American Banker has an article up that is astonishing in that it tells us that the main regulator of national banks, the OCC, has confirmed one of our ongoing complaints: that the controls at the biggest banks are inexcusably weak. The OCC is the last place you’d expect to hear this from; historically it’s been a major enabler of banks playing fast and loose with the rules. And the implication is that bank execs should be wearing orange jumpsuits rather than getting multi-million pay packages.
Recall that this blog has inveighed repeatedly that the officialdom had a clear and easy path to prosecuting bank executives by using Sarbanes Oxley. From a 2011 post:
Contrary to prevailing propaganda, there is a fairly straightforward case that could be launched against the CEOs and CFOs of pretty much every US bank with major trading operations. I’ll call them “dealer banks” or “Wall Street firms” to distinguish them from very big but largely traditional commercial banks like US Bank.
Since Sarbanes Oxley became law in 2002, Sections 302, 404, and 906 of that act have required these executives to establish and maintain adequate systems of internal control within their companies. In addition, they must regularly test such controls to see that they are adequate and report their findings to shareholders (through SEC reports on Form 10-Q and 10-K) and their independent accountants. “Knowingly” making false section 906 certifications is subject to fines of up to $1 million and imprisonment of up to ten years; “willful” violators face fines of up to $5 million and jail time of up to 20 years.
The responsible officers must certify that, among other things, they:
(A) are responsible for establishing and maintaining internal controls;
(B) have designed such internal controls to ensure that material information relating to the issuer and its consolidated subsidiaries is made known to such officers by others within those entities, particularly during the period in which the periodic reports are being prepared;
(C) have evaluated the effectiveness of the issuer’s internal controls as of a date within 90 days prior to the report; and
(D) have presented in the report their conclusions about the effectiveness of their internal controls based on their evaluation as of that date;
These officers must also have disclosed to the issuer’s auditors and the audit committee of the board of directors (or persons fulfilling the equivalent function):
(A) all significant deficiencies in the design or operation of internal controls which could adversely affect the issuer’s ability to record, process, summarize, and report financial
data and have identified for the issuer’s auditors any material weaknesses in internal controls; and
(B) any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal controls
The premise of this requirement was to give assurance to investors as to (i) the integrity of the company’s financial reports and (ii) there were no big risks that the company was taking that it had not disclosed to investors.
This section puts those signing the certifications, which is at a minimum the CEO and the CFO, on the hook for both the adequacy of internal controls around financial reporting (to be precise) and the accuracy of reporting to public investors about them. Internal controls for a bank with major trading operations would include financial reporting and risk management.
It’s almost certain that you can’t have an adequate system of internal controls if you all of a sudden drop multi-billion dollar loss bombs on investors out of nowhere. Banks are not supposed to gamble with depositors’ and investors’ money like an out-of-luck punter at a racetrack. It’s pretty clear many of the banks who went to the wall or had to be bailed out because they were too big to fail, and I’ll toss AIG in here as well, had no idea they were betting the farm every day with the risks they were taking.
With that in mind, get a load of the opening paragraphs of the American Banker story:
Think corporate governance at the largest banks is weak? You’re right, but you probably have no idea just how right you are.
The Office of the Comptroller of the Currency recently graded the 19 largest national banks on five factors designed to gauge how well they are being run.
The results are startling.
Not a single bank met the OCC’s requirements for internal auditing, risk management or succession planning. Only two of the 19 banks met the regulator’s requirements for defining the company’s appetite for risk-taking and communicating it across the company. Only two banks were judged to have boards of directors willing to stand up to their CEOs.
You might not fathom how damning that is. If the top brass ins’t doing an adequate job of making sure the books are kept properly and overseeing risk, what the hell are they doing? There’s absolutely no justification for super duper pay packages in light of this finding. It confirms what critics have long charged: that banking has become an exercise in looting, as defined by George Akerlof and Paul Romer: lever up on the basis of government support (which allows you to persist in reckless behavior far longer than normal businesses could) in order to pay the insiders more than they deserve. They keep the leverage and extraction game going until the odds catch up with the enterprise and it collapses.
