What is wrong with big banks?

A few stories paint a clearer picture for me – cheating your regulator, some regulators getting frustrated with the number of issues, the disconnect from personal responsibility, and bringing psychology into the analysis.

Why are there sooooo many scandals involving banking?

There seem to be so many banking fiascos in the last few years. It might be that I’m interested in banking. Or it could be that by blogging I have realized what was already going on.  Or I could have an unconscious bias so I see what I’m looking for (that would be the confirmation bias heuristic).

Yet that isn’t all of it.

I read of a FCPA settlement with a manufacturer I like.  Realized from pondering the article that I don’t recall having seen any FCPA settlements for manufacturers. Don’t recall seeing manufacturers negotiating huge settlements with the Department of Justice. Maybe confirmation bias again.

(Rate cooking and money laundering for banks and FCPA violations for manufacturers are separate issues and separate industries, but I see a connection reinforcing the idea something is wrong in banking.)

Seems like the overwhelming majority of fiascos drawing huge settlements are banks. Not all, just the vast majority.

Something is wrong.

Cooking the rates used to pay your regulator

The banking fiasco of the week was Lloyds cooking the rate they used to pay the British central bank for emergency funds at the peak of the financial crisis.

They will pay only a one-third of a billion dollar fine, so this is a small potatoes for a banking scandal. WSJ reports Lloyds Pays $370 Million to Settle Rate Probe.

Really? Cheating your regulator?

That’s not very bright.

What is wrong with banking?

Next day I read a great article on point – New York Times – Why Can’t the Banking Industry Solve Its Ethics Problem?

Extremely short recap:  There is a major, systemic ethics problem in the banking industry worldwide.

The author points out a problem I’m having – it’s hard to keep straight all the scandals in banking and who got what multibillion dollar fine today for which issue and which multibillion issues are still in negotiation. There are so many issues and so many banks and so many numerals with the word billion after them. Probably ought to create a spreadsheet to help me keep track.

Even regulators who grew up in the industry are getting frustrated with the low integrity that keeps surfacing. The article says two in particular are saying so publicly.

One factor is a disconnect between ethical behavior and legal compliance on one hand compared to individual motivations.

The author introduces us to the concept of staffing being a short-term capital issue: if you personally get in trouble, you can jump to another bank.

Both a bank’s financial capital and its human capital are short-term propositions, Mr. Posner wrote, meaning both investors and employees can readily jump to a better opportunity at a moment’s notice. “Any firm that has short-term capital is under great pressure to compete ferociously, as it is in constant danger of losing its capital to fiercer, less scrupulous competitors, who can offer its investors and its key employees higher returns,” he wrote.

It’s a century old problem

One of the jaw dropping lessons for me in the Credit Suisse case involving laundered money is that the bank has actually constructed the legal devices, entities, and paperwork customers used to criminally launder illegal funds.

They provide turn-key money laundering. One-stop shopping for tax evasion.

They have been doing it intentionally. They have subsidiaries set up to fabricate the needed documents.

They have been doing this since 1910.

1910.

Since before there was even a U.S. income tax to evade, Credit Suisse has been laundering money.

(By the way, my comments are in absolutely zero danger of being considered libel because the bank agreed to those facts in their settlement. They admitted those things, in writing, with a signature.)

As an aside, how can a CPA possibly audit a bank which has such a deep-seated lack of integrity? How do you incorporate to your risk assessment analysis that your client has a systemic, entity-wide mindset of cheating other governments?

Scandals won’t stop while there is a lack of personal responsibility

The net effect of a nine billion dollar fine against PNP Parabis is that the stockholders won’t see an increase in their dividends, as had been expected.

We just got a $9B fine? Eh. No problem. We just won’t increase dividends.

Cook interest rates so you can shortchange your regulator?

No prob. Just a third of a billion. A mere rounding error on the provision for fines this year. Pull something out of the allowance-for-loan-loss cookie jar as an offset.

There is a disconnect of personal responsibility. If you cheat, and if your department does well, and if you *don’t* get caught, then you get a superb bonus.

If you cheat and get caught, then you lose part of your bonus and the stockholders pay a big fine. You walk and the stockholders pick up the tab.

Your bonuses of the last decade won’t get clawed back. You won’t go to jail.

I don’t think the banking scandals will stop until the end of each incident is lots of staff in the bank saying “uh, oh. I gotta’ get a criminal attorney” instead of “meh, the stockholders will have a bad quarter.”

Look to the psychology

Here’s a third link that I will need to develop later.

We need to bring in psychology to anti-fraud issues in general. This also applies to the banking industry worldwide in particular.

Jonathan Marks has a superb paper, Putting the Freud in Fraud.

He looks at the behavior elements and the environmental elements of fraud.

If you are an auditor, you ought to read the article.

I’ll try to come back to it soon. It will complete the story I touched on in this post.

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