Fining Bankers, Not
Shareholders, for Banks’ Misconduct
The London headquarters of
Barclays. The bank and Credit Suisse agreed to pay a combined
$154.3 million to settle charges that they misrepresented their
private stock trading services.
Ho-hum, another week, another multimillion-dollar settlement between
regulators and a behemoth bank acting badly.
The most recent
version involves two such financial institutions,
Credit Suisse. They agreed last Sunday to
pay $154.3 million after regulators contended that their stock trading
platforms, advertised as places where investors would not be preyed on by
high-frequency traders, were actually precisely the opposite. On both banks’
systems, investors trying to execute their transactions fairly
As has become
all too common in these cases, not one individual was identified as being
responsible for the activities. Once again, shareholders are shouldering the
costs of unethical behavior they had nothing to do with.
column from Gretchen Morgenson examining the world of finance
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could not be clearer: Years of tighter rules from legislators and bank
regulators have done nothing to fix the toxic, me-first cultures that
afflict big financial firms.
at last awakening to this reality. On Jan. 5, for example, the Financial
Industry Regulatory Authority, a top Wall Street cop, announced its regulatory
priorities for 2016. Among the main issues
in its sights,
the regulator said, was the culture at these companies.
“Nearly a decade
after the financial crisis, some firms continue to experience systemic
breakdowns manifested through significant violations due to poor cultures of
compliance,” said Richard Ketchum, Finra’s chairman. “Firms with a strong
ethical culture and senior leaders who set the right tone, lead by example and
impose consequences on anyone who violates the firm’s cultural norms are
essential to restoring investor confidence and trust in the securities
behavior — as opposed, say, to imposing higher capital requirements — is a
complex task. And regulators must do more than talk about what banks have to do
to address their deficiencies.
Andreas Dombret is a member of the
executive board of the Deutsche Bundesbank, Germany’s central bank, and head of
its department of banking and financial supervision. In an interview late last
year, he said he was determined to tackle the problem of ethically challenged
doesn’t change, banks will not be trusted and they won’t be efficient in their
financing of the real economy,” he said. “A functioning banking system must be
based on trust.”
Mr. Dombret is a
regulator who knows banking from the inside, having held executive positions at
J.P. Morgan and Bank of America.
have codes of ethics, Mr. Dombret said, but they often exist only on paper.
help encourage a more ethical approach by routinely monitoring how a bank
cooperates with its overseers, Mr. Dombret said.
“How often is
the bank the whistle-blower?” he asked. “Not only to get a lesser penalty but
also to show that it won’t accept that kind of behavior. We are seeing more of
have other tools to curb dubious activities, he said. One idea is to increase
the capital requirements of banks that are found to have violated rules and laws
repeatedly. That not only enhances the safety of its operations but also imposes
a real cost on future profits.
“If there was a
series of misconduct, would that require increasing capital or asking for more
equity?” Mr. Dombret asked. “We have to think through how you would penalize
proposal comes in a new book by Claire A. Hill and Richard W. Painter,
professors at the University of Minnesota Law School. In
“Better Bankers, Better Banks,” they argue
for making financial executives personally liable for a portion of any fines and
fraud-based judgments a bank enters into, including legal settlements.
call this covenant banking. And it looks a lot like the kind of personal
liability that was a fact of life among the top Wall Street firms when they were
With their own
money at risk, partners of Salomon Brothers, Lehman Brothers and Goldman Sachs
were much more careful about their business dealings. When these firms became
public companies funded more by outsiders’ money, that self-discipline
“In the old
days, because a partnership paid the fine, it would all come out of the
Mr. Painter said in an interview. “We’re
not going to roll back the clock, but what we can do is come up with a
contractual agreement in the compensation package that mimics some of that
contains a crucial element, requiring the best-paid bankers in the company to be
liable for a fine whether or not they were directly involved in the activities
that generated it. Such a no-fault program, the professors argued, would
motivate bankers not only to curb their own problematic tendencies but to be on
the alert for colleagues’ misbehavior as well.
This would help
instill a culture, the law professors wrote, “that discourages bad behavior and
its underlying ethos, the competitive pursuit of narrow material gain.”
Putting such a
covenant in place would also help eliminate the problem of banking regulators
who become captured by the institutions they are supposed to police. “Those in
the best position to choose conduct that is appropriate may not be regulators
but, rather, bankers with a stake in the bank,” the professors wrote.
aren’t willing to institute a system involving personal liability, regulators
and judges could require it as part of their settlements or rulings,
Ms. Hill said in an interview. “Something
like covenant banking could be included in nonprosecution agreements, for
example,” she said, or a judge overseeing a case in which a company is paying
$50 million could require individuals to pay $10 million of that personally.
could give a company the choice of a far lower fine if it were to be paid by
managers, not shareholders. A company choosing to pay the higher fine and
billing it to the shareholders would have some explaining to do, Mr. Painter
While the idea
of a covenant is centered on banking, it could easily expand to other
businesses. But the focus on finance is justified, Ms. Hill said.
“We don’t take
the position that this should only be about banks,” she said. “But banks can do
huge damage, and we have seen this ethos in the industry that cries out for
regulations and billions in fines levied on financial firms have had little
impact on banking culture, as the Barclays and Credit Suisse cases make clear.
It’s high time to up the ante.
A version of this article appears in print on February 7, 2016, on
page BU1 of the New York edition with the headline: Fixing Banks by
Fining the Bankers.
© 2016 The
New York Times Company