Bethany McLean

The crackdown on bank misbehavior masks a troubling reality

Bethany McLean
Aug 7, 2013 19:45 UTC

“Ex Goldman Trader Found Guilty for Misleading Investors.” “Bond Deal Draws Fine for UBS.” “JPMorgan Settles Electricity Manipulation Case for $410 million.” “Deutsche Bank Net Profit Halves on Charge For Potential Legal Costs.” “US Sues Bank of America Over Mortgage Securities.” “Senate Opens Probe of Banks’ Commodities Businesses.” “US Regulators Find Evidence of Banks Fixing Derivatives Rates.” “Goldman Sachs Sued for Allegedly Inflating Aluminum Prices.”

So goes a sampling of headlines about the banking industry from the past week — yes, just one week. We seem to be living in an era where bankers can do no right. I can’t put it any better than a smart hedge fund friend of mine, who upon reading the news about the $410 million that JPMorgan paid to make allegations that it manipulated energy markets go away, sent me an email. “I am a bank friendly type,” he said. But, he added, in typically terse trader talk, “Something structurally amiss when so much financial activity is borderline.”

By one measurement, the problem has gotten worse by an order of magnitude in recent years. In the annual letter he writes to shareholders, Robert Wilmers, the chairman and CEO of M&T Bank, has started keeping track of the fines, sanctions and legal awards levied against the “Big Six” bank holding companies. In 2011, those penalties were $13.9 billion. In 2012, they more than doubled to $29.3 billion. Wilmers writes that the past two years represent the majority of the cumulative $52 billion in charges, from 236 separate actions in eight countries, over the past 11 years. Wilmers also cites a study done by M&T, according to which the top six banks have been cited 1,150 times by the Wall Street Journal and the New York Times in articles about their improper activities. Perhaps not surprisingly, the biggest bank, JPMorgan, accounts for a sizable chunk of all this. According to a report by Josh Rosner, a managing director at independent research consultancy Graham Fisher & Co, JPMorgan has paid $8.5 billion in fines between 2009 and 2012, or about 12 percent of its net income over that period.

The results aren’t in for 2013 yet, but so far, the tune is more of the same. In addition to all of last week’s news, there’s the $8.5 billion that 13 banks agreed to pay to address allegations of robo-signing. Barclays, while not a “Big Six” bank, was also ordered to pay $488 million by FERC; that bank, along with RBS and UBS, has also agreed to pay a combined settlement that is well over $1 billion to settle charges that they manipulated the key interest rate called Libor.

How you explain those numbers depends on where you sit. In his letter, Wilmers embraces the argument that a predisposition to wrongdoing is now built into the system, in part because of the decline of traditional banking and the merger of commercial and investment banking. Money center banks, which are desperate to pump up their profits, have increasingly invested in things they know nothing about, whether it be emerging market debt or subprime mortgages. At the same time, Wall Street firms have pushed the envelope in developing newfangled ways for their customers to lose money. (Oops — I meant newfangled ways to help “markets remain efficient and liquid.”) Then, commercial banks have used their balance sheets to inject steroids into Wall Street’s products. Or as Wilmers writes, “One’s cash from deposits and the other’s creativity led to a symbiotic relationship, enhanced by the closeness of geography.”

The meltdown explanation that melts away

Bethany McLean
Mar 19, 2012 17:50 UTC

Although our understanding of what instigated the 2008 global financial crisis remains at best incomplete, there are a few widely agreed upon contributing factors. One of them is a 2004 rule change by the U.S. Securities and Exchange Commission that allowed investment banks to load up on leverage.

This disastrous decision has been cited by a host of prominent economists, including Princeton professor and former Federal Reserve Vice- Chairman Alan Blinder and Nobel laureate Joseph Stiglitz. It has even been immortalized in Hollywood, figuring into the dark financial narrative that propelled the Academy Award-winning film Inside Job.

As Blinder explained in a Jan. 24, 2009 New York Times op-ed piece, one of what he listed as six fundamental errors that led to the crisis came “when the SEC let securities firms increase their leverage sharply.” He continued: “Before then, leverage of 12 to 1 was typical; afterward, it shot up to more like 33 to 1. What were the SEC and the heads of the firms thinking?”

A banking strategy that pleases no one

Bethany McLean
Feb 24, 2012 19:34 UTC

Ever since the $25 billion settlement over foreclosure abuses between five of the nation’s biggest banks and the state attorneys-general was announced, there’s been a steady drumbeat of naysayers who’ve asserted the deal does more for the banks than it does for homeowners. And barring some happy accident in which the settlement somehow inspires banks to behave, they’re probably right: In comparison with the estimated $700 billion difference between what people owe on their mortgages and what those homes are actually worth, $25 billion is peanuts.

But the problem isn’t that the settlement is part of some grand plan by the government to help out the banks. Rather, the problem is that the government doesn’t seem to have a grand plan for the banks.

For all the current and well-deserved bank bashing, few question that a well-functioning economy is predicated on a well-functioning banking system. And few question that confidence is a critical ingredient. So then the issue becomes: What kind of banking system do you want to have, and how do you inspire confidence in it?