Your humble blogger must confess to being partly wrong about the Fed’s recent realization that banksters had learned the right lesson from the crisis: crime pays. We were incredulous that the central bank had missed the fact that financial firm employees were unrepentant and their executives saw no reason to make real changes (hence all the howling about reform measures that are pretty minor relative to the damage done). From a recent post:
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 lootinghave 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.
Back to the current post. In fact, the Fed is not wrong to focus on compensation, as well as promotions (which were not mentioned). Anyone who has lived in an organization will tell you that who moves ahead (and money and rank are the key indicators) tells you what the company really values, not what it professes to value. For instance, most corporations exhibit what I like to call “big producer syndrome,” where people who deliver enough in revenues (most often, top salesmen) are allowed to break rules, often flagrantly (the most common misconduct seems to be expense abuses and sexual harassment). But having polite conversations with the banks about these topics was hardly going to have an impact, particularly when some of the most flagrant rule-breakers run the firms (think Jamie Dimon’s Sarbanes Oxley violations and misrepresentations to investors and Congress during the London Whale fiasco).
The Fed is a bit more serious about trying to get the banks to shape up than we had assumed. The pink paper, halfway through an article on how the Fed is dealing with non-bank systemically important financial institutions (SIFIs) like AIG and GE, had this surprising tidbit:
Fed officials are also involving themselves in the kinds of decisions that company management or board directors usually make, including whether employees should be fired or disciplined, which has been surprising, according to some people familiar with the process.
“The Fed is being very intrusive,” said one of these people. “It’s been much more intense than people expected.”
On the one hand, it’s great to see the Fed stepping up and starting to act like a real regulator. On the other hand, banks have become so wedded to their predatory ways that this sort of pressure will only at most make a minor dent in the problem.
For instance, in the late 1980s, when a number of leveraged buyout deals crashed and some raiders like Paul Bilzerian were convicted, Harvard Business School faculty went through some soul-searching over their role in producing some of the financial buccaneers responsible for the wreckage. After a good bit of study, they concluded that teaching ethics was not terribly effective. By the time students were old enough to apply to Harvard Business School, their value systems were formed and not terribly susceptible to influence.
If you accept that view, which seems sound, that means that getting banks to throw out or demote miscreants is a start, but way short of sufficient to achieve culture change. These firms need leaders that will embody and enforce new norms. In most organizations, that means making significant personnel changes at the top of these firms. That’s why, as most readers recognize, the failure to deal harshly with the management of of the banks that drove themselves and the global economy off the cliff was a huge missed opportunity. The boards and most of management needed to be turfed out. The idea that they could not be replaced is a canard. My God, Citi put Vikrim Pandit in charge, a man with no experience in running an operation of that scale and who had no knowledge of retail banking or operations. Sheila Bair, in her book Bull by the Horns, makes it clear she thought Pandit was not up to the job and should have been replaced, but was unable to get him ousted. There were plenty of senior bank executives who’d retired earlier than they liked or otherwise might have been up for a few year stint to see the bank through the post-crisis period and groom a new leadership team.
And as the American public knows well, another way to influence bank behavior would have been prosecutions, or at least heavy fines of executives. Again using Citi as an example, the CFO Gary Crittenden was fined a mere $125,000 for keeping $40 billion of CDOs off the balance sheet. Huh? And that’s before the fact that just about no one save one former Countrywide exec was roughed up at all for all of the subprime lending fraud. And the officialdom has been so desperate to cover up chain of title issues that it has had even less interest in pursuing widespread foreclosure-related misconduct.
So even if the Fed thinks it is now being serious, its blinkered view of what rises to the level of being an abuse, plus its timidity about roughing up top bankers means its interventions fall short. But it is surprise to outsiders that Fed remains so badly captured that it is unable to recognize how much change is really needed.
I am uninformed. Why is the basis for perspective that the Fed is “badly capture” rather than that the Fed is fully complicit and corrupt?
There is a lot of evidence that the Fed believes its own bullshit, including debunked monetarist economic theories. The Fed has also long been effectively out of the business of bank regulation, thanks to Greenspan’s attitude and Bernanke not changing any Greenspan policies materially. The Fed actually seems to be trying a bit to act like a regulator, as in it seems to have crossed the intellectual Rubicon that maybe it needs to to that. But all of its regulatory muscles are badly atrophied, even before you get to the issue of capture.
Shorter: never attribute to malice that which can be explained by incompetence.
OK, just a short video in support of Yves “incompetence” thesis. Alan Grayson vs. the Inspector General for the Federal Reserve:
NY FED run by Timmy Geithner, who moved onto US Treasury secretary. NY FED now run by William Dudley, formerly a high level exec at Goldman Sachs.
Nothing to see here, just move along. Business as usual. If they (regulatory agencies like FED, OCC, FDIC) wanted to be serious they could well stop whatever it is they can’t seem to stop. They have no remorse bringing the hammer to smaller institutions (i.e., not SIFI-designation).
