Mark Carney's new rule for banks: Don't be evil
What a horrible month to be a banker. Except, I suppose, for the millions in cash they pocket — although that cash suddenly seems a little dirtier than it did before.
Even Bank of Canada governor Mark Carney weighed in Wednesday, calling banking culture "deeply troubling," saying that bankers have to "substantially raise their game to levels of conduct that in any other aspect of life, are expected."
You can see his point.
This week David Bagley, head of compliance at the "pervasively polluted" HSBC, took a dramatic exit while testifying to a committee of the U.S. Senate. The bank, Europe's largest, has been laundering billions of dollars in Mexican drug money, a Senate investigation showed.
Paraphrasing Oscar Wilde, to lose one banker may be regarded as a misfortune, but to lose two seems like carelessness.
A week ago it was Bob Diamond, head of Barclays, forced to resign after that bank was accused of fixing interest rates in its favour.
And although he has so far refused to resign, Jamie Dimon, the boss of JPMorgan Chase, outspokenly opposed to better regulation, revealed that losses due to bad bets on derivatives had crept from the $2 billion that the bank had first revealed, up to $5 billion. Some say the final tally could soar to $9 billion.
It is an interesting irony that as of this very week, all these problems with the banks were supposed to be on the way out.
Exactly two years ago, the United States government created new legislation cracking down on banks. Passed by Congress and Senate, President Barack Obama signed the Dodd-Frank Act into law on July 21, 2010, with much back-patting and hand-shaking.
One of the provisions of that law, the Volcker Rule, was supposed to go into effect two-years-to-the-day later — in other words, this Friday.
But that looks unlikely. The people in charge of getting that rule up and running say writing rules for banks has turned out to be just too complicated.
But in the absence of harsher rules, Mark Carney is not the only one who thinks banking culture has to raise its game. Others would go further.
A surprising number of people I speak to think banks are evil. If you don't believe me, search "banks are evil" in your favourite search engine. As someone who works in business news, I prefer a more nuanced approach. On the other hand, I have sympathy for their viewpoint, especially just now.
Laundering drug money is a very nasty crime. It allows the people who cut off heads and pervert democracy to buy nice villas. Money laundering is evil because it is complicity in evil.
Fixing interest rates in your favour, as Barclays (and, apparently, several other big banks) did, is perhaps a lesser evil. No heads were chopped off. But as Carney said Wednesday, this was not just a one-time mistake, but rather "active, conscious, repeated manipulation."
It was taking advantage of an honour system to make yourself richer, which is also pretty nasty. It has the same flavour as dipping your hand in the till at the church picnic. Evil people do that.
The third example, taking huge trading losses while gambling on corporate derivatives, sounds a lot like what we expect banks to do these days. But what does it say about banking culture if we expect them to gamble? There are also now reports that the people who lost the money tried to cover it up.
Gambling is what brought Long Term Capital Management down in 1998 and arguably sowed the seeds of our current economic crisis, when Federal Reserve chairman Alan Greenspan slashed interest rates to prevent what some feared would be a widespread market meltdown.
Gambling — on credit default swaps, on bundles of mortgage debt — was what brought down AIG and Lehman and extended the turmoil of the 2008 economic collapse.
Gambling is no crime, but it is a job for hedge funds, not banks that are too big to fail.
It sometimes feels as if the great international banks have been taken over by pirates. Or as John Pender put it the other day, How traders trumped Quakers.
Pender's idea applies specifically to Barclays, a bank famous for being run by God-fearing, honest, teetotalling members of the Society of Friends, or Quakers.
But it applies to the entire banking system, built by severe men in black suits, disciplined Scots and accountants and rule followers, now run by a generation who made their names and fortunes by taking risks in the era of broken rules when the prevailing attitude was that Greed is Good.
A question of culture
To a man with a hammer, everything is a nail, which is probably why U.S. legislators thought they could fix banking with legislation. I hope they keep trying. But none of these three cases would have been solved by the expected new rules.
Money laundering is already against the law everywhere. So is conspiring to falsifying interest rates. Under the watered-down Volcker rule, proprietary trading of the type conducted by JPMorgan Chase's gambling traders would have been perfectly legal as "hedging."
Banks don't need to be evil to get their job done. Banks already have a licence to print money, given to them by us through our governments. They are allowed to hold our money and then lend out more than 10 times more money than they hold. They are honoured as essential institutions of capitalism. They are allowed to become too big to fail and we support them with tax money when they do.
In their headlong push to find new ways to make more and more money — money for the bosses' high salaries and money for individual traders, money for shareholders — banks have strayed too far from their institutional roles. For some people it is difficult to give up evil profits as a cost of being good, but as Carney would say, in any other aspect of life, that is expected.
As Carney observed, what needs changing is not just laws, but culture. Banks need to be trustworthy. They must be seen to be trustworthy.
I have a suggestion. Maybe Mr. Carney can start the process here in Canada and spread it around the world in his job as head of the Financial Stability Board. He must ensure that as their last evil act banks steal Google's slogan: Don't be evil. And they must inculcate it at every level of their organization.