These internal audit and risk management failures indicate probable Sarbanes Oxley violations. We’ve already flagged that issue with JP Morgan’s London Whale trade, but media, not surprisingly, has refused to buck the Cult of Jamie Dimon. And it’s pathetic that the OCC takes note of this issue now, a full four+ years after the crisis. Remember, in the wake of the crisis, banks have had the opportunity to remedy deficiencies, both for their own sake and as a result of more regulatory oversight. Yet after a period when it would be reasonable to expect that some improvements had been made, they still fall short. But why should they if they can get away with it? Their boards are complicit and I’m sure they remain confident that they’ll be bailed out, regulatory fulminating to the contrary (and remember, big financial firm CEOs believe they’ll be salvaged even in the face of official statements otherwise. Recall how Dick Fuld still can’t fathom why Lehman wasn’t rescued).
Admittedly, the OCC contends that this change is the result of completely redoing their large bank supervision model:
After the 2008 crisis, [agency veteran Mike} Brosnan and his colleagues at the OCC did some serious soul searching and concluded that the same mistakes that have bedeviled banks for decades did them in again: lousy loan underwriting, overleveraging, rapid growth and asset concentrations. Brosnan also faults the regulators, including himself, for missing the obvious.
“We don’t have anything to hide behind. This is all fundamental stuff,” he says. “Let’s not kid ourselves. We got beat the old-fashioned way.”
Determined not to get beat again, Brosnan’s mission is nothing if not bold. He wants to restore the industry’s — and the OCC’s — reputation.
“I want the banking system to be valued again and to be recognized that it is a key component to growth,” he says. “Also, the supervision of the large banks has to be trusted again.”
To do that he’s turned the large-bank supervision model inside out. Rather than putting the primary focus on credit, liquidity, interest rate and price risk, Brosnan has the OCC’s large-bank examiners targeting operational, compliance, strategic and reputation risks.
What I find interesting is that this tougher posture was implemented after the OCC got a new director, Thomas Curry, that has been perceived to be more tough minded that the bank shill that served as the OCC’s head, former acting director John Walsh. One of Curry’s first acts was to get rid of the OCC’s horrorshow of a general counsel, Julie Williams. The odds are high that the fact that the new bank supervision model got implemented without being seriously watered down is due to Curry’s leadership. It would be a remarkable and welcome change if the OCC starts taking its regulatory duties seriously.
“The results are startling.” Oh?
Adding… But looking on the bright side, even if the statute of limitations is kicking in for a lot of the fraud from the last bubble, we’ll get a second bite at the apple when the next crash comes.
I believe the banking system is totally corrupted and this little twig of remorse is not going to change anything. Only when the OCC indicts executives for criminal offences can anything begin to change.
Only when bank executives are doing life imprisonment at hard labor will the situation be resolved. They’re arrogant enough to buy judges, so indictments are not enough.
Using violence to solve social problems is what got us into this mess in the first place. Until that changes, nothing else will.
Criminal prosecutions and sentences are violence??? What do you propose instead to deter fraud and theft?
Wrong, Mr. Elswick. Fraud is what got us where we are now.
Imprisonment is really the only thing we can do to deal with pervasive fraud being committed under the leadership of sociopaths.
An ancient society or a nonhuman society would use ostracism to deal with fraudsters, but there’s nowhere to *send* these people any more, now that humans occupy the whole planet.
But the first thing we will have to figure out after the next crash is if we are having inflation or deflation. That is always sooo important in selecting the correct policy tool to combat these crashes.
But these crashes are designed to deflate and inflate different areas of the economy – effectively masking or disguising the damages of each.
Let’s not wait till the next crash – let’s keep a current series of graphs – here on NC ( donate here ) – let’s keep attention and track where the money shows up and from where it disappears and where we’re leaking and gaining.
We need visuals – words take too long.
How Yves, or anyone else with two brain cells to rub together, can continue to be “startled” or “astonished” by these events at this point is so beyond belief that it truly strains the credibility of the author. At best it demonstrates a stunning inability to perceive the obvious reality that those who threaten us with the guns of the state (to steal our income, to make us use their currency, to murder millions overseas, etc.) are demonstrably and obviously evil.
At worst it shows her true colors as someone who has cast her lot with the monsters who would, and do, rule us.
The lady doth protest too much, methinks.
Look, let’s not denigrate Yves’ motives here. I take the headline Quelle Surprise as thoroughly sarcastic – after all, Yves has detailed this “risk controls are for wimps” meme of the banksters since day 1. The only surprise here is that OCC appears to have been awakened – and I suspect the even bigger surprise is that Thomas Curry still has his job. Have a nice day Jamie.
