The financial sector may have a lot to learn from the theory that helped shutter crime in New York City.
In The Tipping Point, the book that launched Malcolm Gladwell into the national consciousness and atop The New York Times best-sellers list, he begins the chapter titled "The Power of Context" by discussing the rampant crime in New York City in the 1980s and early 1990s, and outlines the Broken Windows theory.
The Broken Windows theory was postulated by two criminologists, James Q. Wilson and George Kelling, and Gladwell describes it like this:
"Wilson and Kelling argued that crime is the inevitable result of disorder. If a window is broken and left unrepaired, people walking by will conclude that no one cares and no one is in charge. Soon, more windows will be broken, and the sense of anarchy will spread from the building to the street on which it faces, sending a signal that anything goes. In a city, relatively minor problems, like graffiti, public disorder, and aggressive panhandling, they write, are all the equivalent of broken windows, invitations to more serious crimes."
Gladwell later continues, stating the Broken Windows theory "says that crime is contagious -- just as a fashion trend is contagious -- and it can start with a broken window and spread to an entire community."
Yet it isn't just crime that can snowball out of control, but the Broken Windows theory can apply to all avenues of life. Consider living in a house with roommates, if one roommate places their coffee mug in the sink instead of the dishwasher, the next will be more likely to place their cereal bowl alongside the mug. Before they know it, the sink will be overrun with dirty dishes, which will turn into a messy kitchen, and a house that is characterized by disorder.
With all the recent turmoil surrounding the banking sector, specifically JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), Citigroup (NYSE:C), or any of the other megabanks that have dealt with their fair share of turmoil as a result of the mortgage meltdown, it's easy to imagine that the root cause could have been a window that was broken more than a decade ago, and things slowly unraveled from there.
Perhaps it was a manager who encouraged an analyst to mark the quality of the loans in a pool of mortgage backed securities just marginally better than their analysis suggested. Then perhaps that analyst became a manager himself, encouraging the same behavior, which ultimately led to an undercurrent of impropriety throughout the organization. Certainly a window could be broken from a cubicle in lower Manhattan just as easily, or perhaps even easier, as it would be in an alley near Queensbridge.
Yet one has to wonder if a broken window more than a decade ago could be one explanation for the rash of litigation and settlements that have been levied against JPMorgan Chase in recent months. From the $13 billion mortgage settlement to the $6.25 billion London Whale trading incident, the alleged manipulation of benchmark interest rate LIBOR, the speculated bribing of Chinese officials, and countless other issues could have all stemmed from someone crossing the line in a seemingly trivial manner.
Although New York City was plagued by crime, the city and its elected officials did not address the problem in conventional ways, and did not even attempt to stop major crimes, nor major criminals.
Instead, starting with David Gunn, the subway director (where most petty crimes occurred), and William Bratton, the head of the transit police (who was later promoted to head of the New York City Police Department), the two addressed somewhat minor problems, such as the subway trains plagued by graffiti, fare-beating passengers, aggressive panhandlers on street corners, and other small things. Indeed, they began repairing the "broken windows."
This raised many questions, as a city that was plagued by one of the highest violent crime rates in the nation seemingly didn't principally need clean subways or to stop those people who didn't pay the $1.25 fare, but instead needed to address the more pressing problems. Yet the reason for this dramatically unconventional approach was not passivity or anything of that sort, but instead that the two (as well as mayor Rudy Giuliani) affirmatively held to the Broken Windows theory, and believed changing these minor things would in turn change the epidemic of crime that swept through New York City. In Gladwell's words:
"When crime began to fall in the city -- as quickly and dramatically as it had in the subways -- Bratton and Giuliani pointed to the same cause. Minor seemingly insignificant quality-of-life crimes, they said, were Tipping points for violent crime. Broken Windows theory and the Power of Context are one and the same. They are both based on the premise that an epidemic can be reversed, can be tipped, by tinkering with the smallest details of the immediate environment."
Although there may have been a reality of broken windows in the past at JPMorgan Chase, Bank of America, and Citigroup, one has to take the simplicity of the resolution in New York City as a sign of encouragement. While the banking system has been beset by problems, if the bank leaders can go after the seemingly small and inconsequential issues, we could indeed see major changes in an industry that badly needs it.
Fool contributor Patrick Morris owns shares of Bank of America. The Motley Fool recommends Bank of America. The Motley Fool owns shares of Bank of America, Citigroup, and JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.