Big Bank Bashing – Waahhh!

Posted on by Phil Querin

Crying BabyOn January 28, 2014, Sergio Ermotti, chief executive of UBS AG, was fed up.  While visiting swanky Davos Switzerland [referred to in a New York Magazine article as “…the annual self-congratulatory kaffeeklatsch known as the World Economic Forum”] he vented. Like Howard Bealle in Network, he was ‘mad as hell and not going to take this anymore!’

What was the object of his angst?  He felt that his company was being unfairly picked on.  According to the article:

Life is hard enough, and I think this constant lecturing on ethics and on integrity by many stakeholders is probably the most frustrating part of the equation. Because I don’t think there are many people who are perfect,” Mr. Ermotti said in an interview last week at the World Economic Forum in Davos, Switzerland. “We are far from being perfect…but it’s not going to be very helpful to be constantly bashing banks.

My Response

Mr. Ermotti, no one expects you or your company to be “perfect.” But the choice is not one of having to choose between “moral perfection” [as in being free of all defects or flaws] on the one hand, and “moral vacuity” [as in a complete absence of any moral code] on the other.  How about something in between?  Just right – like Goldilocks.  Most responsible people, both in their personal and professional lives, hew to a middle, avoiding both rampant immorality and gnostic self-denial.

Surely you know the regulatory rules. Rather than blaming your troubles on “rogue traders,” how about hiring personnel who respect the rule of law?  How about developing a top-down business culture that seeks to work within the system, rather than gaming it?  I know it’s hard, since your industry [I respectfully decline to call it a “profession”], though federally regulated, has no internal “code of conduct” or other strictures, the violation of which could result in the revocation of a license.  Doctors and lawyers must be licensed. Bankers do not. Why?  Because the law does not impose up bankers any fiduciary duties, such as honesty, good faith, and fair dealing. The litmus test for Big Bank decision-making is not whether the result is moral or ethical.

Rather, there exists a two-pronged synaptic analysis that flows through the Big Banker Brain: (a) Is it forbidden by the applicable regulatory guidelines; and if so, (b) Can those guidelines be sufficiently obfuscated so as to permit the conduct?  Even if caught, no one goes to jail; the Big Banks are not charged with federal crimes, the worst that can happen is a large fine.  But so long as the fines are less than the rewards reaped from the rape – and they almost always are – there appears to be a long term financial benefit in flaunting the law.  Besides, the fines are essentially paid from the shareholders’ equity, not the execs’ bonuses.

I’m a lawyer and not a banker.  I’ve never worked in a financial services company.  But for 25 years I was a partner in a large international law firm.  We had in each office, one or more partners in charge of “Quality Assurance” which was a euphemism for a risk manager. There were always the occasional outliers, but those lawyers never lasted long at the firm.  If our firm ever had the never-ending perp walk of serial violators such as we’ve seen at the Big Banks, it would never survive. The rest of the legal community and corporate clients would abandon them; recruiting good new lawyers would dry up, and the firm would implode in a matter of days. Bad publicity goes viral.

With Big Banks this does not seem to occur. Reputational damage for unethical conduct may temporarily affect stock price, but not corporate longevity.  Although several major banks, lenders, and investment companies failed during the financial crisis, circa 2005 – 2008, they did so for financial reasons – or more correctly – greed with heavy doses of hubris. Countrywide, Bear Stearns, Lehman Bros., Washington Mutual and Merrill Lynch, are some of the best known inhabitants if the Graveyard of Big Banks.[1]  They were not brought down by public disclosures of unethical behavior resulting in public condemnation or regulatory sanctions. [This  is not to say they didn’t engage in unethical behavior – they did, but the rest of the industry and its regulators ignored it at the time.] Remarkably, these miscreants were survived by many of their peers whose ethical lapses may have even surpassed their own. Only after the crisis subsided, did the politicians and regulators decide to take action. By then, it was the survivors who had to answer for their reckless conduct during the easy money days.

What made people bristle – and still does, is that the survivors, including Mr.  Ermotti’s virginal UBS, were all bailed out by the American Taxpayer. The reason?  Because there was a perception by the federal government that the Big Banks were too systemically important to be permitted to fail.  In other words, the fear was that once a single Big Bank failed, it would cause a ripple effect of failures throughout the financial world. Sadly, that may have been true. While there may have been no honor among thieves, there certainly were financial entanglements, so if one institution failed, owing billions to another, it could threaten the creditor bank as well.  [This is why the feds bailed out AIG, the insurance conglomerate – so it could pay off the credit default swaps with the likes of  Goldman Sachs. See the story here.] 

But the reason for the reckless conduct of the Big Banks circa 2005-2007/8 is directly related to the fact that they were permitted, via the repeal of the Glass-Steagall Act in 1999, to engage in risky business practices that far exceeded what the banking industry was originally chartered to do.

One would think that the near death experience of the resulting financial collapse would have prompted those in Washington to reinstate Glass-Steagall, thus forcing the Big Banks to spin off their investment banking side, e.g. into “good banks” and a “bad banks.”  That way, the Bad Banks could continue operating like it was still the Old, Old West, without endangering the Good Bank’s depositors’ moneys.   

To his benefit, the Journal reports:

The 53-year-old Mr. Ermotti, who became CEO in late 2011 after the abrupt resignation of the bank’s previous boss, has been trying to clean things up at UBS. He has shrunk the bank’s balance sheet and tried to reduce the importance of its loss-prone investment-banking arm. And he is trying to instill a new culture in the bank’s roughly 60,000 employees around the world.

A “new culture.”  Hmmm. Some folks might say that that’s like trying to instill compassion in a scorpion.  To sting is in its nature.[2] Lest one think that a “new culture” has overtaken UBS, the Journal reports that:

The bank is under investigation by Swiss, British and U.S. authorities in connection with the potential manipulation of currencies. UBS has suspended at least one employee.

Mr. Ermotti’s response:

It is frustrating to see these kinds of issues are popping up,” Mr. Ermotti said of the currencies investigation. ‘We try to the extent possible to take the lessons learned from past issues’ and use them to avoid future mistakes.

Finally, comes Mr. Ermotti’s “moral equivalency” argument; one that was invented when the first 11-year was old caught with his hand in the cookie jar and defended himself by exclaiming ‘But Johnnie does it too!’

Quoting Mr. Ermotti:

When I look around, I don’t think there are many banks that can come to us and say they are the example that should be followed,” he said. *** Speaking of a broader group of industry “stakeholders,” including regulators and politicians, Mr. Ermotti said: “None of them can be overly critical.

Lastly, perhaps one of Mr. Ermotti’s most memorable non sequiturs: ‘It’s not because you’re a banker that you’re a criminal.’ When you have to publicly proclaim, “I am not a crook,” like Richard Nixon did during Watergate, you’ve lost the moral high ground.

I suggest that Mr. Ermotti and his ilk should hunker down and buck up. Change the culture from the inside; set an example; and quite whining. Be tempted by virtue instead of vice.  When you have done what is necessary, the public will recognize it, and stop their Big Bank Bashing. Until then, whining from some luxury hotel in Davos, Switzerland, will not further your cause.

[1] I am taking poetic license.  Some of these companies were absorbed into the bowels of larger banks.

[2] See, Aesop’s fable, The Scorpion and the Frog.

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