The sequel to the financial crisis is under way, and there are no prizes for guessing who has been cast in the role of villain.
It has been a very bad few weeks for banking. The walk of shame has included employees tarred as rate-manipulators (Barclays PLC), money launderers (HSBC Holdings PLC), rogue traders (JPMorgan Chase & Co.), and outright fraudsters (Peregrine Financial Group Inc.).
The drumbeat of controversy is far more than an image problem for the banking industry. Four years after the financial crisis began, the pile-up of bad behaviour is feeding a sense that something remains deeply awry inside banks, despite efforts by governments to reform them.
The scandals are setting the stage for a new round of banker bashing, especially in the U.S. as the campaign for the presidency heats up.
Bankers fear that regulators will also turn up the heat, and if further misconduct emerges, push for deeper changes. in the industry. In particular, the outcome of the sprawling probes into a benchmark interest rate will speak volumes about how wrongdoing gets punished in the post-crisis era.
Even for a public hardened to revelations of Wall Street misdeeds, the recent spate of scandals is a lot to absorb. One sign of the times: Eliot Spitzer, the former governor of New York, recently compared the industry to Penn State, the university where a culture of impunity shielded a child molester.
But don’t take the word of the one-time Sheriff of Wall Street, who of course has had his own very public ethical lapses. Even finance’s top executives are acknowledging how low their reputation has sunk. The furor over the manipulation of a key global interest rate “is once more undermining the integrity of a system that is already undermined substantially,” Lloyd Blankfein, chief executive officer of Goldman Sachs Group Inc., said on Wednesday. “There was this huge hole to dig out of in terms of getting the trust back, and now it’s just that much deeper.”
The more benign interpretation is that the latest instances of misconduct are simply the airing of dirty laundry accumulated during the financial crisis. Most of the problems now surfacing, experts note, didn’t start in the past year or two. What’s more, regulators and authorities are under pressure to adopt a more aggressive tack when faced with possible wrongdoing.
The negative view is that one of the issues that has emerged – the manipulation of a global benchmark interest rate – strikes at the very heart of the capitalist system, even if the behaviour in question is several years old. The evidence so far shows that traders falsified their submissions to the survey that generates the London interbank offered rate, or Libor, which is in turn used to price trillions of dollars of financial products, from derivatives to mortgages to credit card loans.
They did so not only to make their banks look healthier in the depths of the crisis, but also to goose the trading profits of their friends and colleagues. As one beneficiary wrote in a grateful e-mail, “Dude. I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger.”
On Bay Street, the view tends to be that the latest scandals are primarily a problem for New York and London. The one Canadian bank that submits estimates for the Libor survey – Royal Bank of Canada – has said it did nothing wrong. It is part of the investigation by British authorities. Canada’s Competition Bureau is probing the activities of six foreign banks as part of the broader inquiry.
But if the Canadian banking industry thinks it can insulate itself from the backlash – think again, says Michael King, a former senior economist at the Bank of Canada and the Bank of International Settlements in Basel, Switzerland, and now an assistant finance professor at the Richard Ivey School of Business at the University of Western Ontario. Mr. King says the fallout will inevitably tarnish the many “decent and hard-working” people in the financial sector. “But at the same time, at the pace this is going, it is hard to believe that there is such a thing as an honest banker any more.”
The latest revelations are widening the already considerable chasm between Main Street and Wall Street. With the U.S. election fast approaching, the banks remain an irresistible political target, particularly for Democrats. A Gallup poll conducted last month showed that public confidence in U.S. banks had slipped to a 40-year low, and down by more than half from pre-recession levels.