago is now being recognized,” McGuire said during the Fortune conference. “At our firm, there is zero tolerance for that. Zero … There is no debate about that.”
Bernstein, now known as AllianceBernstein, says it is committed to creating a “welcoming environment that will attract all types of talented people.” The firm estimates that 42% of its new hires in 2018 were female and 35% were ethnically diverse.
Bank of America’s company-wide efforts to advance women in the workplace led to the bank being awarded the 2019 Catalyst Award. The bank says that more than half of its global workforce are women and 45% are people of color.
Still, Krawcheck urged corporate leaders to move aggressively to hire and promote successful women, adding that it can’t be left up to boards of directors or middle management to make disruptive change.
“The CEOs need to break the wheel,” she said.
A financial platform for women
Krawcheck said she’s had opportunities to go back to Wall Street, but decided instead to build a business that will focus on helping women.
Ellevest, which she started in 2014, describes itself as a digital-first and mission-driven investment platform for women. It boasts a “gender-smart” investing algorithm that takes into account women’s longer lifespans and different salary trajectory and the consequences of taking time off from work to raise children.
“We’ve been told we are bad with money and we internalize it. It costs us,” Krawcheck said, noting that too many women keep their savings in cash. “We feel misunderstood, patronized and not listened to.”
Ellevest, whose workforce is two-thirds female and 45% people of color, was recently ranked No. 14 on LinkedIn’s 50 “Most Sought-After Startups.”
And in March, Ellevest received a major endorsement from Melinda Gates, whose firm Pivotal Ventures took part in a $33 million round of funding. That round nearly doubled Ellevest’s total funding to $78 million, the firm said. Valerie Jarrett, the close confidant of former President Barack Obama, and billionaire and former Commerce Secretary Penny Pritzker have also invested in the startup.
Ellevest’s venture backers include Salesforce, MasterCard and PayPal — three companies that Krawcheck singled out for having CEOs that are truly driving change on diversity and gender equality.
“I hope I’m breaking the wheel with Ellevest,” she said.
