Time to Put the Heat on the Fed and FDIC to Fix Lousy Governance at TBTF Banks

Posted on by

Adam Levitin makes a sensible recommendation in a new post:

…what’s at stake in the corporate governance of a too-big-to-fail bank like JPMorgan Chase is not just the share price, but also the public fisc. There is a strong federal regulatory interest in having good governance at too-big-to-fail banks because of our explicit (FDIC) and implicit (bailout) insurance of too-big-to-fail banks. This suggests that federal bank regulators and Congress should be pushing to ensure that too-big-to-fail banks conform with best practices in corporate governance. To the extent good governance at a too-big-to-fail bank includes division of the CEO and Chairman positions, ensuring such a division should be on the regulatory agenda. Financial regulation may need to include governance regulation…

If the shareholder reform mechanism is hopelessly broken–if management entrenchment techniques have simply become too powerful for proxy fights and other modes of shareholder expression to work–then it may be up to the regulatory process to fix the problem. Put another way, if management’s victory in Delaware corporate law is too complete, the only avenue open for reform is through federal legislation or regulation. Management’s sucess in Delaware might have the hydraulic effect of forcing reform of corporate law on the federal stage. (See here for Roe’s discussion of the dynamics of the state-federal competition.) This sort of change has not happened yet, of course, but the case of too-big-to-fail banks presents a special case where the dynamics could potentially be different….

Regulating for governance in too-big-to-fail banks would be a real change in bank regulation as practiced, but the seeds already exist in the current bank regulatory framework: the bank chartering process already requires certain qualifications for officers and directors. Perhaps its time to take the historical bank regulatory framework seriously, not just in terms of governance regulation, but in other aspects as well, such as the social purpose of granting limited purpose private banking charters.

Now of course, it’s easy for cynics to say that our current scaredy-cat regulators would never dare rough up big bag Jamie Dimon. But look at this another way: pressing on the governance front is less intimidating to regulators than tangling with armies of bank lobbyists who present unending arguments about how making the world safer in finance would do horrible things like reduce lending or liquidity (as if anyone but speculators benefits from our current hyper-liquid markets; we hit the point of diminishing to negative returns long ago) or “innovation”. The banks and their minions are expert at moving the conversation into technical terrain where the banks have an information advantage and cowing officials with that. By contrast, the standards for good corporate governance are simple and widely accepted. There’s not a lot of room for debate.

Moreover, as Levitin suggests, this fixation on shareholder value is a recent phenomenon, and really took off in the 1990s to justify CEOs fixating on their own bottom lines as they received more equity-linked pay. It’s an aberration because equity is both legally a very weak and ambiguous promise (you get dividends when the company is sufficiently profitable and management decides to pay them, and a vote that management can dilute by issuing more shares) and a residual claim. It’s the value that’s left after everyone else has been satisfied. But paid to take the new definition of executive responsibilities to heart, CEOs have taken to screwing their various other constituents, as well as taking on more and more risk, to goose short-term profits.

It’s not hard to imagine the “tough on banks” Congressmen like Elizabeth Warren and Sherrod Brown grilling regulators on why they aren’t making banks adhere to good management practices. It should be inexcusable for the CEO of a TBTF bank not to have a succession plan. Dimon’s refusal to get serious about it looks to be a way to assure he can blackmail the bank and stymie demands for changes in how he runs JP Morgan.

And remember, the purpose of having Congressmen pressure regulators (and hopefully having the media take it up) is not so much that any of these particular ideas are likely to come to fruition. It is to create a climate where regulators feel they have public support for getting tougher with banks. As much as that might seem obvious from polls, the banks do a great job of organizing allies to flood regulators with support for their pet wishes during public comment periods on pending regulations. And the trade press is pro-industry. So from the regulators’ perspective, they see a lot of pressure to do what the banks want and seldom find much in the way of objections. So changing that dynamic is key to chipping away at the influence of banks. In keeping, the more experts can find new fronts that can be opened up against the systemically dangerous financial firms, the better.

Print Friendly, PDF & Email


  1. jake chase

    Regulating governance at big banks? How about mandating more dark skinned and female directors, or forcing the directors to remain awake during those monthly briefings and take a test afterwards, or making them read 5 financial statement footnotes and digest their meaning by Wednesday? Maybe you could force the CEOs to explain themselves monthly on CNBC? Oh, wait, they already do that.

    Talk about rearranging the Titanic deck chairs.

    1. Yves Smith Post author

      Nah, you are missing the point!

      This is another opportunity for getting Warren to make bankers and regulators squirm. When she does it (Carl Levin too), the media piles on and industry rags like American Banker chew over her and other Congresscritters’ latest. And increasing AB isn’t knee jerk running bank party line.

      This is slowly moving the Overton window to the left on this issue. It almost doesn’t matter what the subject matter is as long as it will legitimately make banks and regulators squirm.