Your reasoning confuses me. Because her prose isn’t the barricade bark necessary for street action, it’s proof positive she’s in the veal pen.
Horses for courses, dear. Outrage is no less incendiary because it’s presented in a cool mode. Learn to speak to your audience, and change may yet be built.
It’s pretty cheeky for a newbie to sit in judgment when I’ve been chronicling bank miscreance from before the crisis was in full roar, and have likely dug into and documented more forms of bad behavior than any single writer, including, for instance, documenting how bank CEOs could easily be prosecuted under existing statutes (as in not making the “there’s a lot of shit here, there must be a pony” argument that many make, and is waved off by the officialdom, but actually setting forth statutes and legal arguments).
And you are also too dense to get that “Quelle Surprise” is a long established snark marker here.
Keep digging a hole with your mouth. Trolls tend to be good at that.
Wow, Yves. Sounds like you’re feeling better! Good health to you in 2013. You’ve been getting more than your fair share of ill health, you need a respite; and we need your stacatto bite. Happy Holidays. Xoxo, tawal
This was a terrific post, but you cannot really expect SarBox prosecutions of top executives in every one of the dealer banks, all of whom were equally guilty of control failures and capitalized on such failures to continue their own looting. When an entire industry is corrupt in its operation, the existence of a herd of miscreants provides cover for each of the individuals, who can hide behind characterizations like corporate executive or banker, etc., and can easily demonstrate that they did nothing which was not also done by everyone else in their position.
The entire field of bank risk management for at least ten years was mired in fantasy and heedless of all systemic counterparty risk which ought to have been obvious to anyone looking at trading from the outside, and which was obvious to anyone who had so much as glanced at Keynes’ 1926 Treatise on Probability.
FDR wouldn’t have allowed this “herd” nonsense. He simultaneously shut down all banks for three days.
Actually, no leader in history would have tolerated this. If the entire industry is corrupt, shut them all down. After the S&L crisis… well, there aren’t any S&Ls any more, the category does not exist.
But we don’t have leaders right now.
This is gratifying to read but it will take more than a press release by the OCC to convince people. Everyone is very skeptical of the entire banking sphere. It will take an entire generation to come through this and reestablish trust. My parents lived through the Great Crash and Depression as young adults and they remained cynical their entire lives. If the damage could be fixed it would be one thing, but clearly that will never happen, so we are left with millions of people whose lives have been literally ruined. And those are some pretty hard feelings.
Real reform or enforcement now would expose the ongoing complicity of regulators still in power. Not gonna happen.
Ah, the small still voice of trumpets. When I was a kid I used to have nightmares about vampires that everybody else thought were regular people. Now that I’m older this is the sort of thing that really scares me. Because – good as Yves and others are at reporting this sort of story – the fact of the matter is we’re effectively outsiders.
And so, sometimes, I stop castigating this administration for the feckless thralls that they are and wonder if they don’t know something I don’t. The MSM does seem to work overly hard at the clapping bit.
Regulator exposure in realtime, not aging into statute-of-limitations limbo, is massively threatening to most of those currently in office. But the other reason meaningful prosecutions won’t happen is that the big problems that the regulators have been colluding to cover up for several years are still there.
Real prosecutions would graphically reveal that Wile E. Coyote has been kept hovering in midair, and people might start to wonder how long this will last. If the audience stops clapping, Tinker Bell dies.
Sorry, I meant to reply here: “And so, sometimes, I stop castigating this administration for the feckless thralls that they are and wonder if they don’t know something I don’t. The MSM does seem to work overly hard at the clapping bit.”
If you are the cynical sort this “revelation” can mean only one thing: Jamie Diamond is to be our next Treasury Secretary.
If the others are just as bad, he is off the hook. No reason not to confirm him.
One might say, this “news” has “foamed the runway” for Diamond’s confirmation.
There are a couple of points here that jump out
First the O.C.C. is historically viewe as a captured regulator and not cut form the same cloth as the FDIC
Second the banks have had a fair amount of time to deal with Sarbanes Oxley and the the guys who sign have created committees and subordinates that sit between them and what they sign. There’s been discussion that this will/is effective in limiting CFO/CEO exposure
Lastly the a big reason that this is necesary is because the tax-payer is on the hook in stead of external creditors. If the banks were forced to issue more subordinated debt and be more at the mercy of true creditors many/most/all of these issues would go away.
