THE PELOTON AND THE BAD BOYS OF BANKING
By Steven Woodruff
Neither the big shots at JPMorgan Chase nor their counterparts at Barclays in London understand that there is a full blown honesty crisis in the banking world. You would think that with all the negative attention that banks have weathered since the 2008 debacle that they would be playing their hands with a lighter touch. But these guys are weak in the restraint department. In fact, banks don’t even have a department of restraint. Maybe they should be considering one so that it is not always the government that has to rein them in, and in doing so, suffer the standard criticisms of overreaching and big government meddling.
Two Barclays managers put it this way in trying to describe the unique stylistic properties of the ethical dodge they are now embroiled in with the Britain’s Financial Services Authority. “I would sort of express us maybe as not clean, but clean in principle”. Another said: “We’re clean but we are dirty-clean, rather than clean-clean.” And so goes the “sort of, maybe” hair splitting in which the banks try to stake out a position in some brave new world where the expectation of deceit passes as the new, acceptable standard of banking “du jour”.
Barclays’ CEO, the hard charging Robert E. Diamond Jr., tried to put it all into perspective by chalking it up to a misunderstanding between banks and the government’s regulatory agency. He noted that Barclays was, in fact, reporting interest rates to the regulators as required. He neglected to mention that the rates he was reporting were manipulated, phony baloney versions–the “dirty-clean”. Barclays has recently sustained a 450 million dollar fine for the interest rate manipulation going back to the 2008 crisis. The scope of the fixing includes at least 10 other big banks including Chase, Citi and UBS. The interest rates, which were subject to Mickey Mouse accounting to make heavy borrowing look more sustainable, represents a falsification affecting hundreds of trillions of dollars-worth of trading transactions.
Over at JPMorgan Chase, financial managers are sorting out their own version of the “dirty clean”. By leading Chase clients to buy financial instruments created by Chase itself, they passed up better opportunities to make deals for their clients which were cheaper to purchase and which earned more as well. Simply put, they acted like salesmen for the house rather than actual financial managers. By pushing their own products over better performing financial instruments the “salesmen” at Chase made money for the bank and drove up fees for themselves in doing so. As one of the JPMorgan advisers said, “I had to be a salesman, even if what I was selling wasn’t that great.” Fees for the sales amounted to 1.6 percent in a market where one percent was closer to the industry norm.
What is remarkable is not the extent of the cheating –we have come to accept it as part of modern, high-flying and weakly regulated investment practice–but the fact that banks are still looking for palatable ways to explain away the lies to a public weary of the cheating and the ensuing financial catastophe. The disadvantageous manipulation of Libor interest rates has affected individual mortgages, student loans, and credit card services, sovereign wealth portfolios, pension funds, and municipal investment portfolios. The litigation against the banks is starting to queue up like planes on fogged-in runways at JFK.
When asked by a British Parliamentary Committee if the interest rate fixing had stopped, the Financial Services Authority banking regulator, Paul Tucker replied, ”I can’t be confident about anything after learning about this cesspit”. The cesspit he is describing is the rising tide of corruption in the corporate world which now has the power to sink whole cities and even nations. Here are some of the sorry statistics. Since 2001, the U.S. has slipped from 14th to 26th place on the index of corporate transparency in the cheating arena. The UK came in at 20th. Denmark finished at the top. Not surprisingly, the Danes have weathered the banking crisis far better than most.
But it’s not just the banking world suffering a crisis of faith. In case you haven’t been following the disheartening cycling news, it looks like Lance Armstrong is about to be disinherited for doping his way through his Tour de France appearances while playing his own version of “Beat The Regulators”. In the peloton, cyclists ride in a phalanx until a chosen rider breaks away for individual glory. While the bankers and the fixers break for the big money, the rest of us in the peloton are left holding the bag in a race we never really had a chance of winning. In banking and in the peloton, it may be be all for one but never one for all.