If the past few weeks are any indication, hubris, deception and amorality seem to permeate the financial services industry.
The latest example came Tuesday when U.S. lawmakers detailed a pattern of deceit and illicit activity at HSBC Holdings, Europe’s biggest bank. For years, the bank looked the other way as terrorists, drug cartels and other criminals used its far-flung operations as a conduit into the U.S. financial system, according to a Senate report. As Leopoldo Barroso, a top HSBC anti-money-laundering official told the bank upon his departure in 2008, the institution’s standard practice was to pursue “profit and targets at all costs” and it was “only a matter of time” before it faced criminal charges.
The roll call of alleged malfeasance at other banks is long. Investigators in Europe, Asia and the United States are piecing together a widespread conspiracy by as many as 16 banks to conceal the extent of their problems during the financial crisis — and boost traders’ profits — by manipulating the globally important London interbank offered rate, known as Libor. The probe has already snared Barclays, which paid about $450 million in fines and civil penalties.
JPMorgan Chase just reported losses of at least $5.8 billion from risky credit-derivatives trades that may have been intentionally mismarked by employees in its London office. Last week, the chairman of Peregrine Financial Group attempted suicide, leaving a note detailing two decades of embezzlement.
Unscrupulous behavior during and after the financial crisis, including the marketing of dubious mortgage-backed securities to unsuspecting investors and improper home foreclosures, is almost too voluminous to list. In each case, bankers put profits ahead of probity while regulators either ignored or failed to spot red flags. For the sake of the financial industry — not to mention the millions of people who work in it and the extent to which robust economies depend on it — banks and regulators will need finally to take some meaningful steps toward reform. If they don’t, what little confidence remains in the system will evaporate.
The good news is that regulators don’t need new tools, they simply need to make better use of those already at their disposal, including new powers in the 2010 Dodd-Frank financial reform law. Prosecutors should dust off anti-fraud statutes. Officials who may be tempted to point to Britain’s light-touch method of regulation as superior to the U.S. system should take note of the lawlessness that can result. And U.S. lawmakers should stop trying to starve regulatory agencies of the money they need to hire experts and acquire new technology to put Dodd-Frank into practice faster.
Perhaps most important, regulators must stop treating the companies they oversee like their buddies. A 335-page report by the Senate Permanent Subcommittee on Investigations highlights a decade of compliance failures by HSBC and accuses its primary regulator, the Office of the Comptroller of the Currency, of failing to sufficiently deal with repeated violations of the bank’s money-laundering controls. Problems at the bank were no secret: A 2005 Bloomberg Markets article documented HSBC’s ties to Iran, Libya, Sudan and Syria.
Last month, the OCC acknowledged it was unaware of the disastrous JPMorgan trades, even though 65 of its examiners were on-site at the bank. And the Commodity Futures Trading Commission failed to spot problems at Peregrine, despite reviewing its operations at least twice since 2006, according to a Bloomberg News report. CFTC Chairman Gary Gensler told lawmakers on Tuesday “the system failed.”
Banks should care about the public trust. Anger toward Wall Street continues to build, leading to increasing calls to break up the big banks. If for no other reason than self-preservation, financial institutions should create zero-tolerance policies for improper behavior and begin rewarding, rather than punishing, whistle-blowers.
If history is a guide, banks won’t do this voluntarily. It’s up to regulators to crack down. Criminal prosecutions would also go a long way toward deterring people from breaking laws in search of bigger profits and fatter bonuses. Shareholders, too, should demand change; they ultimately pay the cost for risky behavior that results in stiff penalties or a bank’s collapse.
No one can demand morality. But lawmakers and regulators can stop enabling bad behavior. Putting in place (or not blocking) the rules required by Dodd-Frank, including the Volcker rule, to prevent self-dealing and abuse of taxpayer money will go a long way toward redirecting Wall Street’s moral compass.