This story would be funny if it weren’t so pathetic. Yesterday, the Financial Times reported that the New York Fed woke up out of its usual slumber and realized that the crisis has changed nothing and that banks still
are in the business of looting have unaddressed ethics issues.
The Federal Reserve Bank of New York is stepping up pressure on the biggest banks to improve their ethics and culture, after investigations into the alleged rigging of benchmark rates led officials to conclude bankers had not learnt lessons from the financial crisis…
Fed officials were surprised that some of that reported behaviour occurred after the 2008 crisis, leading them to believe bankers had not curbed their poor conduct.
To make sure the biggest banks are paying enough attention to ethics and culture, NY Fed bank evaluations have begun incorporating new questions emphasising such issues. Topics include whether the right performance structure is in place to punish bad behaviour, especially when it comes to compensation.
The NY Fed does not have the authority to write regulations, but it plays a crucial role in the regulatory landscape, overseeing banks in its jurisdiction that include Goldman Sachs, JPMorgan, Citigroup, Barclays and Deutsche Bank. It assesses banks through evaluations, which often do not contain specific criteria but which provide guidance for standards.
NY Fed general counsel Thomas Baxter has also been meeting bank executives to emphasise that when it comes to ethics and culture the tone needs to be set at the top, people familiar with the efforts said. The agency will also hold a workshop on bank ethics and culture in the autumn…
“Banks are taking the Fed’s message very seriously,” a banking industry source said. “We just want to make sure we know what the rules are.”
The steps taken by the NY Fed come after its president, William Dudley, gave a surprisingly scathing speech in November saying tougher capital requirements may not solve the problem of banks’ “apparent lack of respect for law and regulation”.
This is simply ludicrous. How do you get bankers to behave in an ethical manner? You have serious consequences if they don’t, particularly for those in supervisory and executive positions.
The cute notion that the tone is set at the top (or more vividly, the fish rots from the head) is true but meaningless, since everyone knows that no one senior suffered any meaningful punishment for the colossal damage done in the crisis. It was the New York Fed, for instance, that was unwilling to renegotiate pay deals in the AIG Financial Products Group, the unit that booked the credit default swaps that led to the certain failure of the giant insurer had the Fed not rescued it.
As we pointed out, the authorities had the perfect mechanism for punishing bank executives, which was Sarbanes Oxley, passed in the wake of the Enron bankruptcy. It was meant to put an end to the “I’m the CEO and I know nothing” excuse. It requires that the CEO and the CFO personally certify the accuracy of the financial statements and the adequacy of internal controls. For financial firms, that includes risk controls. The fact that major banks and what were then investment banks would have all keeled over save for the munificence of the authorities and ultimately the American taxpayer is prima facie evidence that risk controls were seriously deficient.
It was obvious the banks had an ethics problem as of the end of 2009. The fact that they paid executives and staff record bonuses, greater even than in the previous record level of 2007, rather than tone it down and use more of their gpvernment-gifted profits to boost their capital levels, screamed that there had been no behavior change. The fact that the Fed can profess to be shocked at this juncture reveals either extreme cluelessness or a disingenuous effort to play cop on the beat when this cop regularly plays cards with the crooks.
Since the Fed brought up the “tone at the top,” let’s look at the example set by the highest profile, most lauded banker over recent years, Jamie Dimon. In the London Whale fiasco, JP Morgan disclosed a material weakness in internal controls. That’s the worst level of internal control failure a going conern can report. In JP Morgan’s case it’s more damning since Dimon, as recently as May 10, 2012, Dimon certified that all was well with internal controls as of the end of the first quarter of 2012. JP Morgan has effectively admitted the gross inadequacy of its financial and operational oversight via its plans to spend over $4 billion and add 5,000 people for better compliance and risk control. So what exactly was Dimon doing to earn his keep, besides lobbying in DC?
