When will someone really pay for financial abuse?
This week saw the two partly taxpayer owned British banks, Lloyds and RBS fined, yet again. J P Morgan is expected any day now to pay around $2bn over its involvement in the Madoff Ponzi scheme. And just over a week ago, eight banks were fined E1.7bn by the EU for fixing rates in the Japanese yen and the euro.
Almost every week there is a bank somewhere in the world paying its dues for the filth of the past. Regulators are doing a great job filling government coffers, but are they punishing those responsible and preventing future abuse? I don’t think so. It is the shareholders and taxpayers who are bearing the cost of the fines and not the individuals who have broken the law. Rarely are those responsible held to account. And without that, it will all happen again. Group level fines are no deterrent and punish the wrong people.
This deeply unfestive tune achieved the much coveted Christmas number one slot in the UK four years ago in a successful attempt to prevent the X factor single taking the slot. I was thinking of writing my piece using some of the lyrics but having looked them up, I decided against it. But we should all follow their example (if not their lyrics) and Rage. Find your anger and use it to make our leaders hold those individuals that broke the law to account. Why are not more corrupt, immoral, crooked, shameless “bankers” (although that is not really a term I would use as most of them are not bankers, but just work for banks) in jail? Why are they allowed to keep their multimillion dollar bonuses, their ill-gotten gains? They should be paying the price for their illegal behaviour.
The scale of the fines imposed on the banking sector is truly enormous and highlights the extent of the corruption. JP Morgan has provisioned $23bn already and some analysts suggest even that may not be enough. The $13bn fine agreed last month over its involvement in mortgage misselling is a record in US corporate history. And the Recent EU fine also the highest ever imposed in Europe. The scale of the fines shows how truly pervasive law breaking became and yet so few actual individuals have appeared in court.
Even though these fines are extraordinarily large, this is the new normal – these bank fines are likely to continue for some years for two reasons. Firstly many of the illegal dealings that we know about are still being investigated – for example the US Justice Department is expected to bring more cases of mortgage fraud against other banks in 2014 (following the $13bn deal with JPMorgan). Secondly there are also whole new areas of ordure only just being exposed. For example, in September the UK’s FCA confirmed that there was a formal investigation into ISDAfix, the investigations into the foreign exchange markets are widening and now the gold market is now also under scrutiny. Is there any market that has not been illegally manipulated to make the corrupt rich?
And yet who is being penalised for this? Clearly it is the bank’s shareholders, which ultimately is us. For those banks that have been bailed out by the state, like RBS and Lloyds, the taxpayers directly own them. And for those banks that are not state owned, then most of us own shares in them via savings products, our pensions and life insurance. Of course, if banks pay large fines, they have less capital to lend into the real economy, which again impacts us – there is less money to borrow in a mortgage or for a business loan. And finally the political solution to all this is to impose massive regulation on the industry. That ensures that the costs of banking and financial services will go up for the customers. So who gets hurt? The voters and the electorate that bailed banks out in the first place.
But what about those that did break the law? Very rarely are they pursued through the courts. They tend to be suspended from their jobs, are occasionally fired, but how many have been fined? Had their past bonuses taken away or ended up in jail? Companies don’t break laws, individuals do. So why aren’t those individuals prosecuted?
It is not just for a sense of fairness that those who broke the law should be pursued. Far more importantly the law needs to be seen to be done to set a real deterrent. Or as Voltaire famously wrote “pour encourager les autres” (which indirectly refers to British Admiral John Byng who was executed in 1756 for failing to attack the French with sufficient vigour). To me this is one of the main reasons why financial crises (with corresponding corruption) happen with such alarming regularity. The very people attracted to work in financial services are those that are willing to take risks. And if there is no personal downside to breaking the law, but significant upside in the form of multimillion dollar bonuses and promotion, then that trade will be done too often. And of course, the added problem is that investigations and the legal process take a long time. Madoff went bust five years ago and only now are the fines being agreed. If the only consequence for breaking the law is that in five or more years’ time your employer will be fined millions, then there will be enough willing to break the law, make money in the short term and depart rich (before the ordure hits the fan).
So why are regulators not going after the individual? Clearly they have a lot of work to do at the moment given that corruption in financial services became endemic . They are under staffed for the amount of filth to be investigated, particularly the painstaking work required to prosecute individuals. It is likely to be very costly to follow every paper trail to find out exactly who was involved and how. And of course regulatory capture is always problem – regulators always get too close to the industries they regulate (an ex-energy industry regulator emailed me recently to highlight exactly this). It is also a lot easier for the regulator to settle, to get a result generating positive newspaper headlines. The politicians like big fines and agreements for the same reason. Bank executives like to do a deal because it gets rid of the problem with shareholder’s cash. But for society as a whole, a fine and a deal without personal prosecution is a bad result. We need to ensure that financial crises and corruption are as rare as we can make them. Excessive regulation won’t help. The threat of personal fines and jail terms will.
It seems that for many banks, fines are regarded as just another cost of doing business to be recouped from customers in the form of higher fees. Standard Chartered was fined $667mn for breaking sanctions to Iran and yet denied responsibility for any wrong doing (which it later had to retract). For the greater good of society, individuals need to be held accountable – to realise there will be personal consequences to their illegal actions. This is not happening. But without it, there will be more financial crises and corruption in the future. Regulation, no matter how complex, always fails.
In the current season of Homeland , bankers are the bad guys, helping to fund the Iranian terrorists who attacked CIA headquarters. The script writers may have chosen the wrong country in Iran given the political developments over a new nuclear power deal currently being negotiated, but they choose well to make bankers greedy and evil. That goes down well with the public. However if the corrupt minority are not prosecuted, then all working in financial services will be tarred by the same brush. Financial crises of one form or another occur remarkably often and all come with some form of corruption. The strategy being pursued now will only ensure a repeat of the past.
RATM seem very angry young youngish men. Although some of the best music has come from barely contained fury. I asked my husband, who was a teenager in the key punk years, what is his favourite track. He chose Sex Pistols – Anarchy in the UK from 1976:
http://youtu.be/0TZ_9-rbslo
Johnny Rotten (or John Lydon) has now lost some of his anger in his old age, doing television adverts for butter of all things and appearing on “I’m A Celebrity, get me out of here” where he did still manage to offend. Maybe we all need to channel our inner Johnny Rotten and get angry at politicians and regulators for not enforcing the laws of our country and choosing the easy way out for them (but not for us).