Sure, cartels reform themselves all the time! It’s like bringing in the Mafia to implement the Fair Debt Collection Practices Act.
Knowledgeable about the panoply of potential abuses, the Federal Reserve will clean up the industry in a hurry … and then pay the regular 6% dividends to its members. No conflicts of interest here!
I wish I could get 6% interest on my savings account. Do you think the Fed will notice that I’m not a bank if I open an account with them?
” (think Jamie Dimon’s Sarbanes Oxley violations and misrepresentations to investors and Congress during the London Whale fiasco).”
Are violations lawlessness or the behavior of a scofflaw?
Are misrepresentations lies. Lies under oath?
Please bone up on the standards for SEC disclosures. Omitting information is a SEC violation.
I don’t know why you are trying to hairsplit. A misrepresentation is a lie. It’s the elite discourse word used to reduce the sting of calling someone a liar, as opposed to, say, a prevaricator.
Sarbanes Oxley provides for criminal prosecution for false certifications, which as we have argued long form, Dimon made.
These firms need leaders that will embody and enforce new norms.
A leader that is honest will lose when their competitors are unrepentant and unpunished criminals. That goes for more than just banksterism.
When the cops and the crooks trade places weekly, reform is not possible.
The Fed is fully complicit and corrupt. After the financial meltdown, Mr Magoo went in front of congress and claimed surprise that leaders of too big to fail financial institutions are criminals. Most of them are still there, propped up by the Fed, and now a bit of mouth flatulence is supposed to turn hardened criminals into saints.
Habitually lawless institutions cannot be reformed by even the most diligent “regulation”.
Catch-and-release simply doesn’t work when penalties imposed for transgression are regarded by the management as just one of the costs for doing business.
These institutions are creatures of government. They can therefore be systematically dismantled by the same hand that originally chartered them. The “Arthur Andersen solution” guarantees an end to lawless companies and it works the first time, every time.
It may only be observing the obvious, but most fair-minded people would distinguish sleazy, morally repulsive individuals and sleazy, morally repulsive companies from criminals and criminal enterprises. Greedy sleazebags who run banks into the ground through moneylust and stupidity belong on the unemployment line, but arguably not in jail. Sadly, these types (and their criminal colleagues) were all bailed out by Fed policies as one undifferentiated mass. An undifferentiated mass of undeserving, revolting scum — but not all criminal scum. Some were just there as hangers on, mind-lost, soul-lost, craving and craven.
It’s sad our political society can’t figure out how to regulate banks and create criminal laws that make bright lines, clearly demarcated, so that juries can place executive actions up against laws and come to a reasonably clear conclusion about justice and innocence. But the complexity of it all makes that difficult, not impossible to be sure, and no argument from me about the basic editorial premise of NC on that front, but nevertheless it is hard — a long, arduous, expensive, complex fight with the best lawyers money can buy. Does it have to be that way? No. But society makes laws and the laws are mirrors of the society that makes them, mirrors that transpose and reflect the dimensions of its expediencies and its compromises, ones that it can hardly articulate to itself. But there they are in its laws and all their ambiguity like the Principal Components of a multi-dimensional matrix that distill and reduce its chaotic essential energies to clear and intelligible forces.
And so it degenerates into the oooze and sleaze of politics in every direction.
It’s not a crime to try and fail, or to be wrong through carelessness and greed, or to not try and fail through basic incompetence. A just society doesn’t prosecute failures, it prosecutes criminals. The distinction between the two — in matters of banking and “risk”– should be clearer than it is now. Any reasonable person would agree with that. But there are too many unreasonable people with power and influence, and the laws are as corrupt as they are, the laws are projections of their soul corruption, and the rest of us suffer from it. We’re in the 6th year of The Plague. When will it be lifted? It’s a rhetorical question.
We’re in the 6th year of The Plague. When will it be lifted?
It’s a great rhetorical question.
Certainly trying and failing is not a crime, but that is not what is happening or happened. The greedy sleazebags that ran the banks into the ground cannot claim innocence through stupidity when catalogs of laws were broken.
Have you ever heard a greedy sleazebag bankster say “I am stupid and your money is gone because of it.”
Bill Black and Randy Wray have told us repeatedly that there is a crime wave emanating from Wall Street, but there is never a serious look at the criminality. The president of the United States has repeatedly said that no crimes were commited in the run up to the financial crisis. It was just a bunch of moneyhorny banksters with sharp elbows, that got a little out of hand. You know, guys you would spend a few hours with at a bar (upchuck to follow ). The problem is, that you would walk home because the banksters would steal your wallet. Good guys they are and all that.
I respectfully disagree with your sentiment that it is not a crime to be wrong through carelessness. If you drive a car carelessly it is a criminal offence. Even Dick Cheney had a few jokes made about him when he carelessly discharged his shotgun into someone’s face. We all know what would have happened to you or me had we done that.
You make a good point about punishing corporations and distinguishing between the executives that control the corporation and the corporation itself. How do you put a corporation, a ficticious person, in prison, when it is animated by it’s executives?