And the London Whale was simply one in a long string of serious risk control failures at the Morgan bank. As Dave Dayen wrote:
I urge you to read an astonishing new report, which I’ve embedded below, from analyst Josh Rosner of Graham-Fisher and Co. The best way to describe the report, “JPM – Out of Control,” is that it reads like a rap sheet. Notably, Rosner takes mortgage abuses almost entirely out of the equation, and yet still manages to fill a 45-page report with documented case after documented case of serious fraud and abuse, most of which JPM has already admitted to (at least in the sense of reaching a settlement; given out captured regulatory structure the end result is invariably a settlement with the “neither admit nor deny wrongdoing” boilerplate appended). Rosner writes, “we could not find another ‘systemically important’ domestic bank that has recently been subject to as many public, non-mortgage related, regulatory actions or consent orders.”…
It’s hard to summarize all of the documented instances in this report of JPM has been breaking the law, but here’s my best shot. I try to keep up on these matters, and yet some of these I’m learning about for the first time:
Bank Secrecy Act violations;
Money laundering for drug cartels;
Violations of sanction orders against Cuba, Iran, Sudan, and former Liberian strongman Charles Taylor;
Violations related to the Vatican Bank scandal (get on this, Pope Francis!);
Violations of the Commodities Exchange Act;
Failure to segregate customer funds (including one CFTC case where the bank failed to segregate $725 million of its own money from a $9.6 billion account) in the US and UK;
Knowingly executing fictitious trades where the customer, with full knowledge of the bank, was on both sides of the deal;
Various SEC enforcement actions for misrepresentations of CDOs and mortgage-backed securities;
The AG settlement on foreclosure fraud;
The OCC settlement on foreclosure fraud;
Violations of the Servicemembers Civil Relief Act;
Illegal flood insurance commissions;
Fraudulent sale of unregistered securities;
Illegal increases of overdraft penalties;
Violations of federal ERISA laws as well as those of the state of New York;
Municipal bond market manipulations and acts of bid-rigging, including violations of the Sherman Anti-Trust Act;
Filing of unverified affidavits for credit card debt collections (“as a result of internal control failures that sound eerily similar to the industry’s mortgage servicing failures and foreclosure abuses”);
Energy market manipulation that triggered FERC lawsuits;
“Artificial market making” at Japanese affiliates;
Shifting trading losses on a currency trade to a customer account;
Fraudulent sales of derivatives to the city of Milan, Italy;
Obstruction of justice (including refusing the release of documents in the Bernie Madoff case as well as the case of Peregrine Financial).
The sheer litany of illegal activities just overwhelms you. And these are only the ones where the company has entered into settlements or been sanctioned; it doesn’t even include ongoing investigations into things like Libor, illegally concealing inclusions of mortgage-backed securities in employer funds (another ERISA violation), the Fail Whale trades, and especially putback suits for mortgages, where a recent ruling by Judge Jed Rakoff has seriously increased exposure. While the risks are still very much alive and will continue to weigh on the firm, ultimately shareholders will pay, certainly not executives as long as the no-prosecutions standard holds.
We’ve argued at length that Dimon may be guilty of criminal violations of Sarbanes Oxley. Yet when called to testify before Congress on the London Whale, Dimon clearly had not bothered to prepare for the session and was often arrogant.
With Dimon the most visible face of the banking industry, and not a peep of a public or apparently much of a private critical word from regulators about his conduct, employees at banks have a very clear message as to what the real game is: deliver profits, no matter how many rules you disregard in the process, and take an aggressive posture with regulators if they happen to catch any transgressions. Tea and cookies talks with banks about fixing their compensation structures is pathetic. The Fed and regulators need to take the lead by being vastly tougher with the CEOs themselves. The Fed had no compunction about compelling the resignation of the three top officers of Salomon Brothers, then the biggest bond trading firm, in 1992, over regulatory abuses. The Bank of England similarly forced the ouster of the chairman, CEO and president of Barclays for mounting a frontal attack on its authority. Could you imagine anything like that out of a US regulator today? Nothing meaningful will change unless the Fed demonstrates that it is willing to remove top executives if the needed changes aren’t forthcoming, and to push for prosecutions when warranted.
Instead, the Fed is acting as if it expects a largely extractive industry to shape up just because it has made them look like a chump. Or perhaps this is all kabuki for Congress and the rubes, so the next time a major scandal breaks out, the Fed can piously claim it did what it could. While that excuse was and remains nonsense, there are enough media amplifiers that the central bankers and other regulators can continue to get away with professional negligence.
I believe it was the article (IIRC by a judge) you posted here some time ago that argued the personification of the corporation leads to less prosecution of the top brass. We really really need to go back to basics on this and say there’s no corporate responsibility, there’s only personal responsibility.
LLCs are ok legal form for small/medium entrepreneurs, where you want to reward innovation and limit the damage of failure. It’s an entirely inappropriate form for state sponsored oligopolies (or IMO for publicly listed companies for the matter).
London Banker nailed it when s/he said, “chop off their hands.” Figuratively speaking of course.
I’m sure this is all Putin’s fault.
Why is Dimon arrogant and believes Congress is just paid staff? He outranks them and the Fed. This should be obvious to anyone. Dimon can buy muscle and buy information to intimidate anyone he wants. In the USA money talks and so it goes as long as you know who to hire, who to pay off and who to threaten.
As for the NY Fed:
That’s clearly meant as comic writing isn’t it?
“As we pointed out, the authorities had the perfect mechanism for punishing bank executives, which was Sarbanes Oxley, passed in the wake of the Enron bankruptcy. It was meant to put an end to the “I’m the CEO and I know nothing” excuse”
The problem isn’t that there aren’t enough laws, the problem is that is that the laws are expertly written and carefully crafted only to provide a simulacrum of justice – not to actually render justice to the corrupt. And should there be some inadvertent error that would actually make it possible to prosecute someone at the top, well, there’s a solution to that to.
Just promise to prosecute to get elected and than don’t……
Really, what are people suppose to do – vote for republicans and they’ll prosecute?
