Are big banks getting picked on by politicians and regulators? Not surprisingly, the bankers think so. And in an empathetic column in their latest issue, the folks over at The Economist are feeling their pain.
The latest flurry of big settlements – including the $1.8 billion SAC Capital agreement announced today and JPMorgan’s massive, tentative $13 billion deal with a variety of federal and state agencies over mortgage securities sold during the crisis – is at the center of the editors’ argument. These, The Economist argues, underscore “just how ready authorities are to raise the whip hand and how quick banks are to pay up rather than go to court.” More troubling, The Economist says, is that the deals lack “any clear adjudication of what banks have done wrong, and therefore any guidance for setting things right.”
This is clearly a significant issue for both banks and regulators, with U.S. and European banks likely to end up forking over $100 billion in fines covering everything from violations on money laundering controls to penalties for clear missteps by banks, such as JPMorgan Chase’s “London Whale” scandal and the LIBOR-rigging debacle. And yes, as the magazine points out, at least in the short term the cost of the penalties will take some kind of toll on bank investors and even clients, eating into profits and possibly driving up the cost of providing services.
There’s another way to look at it, though: through the prism of the clawback. Now a feature of most compensation policies on Wall Street, clawback clauses give institutions the ability to yank back a large part of the bonuses paid to employees deemed to have been responsible for a loss due to reckless or unauthorized behavior. (Rohit Jha, the ETF trader allegedly fired by Credit Suisse in London this week after claiming that he lost $6 million of the bank’s money late last year in unauthorized trades, may well want to brace himself for just such an eventuality.)
The clawback idea gained traction in the immediate aftermath of the financial crisis as a way for financial institutions to deal with the unseemly spectacle of employees getting lavish compensation packages even as they steered their businesses to the brink of destruction. True, Dick Fuld, ex-CEO of Lehman Brothers, lost a chunk of his wealth in the aftermath of his firm’s collapse. Still, he was still able to launch a new M&A advisory firm and so far at least has been able to hang on to homes in Greenwich, CT., Sun Valley, ID, and Florida.
Why, then, are banks surprised by the idea that society – as represented by a variety of federal and state government agencies – is seeking its own kind of clawback?
Anyone puzzled by this may want to go back and take a look at the report published by the Financial Crisis Inquiry Commission and spend some time reviewing its conclusions: that the crisis was avoidable; that “dramatic failures of corporate governance and risk management” were a key cause of the collapse of Lehman and the near-collapse of the financial system itself; that there was “a systemic breakdown in accountability and ethics.” (The report didn’t let Washington off the hook, concluding that regulatory and supervisory failures set the stage for the crisis by undermining the stability of the system, while inconsistent policy responses made matters worse.)
Bankers and those who believe they are being victimized should calm down and rethink the matter soberly. On one level, how realistic is it that the government and its various regulatory agencies wouldn’t pursue their self-interest as aggressively as banks have in the past and continue to do today? That self-interest is demonstrating to taxpayers that the system is better managed and regulated – or at least that those who place it in jeopardy will pay, sooner or later. If there was fraud, should a takeover by another institution erase the misdeeds as if they had never occurred?
The government’s attempted clawbacks can only achieve so much, regardless of how many billions of dollars they generate. In some cases, the fines represent just a portion of the profits generated directly or indirectly from the misdeeds. What needs to take place on Wall Street to prevent any future such crisis from taking shape – five, 10, 20 or 50 years down the road – is a change in culture, and that’s something that no government entity can mandate.
I also do have to wonder whether the Justice Department and other agencies now negotiating the fine print of the $13 billion settlement with JPMorgan Chase would have played hardball quite as aggressively had CEO Jamie Dimon not emerged as a vocal opponent of regulation. Or if the London Whale scandal hadn’t ended up revealing the inadequacy of the bank’s internal controls and a rather unnerving degree of complacency on the part of senior management when the debacle first became public.
Whatever the government’s motivations, by all means, let’s call on regulators to be consistent, to be fair, to be judicious. Let’s urge them to be responsive to informal word that banks suspect trouble. That could prevent an institution from covering up a problem area in the same way a rogue trader tries to mask his losses.
At the same time, let’s not overdo the hand-wringing over the poor, poor banks. Dimon knew that there’s no free lunch on Wall Street: no institution gets the chance to supersize itself overnight at a discount price without having to incur some risk down the road. And I’m skeptical that the government’s efforts to hold JPMorgan Chase accountable for fraud connected with assets that it purchased will really result in banks being less willing to undertake similar transactions in a future crisis.
Banks, when offered discount prices on assets that will dramatically increase their market share, will make the same kind of reasoned and informed decision that Dimon did five years ago. It’s the nature of the beast.