      And Jamie not having a succession plan is just unacceptable. His board needs to be embarrassed publicly about it as often as possible. This is really easy to explain and someone clever could generate lots of soundbites.

      1. jake chase

        I had to look up Overton Window. For others similarly challenged, at any given moment, the “window” includes a range of policies considered politically acceptable in the current climate of public opinion, which a politician can recommend without being considered too extreme to gain or keep public office.

        So, I guess the point is that any criticism of banker behavior, meaningful or not, makes eventual reining in of bank power more likely. Okay, I think somebody should start objecting to the excessive sartorial elegance in bank executive business wear. Aren’t these guys supposed to be working?

        1. Andrew Watts

          Thanks for the explanation Jake, I was similarly uninformed of what high ineffectual political strategy our political center was devising to retain their legitimacy. I’m sure we could all learn from their example if for no other reason then it’s inherent comedy value.

          Did I use the word propaganda? That’s not a very nice word!

          1. washunate

            Yves is making a very straightforward point; I think you should give it more serious attention. And I’m not sure what political center exists in this country; there is the great mass of Americans who want to live a good life, and then there are a small group of sociopathic predators who want to tell other people how to live their lives.

            The substantive critique is not about the Overton window, but whether this moves it.

            Focusing on technical details like CEO/Chairman roles risks getting stuck in the weeds, serving as a distraction from the main issue, which I think we all agree is the existence of TBTF firms. Personally, where I disagree with Levitin’s assessment, is that the response to the difficulty of uwninding the firms is not to lobby for regulatory half-meausures.

            Rather, it’s to keep it simple and ask for the boldest solution. Complexity, I would argue, generally favors those trying to obfuscate.

          2. Andrew Watts

            “And I’m not sure what political center exists in this country; there is the great mass of Americans who want to live a good life, and then there are a small group of sociopathic predators who want to tell other people how to live their lives.”

            That’s what passes for political centralism in this country. It has nothing to do with what the average person wants. On the contrary both national parties are dedicated to subordinating their local state affiliated parties to the national party. In the process of this transformation they hope to turn the majority of the local electorate into a reliable constituency that won’t bother with actual participation in the political process beyond voting for their approved candidates.

            “The substantive critique is not about the Overton window, but whether this moves it.”

            That’s woefully irrelevant in my opinion. By allowing other people to define your agenda you’re taking the first steps towards your own marginalization. It is also a sign of cowardice. Neither of which will succeed in bringing about any genuine change.

            I do not mean for that sentiment to be personally insulting or inflammatory. So my apologies in advance if it was taken as such.

          3. washunate

            Oh, no worries, I largely agree with you. Both national parties are doing the same thing – representing the psychopaths instead of stopping them.

            I just don’t follow the outcry about Overton window as a concept. It’s not some super secret corporatist Third Way doublespeak. It’s just applying pressure to a system.

            Which is why I oppose Levitin’s framework, because I don’t see it really pressuring anything. It feels more like a pressure release valve that distracts attention away from the existence of TBTF into the tangential weeds of regulation and governance. That is where people’s eyes glaze over, not where people feel connected to a cause.

            Just ask somebody how many votes they have cast in shareholder elections of the companies that are held by their low-fee index fund. That’s Vanguard’s business model – externalize the cost of governance onto society at large.

        2. lambert strether

          Well, objecting to “excessive sartorial elegance” would be called snark, if done consistently and viciously enough. Snark can be, in fact, an effective tool in eliminating the claims of the powerful to deference. Ask Imelda Marcos. Or, more to the point, Marie Antoinette. It’s only one tool, of course.

        3. Propertius

          Okay, I think somebody should start objecting to the excessive sartorial elegance in bank executive business wear. Aren’t these guys supposed to be working?

          Or, as Queen Elizabeth I put it:

          The excess of apparel and the superfluity of unnecessary foreign wares thereto belonging now of late years is grown by sufferance to such an extremity that the manifest decay of the whole realm generally is like to follow (by bringing into the realm such superfluities of silks, cloths of gold, silver, and other most vain devices of so great cost for the quantity thereof as of necessity the moneys and treasure of the realm is and must be yearly conveyed out of the same to answer the said excess) but also particularly the wasting and undoing of a great number of young gentlemen, otherwise serviceable, and others seeking by show of apparel to be esteemed as gentlemen, who, allured by the vain show of those things, do not only consume themselves, their goods, and lands which their parents left unto them, but also run into such debts and shifts as they cannot live out of danger of laws without attempting unlawful acts, whereby they are not any ways serviceable to their country as otherwise they might be:

          Which great abuses, tending both to so manifest a decay of the wealth of the realm and to the ruin of a multitude of serviceable young men and gentlemen and of many good families, the Queen’s majesty hath of her own princely wisdom so considered as she hath of late with great charged to her council commanded the same to be presently and speedily remedied both in her own court and in all other places of her realm, according to the sundry good laws heretofore provided.