In this context, a read of “Lords of Creation” by Frederick Lewis (recently republished by <a href="http://www.openroadmedia.com/forbidden-bookshelf"the Forbidden Bookshelf imprint) is in order. This has been going on for a very long time.
that link leads to a file not found page
This is the correct link to forbidden bookshelf
For the third time – Lords of Creation
It’s still early, but this is definitely the funniest thing I’ve read all day:
Surprised?!? Hahahahahaha! Oh the FT, what jokers…and so droll
I guess the way it was supposed to work is the banksters would stop listening to the Devil perched on their left shoulder, and start listening to the Angel on their right shoulder, should an Angel decide to alight on their right shoulder.
But this is a surprising world.
So it turns out that telling banks firmly not to do it again while giving them a giant pile of money doesn’t work very well as a deterrent.
I look forward to seeing the Fed’s conclusion on this matter. I predict that they will decide that the pile of money needed to be larger.
‘banks have a very clear message as to what the real game is: deliver profits, no matter how many rules you disregard in the process…’
And the boards drive that message home thus:
PS. And, ‘ plans to spend over $4 billion and add 5,000 people for better compliance and risk control…’
How about just hire managers who understand and abide by the regulations
The fact that the Fed can profess to be shocked at this juncture reveals either extreme cluelessness or a disingenuous effort to play cop on the beat when this cop regularly plays cards with the crooks.
This cop not only plays cards with the crooks, he made sure the getaway car had a full tank of gas, good steering and brakes, and for good measure laid out the escape route. This cop was actually an accomplice, in on the heist.
Besides, next week the cop and crook trade places.
Or perhaps this is all kabuki for Congress and the rubes
Plausible deniability for the next heist. They can say, “we talked about it and asked them to stop, and they didn’t. What else can we doooooo?”
The relationship between pirates and the crown bears no resemblance to current events between JPM’s Dimon
and the Federal Reserve unless you change their wardrobes.
Captain Renault is shocked:
Sorry. Correct URL:
People who lack ethics are people with a defective conscience. As such they are probably narcissistic or its close cousin sociopathic. They lack empathy. Not surprisingly they often gravitate to fields where they can make a lot of money. Or they head for positions of power. Since the latter make most of our laws, the former know how to make sure their bread is well-buttered.
I often wish we had a “conscience test’ that people in power or finance had to pass. But even if we had one, there would soon be a way to cheat on it.
“The agency will also hold a workshop on bank ethics and culture in the autumn…”
Seriously? What a crock full of crap!
These banksters already know the “ethics & culture” better than the regulators. They know EXACTLY how far they can go outside of those ethics, & still get away with fines rather than imprisonment. (VERY far, obviously).
And, of course, they also know the fines will be much smaller than their criminal gains.
I’m hoping the cost of those “workshops” isn’t coming from taxpayers dollars. The only place I want my tax money to go, is in putting & keeping them in prison (The actual PEOPLE responsible).
It’s become quite obvious the “cops” (our govt.) IS an accomplice to these crimes, as so aptly put in another response here.
I remain absolutely disgusted with the govt solution of fines in which the govt gains, but those of us who lost our homes see no compensation. (Unless you wish to count the $300 most received from the IFR. Ha, ha).
I’ve even come to strongly suspect the govt lets them cross the lines, in order to obtain more money from fines.
“… in order to obtain more money from fines.” Exactly as the cop on the beat takes a fiver out of the pot every so often, for a game of three card monte.
Morals and Ethics. That is a good beginning point. I was raised in a village where every one knew every one. It was fun. Ethics and morals are taught by parents and grand parents, influenced by friends and girlfriends. America was very successfull in stripping the family culture to sell their planned obsolescence products. It also had to do with the wealth factor. I do believe that some times kids raised in rich houses tend to gravitate towards less moral,Ethical behaviour compared to the poor.
This should be recognized as a disease by a neurologist and start filling the bankers bathroom counters with some much needed help. We would believe that there is a medicine to turn a man into ethical person. It’s how you were bought up. Its what you see on daily basis. Its where you live and who your neighbors are. Its what we eat. Its our teachers, our government. I can go on and on. Every single species, non species has a purpose in life.Its not all for consumerism and commodification. I will die. America keeps selling the products, banks keep failing, Nothing will change. I have come to accept it and live a life without a purpose supporting their ideology.
Ah just give ’em another $Trillion dollars, ok? I’m sure things will start to get better.
What’s a couple trillion among friends?
Truly an example of you can’t get people to see a problem if their paycheck relies on them not seeing the problem.
A trillion here, a trillion there, pretty soon we’re talking about real money, (O, Everett, those were the golden years, when a billion was a lot of dough.)
[I mean if we can ever talk about real money. May be an oxymoron for all I know.]
I’m sure a good talking-to from the Fed will solve the problem.
Has the Fed’s appetite for using it’s regulatory authority improved since the Maestro got his Medal of Freedom
or has it essentially remained anemic? If so why not unburden them of that role and fold it into another regulatory agency.