True creditors? Hah! Please look at the history of frauds against the creditors perpetrated in corporate chapter 11 bankruptcy.
It’s been going on for decades, since roughly the Reagan administration. The classic scam is to declare bankruptcy, shovel all the assets into the hands of the executives as “pay”, and the creditors can go hang. The executives then form a new corporate entity and repeat.
Until the SEC gets back on the job, this is going to keep happening. But the Republican administrations ripped the heart out of the SEC and the Democrats haven’t put it back.
Pass laws, ignore enforcement of them or threaten the jobs and budgets of those that try to enforce them, this is the role of government. Enron, S&L Crisis, Mortgage Crisis; all these and more present the tip of the iceberg. Small wonder that organizations as diverse as Occupy and the Tea Party spring up to channel the frustrations of people that are sick of it all.
People still want to believe in the process, they hope that all the noise, lies and aggravations out of DC masks a genuine effort. They ignore the blatant cynicism from the players and .01 percenters that rules are for ‘the little people’.
The next whocuddaknowd moments could be very ugly, because the criminal class has cast aside deniability in favor of ‘so what?’.
The OCC is the one place where people who are looking for a “cop” are going to find it. They have very wide, independent powers, if they choose to use them.
I don’t know how far down the rot spread from the former heads, or what the new head has in mind, but this could be one very small “good” thing.
“It’s pretty clear many of the banks who went to the wall or had to be bailed out because they were too big to fail, and I’ll toss AIG in here as well, had no idea they were betting the farm every day with the risks they were taking.”–Yves
Ok, I’m going to have to ask for a little clarity here. Who exactly do you mean when you say “the banks”? The stockholders, CEO, CFO, other employees, or all of the above? If the dealer banks have indeed been being run on a bankruptcy-for-profit model, a la Romer and Ackerloff, then the looting parties (C-level employees) may well have been aware that they were betting the farm, they just didn’t care. The stockholders obviously weren’t informed, but I have my doubts that no one knew.
Even if no one did know the actual extent of the risk (if for no other reason than they just never bothered to find out), I still have to quibble with your phrasing. Banks don’t know anything, they don’t do anything, they are legal frameworks, nothing more. People at the banks know and do things, but that’s a very different thing.
You’ve touched on an interesting point of the current discussion. It’s often expressed as the ‘we wanted’ construction.
We wanted too much risk. We wanted to buy everything and borrowed for it. We wanted exotic derivative instruments. We wanted alpha and didn’t care how it happened. We elected Barry. We wanted to have our cake and eat it too. We wanted a privatized social insurance. We don’t want to nationalize insolvent banks. We don’t want to prosecute forgers of mortgages and supporting documents. We don’t want socialized medicine…
The ‘we’ of the insolvent banks is a handful of upper level employees, the ones who pull down eight figure compensation. Nice of the MSM to identify with them.
If you ask the majority in the real world to raise their heads from the daily grind, you won’t get most people to agree to be ‘we’. We like the New Deal, the Great Society, and the life they provide.
But that’s not the ‘we’ that gets in the MSM. It’s another different ‘we’.
You are correct to identify the “banks” with the “senior executives of the banks”.
Assuming one accepts Mr. Curry, unlike Mr. Brosnan, is not in the genuine, self-proclaimed “just another dumbass top regulator club”, one has to immediately ask whether announcing all the energy will be focused on “X” isnt’ begging for someone to come up alley “Y”, get caught at “Z”, then be bailed from above over the “protests” of the suddenly, sex-enscandaled watchful owl with the fading memory.
“The odds are high that the fact that the new bank supervision model got implemented without being seriously watered down is due to Curry’s leadership. It would be a remarkable and welcome change if the OCC starts taking its regulatory duties seriously.”
Do we dare to hope? Even so, it’s a day late and a dollar short. Banks that are too big to fail and too big to indight are also too big to regulate. They need to be broken up.
Quelle Suprise is right. Just saw this comment on Shiela Bair’s book in a review by Harvard’s Motley Fool.
“Looking back, it’s astonishing that even in 2006, on the doorstep of the largest financial crisis in generations, banks like Washington Mutual (which two years later would become the largest bank failure in U.S. history) were aggressively trying to increase risk-taking.”
Could we just consider it a simple case of cause and effect? or should we follow the lead of those great thinkers at that hallowed institution and consider it “astonishing!”