      2. jake chase

        And if Warren truly is what her boosters claim, her efforts ought to be addressed singlemindedly to the problem of student debt, which threatens to enslave an entire generation of underemployed serfs. This requires repeal of the 2005 Bankruptcy Act amendments, as well as write downs and an end to the Federal Gomint as usurer in chief.

        A very good analysis of the problem is provided by Michael Hudson on his web site.

        1. Brooklin Bridge

          The student loan crisis? What ever happened to the mortgage crisis which Warren cited so much in her campaign? And will the student loan crisis go the way of the mortgage crisis when another juicy crisis comes along?

          I’m not arguing with Yves’ points (I hope that she is right about how things work in that twisted nut house), nor with the seriousness of absurd student debt, but simply with skipping like a stone from crisis to crisis. I’m missing something obvious as usual.

        2. lambert strether

          It would be nice if Warren’s acolytes would, at some point, figure out that wearing red and asking questions isn’t enough. Oh, wait, a new petition just appeared in my mailbox. Let me click through. Ka-ching!

          1. Frank Drain

            I called Liz Warren and did the “fraudclosure this, he said she said yadda yadda”. Christ, probably the only people who listen to the proles are the FBI at this point.

            Washington Office

            Russell Senate Office Building

            2 Russell Courtyard

            Washington, DC 20510

            Phone: (202) 224-4543

          2. Brooklin Bridge

            Christ, probably the only people who listen to the proles are the FBI at this point.

            FBI: If not the only ear, likely the most sympathetic.

  2. Andrew Watts

    The propaganda war against the Federal Reserve has always been a proxy battle. As long as the TBTF banks have their protector (that enables pretty much all their actions) it will not matter what legislation Congress considers passing. In the unlikely case that our regulators grow a spine, the Fed will covertly work against anything that threatens to undermine the TBTF banks.

    It might have happened once or twice before.

    1. steelhead23

      I think Andrew nails it. One wonders what ex FDIC chief Sheila Bair thought of the role of the Fed in controlling TBTF risks.

  3. douglass truth

    After any post like this there’s always a grizzled hard case saying something like “grow up, stop dreaming, things will never change.” Every business site has em. Cynicism as a way to one-up the post. I wonder why they bother.

    1. Bachlan Pham

      Folks are doodling as artists. It’s alive as opposed to wretched. We should strive to pull ourselves up by our own bootstraps. The first non-sequitor tome of highly effective people is that they take responsibility for their own lives; if they fail, they have no one to blame but themselves, so that they may then join the others who blame.

  4. down2long

    Here’s another thought piece on Slimin’ Dimon, um, victory, which ties in very nicely with Yves’ post. It has a little of the collective guilt thing in it – six years and a lot of lawyers and money have proved to me fighting these banks is not for the faint of heart.

    And our large public protests were for naught, Think our timing was off.

    Incidentally Jake, Senator Warren has introduced a Senate Bill that forcing the Fed to extend credit to students at the same rate it gives money to TBTF. It’s already had one committee hearing which did not go well. Of course. But it ain’t dead yet.


    1. Propertius

      And our large public protests were for naught, Think our timing was off.

      Well, yes, since he wasn’t at home when Occupy came to call (he was in Lebanon). And, of course, they forgot to bring a rope.

      1. down2long

        Meet my cousin: Never2Late. I’ll bring the meat-hooks to adorn his lovely ankles and a portable lamppost. Something starkly Bauhaus seems fitting.

  5. washunate

    I agree that corporate governance is one of the big underappreciated problems of our time. I also agree that the death penalty (revoking corporate charters) should be a legitimate threat for companies that engage in criminal activity.

    But isn’t the problem in financial services the existence of TBTF firms? The worry isn’t about innovation or worker rights or executive compensation or the dispute about whether the CEO should be Chairman of the Board or anything about the particular firm; the worry is that if one major firm collapses, they bring down the entire industrialized world.

    I enjoy the irony that those of us in opposition to the bailouts seem to best understand their claimed purpose.

  6. Pita n' Hummus

    I’d suggest Levitin should be as much a source of controversy as any other DC commentator. Excruciating legal exercises for the sake of trivial persuit some how makes a career for the warmaker or the white tower intellectuak. NW DC means military power and an institution like Georgetown is another structural member. Why can’t he drive out of Bethesda or Chevy Chase and provide commentary on the awesome power of debt, it would be taboo to do so. So it is with commentators who support defensive (offensive) weapons systems by the billions, a lawyer will do his part to prevent the population from escaping weapons of debt, human rights be damned.

  7. Hugh

    I have no problem pointing out the crimes and failures of the TBTF, but calls for better governance at them assumes that reform of them is possible and that they are something other than vehicles for large scale looting. To me, this is like calling for better governance on a few of the larger pirate ships, ignoring that they are still pirate ships.

    1. lambert strether

      To quibble with the metaphor, IIRC governance on pirate ships was preferable to governnce on, say, the ships of the Royal Navy, if democracy is your metric.

    2. Andrew Watts

      You’re probably right too. Mr. Levitin cautiously insists that if our predatory financial institutions were re-structured they would be purified of self-interest. They would then be able to pursue goals that would not be so detrimental to the common good. This basis for his argument lacks any contemporary evidence to back up his claim.

      “You’ll be gone, I’ll be gone.” as the saying goes. Oft to the sea mateys. Y’har!

    3. ChrisPacific

      Granted, but even if the TBTF institutions and the politicians that enable them are all thoroughly corrupt (which is not 100% the case yet, in the case of politicians at least – some have even posted on NC) they are still subject to the court of public opinion. Even the corrupt politicians still find it necessary to pretend to be serving the public interest, and it can be politically costly for them to oppose certain positions publicly even if it’s clear that their financial backers expect them to do so in practice.

      I think a lot of what Yves, Lambert and the other contributors do here is aimed at removing the doublespeak element and exposing the truth – in other words, making it difficult to say one thing while doing another (the series on the OCC is a good example). Even if our officials are corrupt, we still have enough of the forms of democracy that public and open corruption can be career-ending.

  8. clarence swinney

    Why do we rank third in OECD nations as Least Taxed as Percent of GDP?
    The Top 1% pays 33% in Federal, State and local taxes.
    The bottom forty percent pay 29.8%.
    You read how Top 1% pay all the Income Tax.
    They pay 24.3% in federal taxes.
    Yet! Only 8.7% in State And Local taxes.

    1. LifelongLib

      Despite recent “reforms” the federal income tax still has some connection with ability to pay, making it very unpopular with the conservative set. That’s why there’s a lot of discussion of it. There’s relatively little discussion of the much more regressive federal payroll tax, and even less of state/local taxes and fees. In truth these more than offset the progressive federal income tax, resulting in the less well-off paying a higher percentage of their income to taxes than the wealthy do.

  9. allcoppedout

    I ‘side’ with Jake and Hugh – but I have this thing about cavalry charges towards the centre of volcanoes. That we need radical change is obvious – the problem being the old one of the art of doing business in corrupt systems. We want to be Serpico, but probably know there is no way to get the truth out and do its work. Plato wrote at least seven books on corruption and gave up to its inevitability.
    ‘Windows’ do shift – Hillsborough has gone from being alcohol fueled soccer hooliganism to major agency cock-up and defamation of the fans over 23 years here. But key in this is that justice delayed is justice denied – delaying tactics are essential to the establishment.
    There’s a Robin Hood film (Robin and Marion with Sean Connery) that addresses the issues. The Sheriff of Nottingham is (unusually) not the bad guy, but a learned intermediary between clown and vile Normans who strives to prevent Robin stirring a peasant army against overwhelming military strength. Yves could be seen in this role here (the Sheriff fails and the film ends with a horde of we Jakeites rushing to our doom). Of course, when Wat Tyler went for a reasonable chat with the King he was stabbed in the back and a substantial victory lost in the time the King had to regroup while ‘we’ got drunk.
    Jacques Tati should be hired to re-arrange the deck chairs.

    What do we know (behaviourally) about “windows” and change through debate? Academic studies are legion and almost all leave little room for faith in facts. We might ask how the UK has moved from cops locking up queers in toilets to gay marriage – or any area we think the ‘window has shifted’ (or not as in our feeble anti-EU politics).

    The shift needed for really radical economics that is subservient to democracy is enormous. We have shifted from the divine right of kings (made up by Rome’s Octavian) to corrupt democracy without democratic foreign policy. Is there any evidence on whether such shifts are achieved better with Yves softly softly or Jake’s ‘bludgeon’? And is this the real question?

    Take Plato’s idea of a maximum 1:6 ratio on wealth/earnings.
    A lot of people think this is a radical notion – yet most of us already live with it. It’s only, say, 10% who don’t. Does the sky fall if we remove them?

    Management has often removed unions as intermediaries and directly addressed workforces (often lying) and one question we should be asking is how we might do something similar. I think ‘radical’ might be more normal and involve less change than we think.

  10. kris

    This issue is taken upside down.

    1) There is no such a thing as an independent central bank, or independent regulator.
    White House rules over the Fed and any other regulator.

    2) There is no such a thing as corporate governance. If a corporate becomes mammoth big, the corporate becomes UNGOVERNABLE and exists only because the government back it up.

Comments are closed.