What was most striking about the foreign exchange scandal that exposed more sleazy behaviour among the world's biggest banks was not the size of the fines – $4.3-billion (U.S.) – or the crass chat room banter among the traders as they plotted their rip-off schemes; it was the timing of the sleaze. The boys (the transcripts didn't reveal any females) were in full currency-rigging mode even after another bank scandal, the Libor interest rate stitch-up, was making page-one news.
The Libor scandal, in which banks were hauling in illicit profits by inflating or deflating the London interbank offered rate, was well known by mid-2012 and certainly an open secret several years earlier. But the firings and enormous fines that went with the settlements obviously had zero deterrent value. The trading floor controls promised by the banks turned out to be wholly inadequate. No wonder the currency traders, defiantly and arrogantly, were able to keep their scams intact for so long.
I, for one, do not think the manipulation of the daily 4 p.m. London currency "fix" was a hanging offence, since these greed heads were not risking the health of the banks that employed them (unlike the 2008 subprime disaster, which almost destroyed the global banking system). But it did prove that the culture of corruption in the banks is a) apparently fully intact in spite of the CEO protests to the contrary b) immune to fines and c) tolerated by shareholders even though the fines, in effect, are paid by them.
So, if fines and the odd firing are no deterrent to bad bank behaviour, what is? The obvious answer is shareholder rage. The trouble is, shareholders are not enraged. They have not grabbed pitchforks and torches and stormed CEOs' houses when the multibillion-dollar fines are paid to secure settlements. Instead, they meekly accept the fines as if they are a cost of doing business, a sleaze tax, if you like.
In some cases, the bank shares actually rise when the fines are announced. The reason? Because in each of the settlements, the fines could have been far worse and, in no case, have the penalties threatened to put the banks out of business. The era of destroying terminally vice-ridden companies is, apparently, long gone. The last time that happened was in 2002, when Arthur Andersen, one of the Big Five accounting firms, was convicted of obstruction of justice for shredding documents in the Enron case. Some 85,000 employees eventually lost their jobs. Regulators and the governments that employ them no longer have the appetite for collateral damage in the form of massive job destruction.
So if fines don't work, and regulators and government prosecutors won't put the most corrupt companies out of business, what is needed to clean up the banks? That's easy. Toss the bastards in jail or close the offending individual bank business for a few months or a year. That would hurt. UBS, which got hit with U.S., British and Swiss fines for currency-market rigging, has almost 11 per cent of the $5.3-trillion-a-day foreign exchange market.
Since the 2008 financial crisis, whose fix-it costs to taxpayers around the world totalled trillions of dollars, not a single bank CEO has been sent to the slammer to contemplate his bank's sins, even though doing so would be an instant crowd pleaser. To be sure, a lot of lower-level bank managers and traders have been pushed out the door, with or without their bonuses, and a few got hit with criminal charges (such charges are possible in the currency-rigging case). But that was pretty much it. Executives at BNP Paribas were the only ones who were truly scared and even they managed to escape.
In June, the bank itself, but not any executives themselves, pleaded guilty to criminal charges of violating sanctions imposed against Sudan, Iran and Cuba. It paid a fine of $8.9-billion and quietly terminated a few employees. Jean-Laurent Bonnafé, who has been a member of the bank's executive committee since 2002, and CEO since 2011, kept his job.
Unless senior executives are put on criminal trial or, at a minimum, marched out the door in shame, shorn of their lavish bonuses and corporate golf-club memberships, the rotten culture of the banks will not change. Why would it? The traders in the currency scandal who worked for HSBC, Citi, UBS and other biggies decided that the chances of them getting caught were minimal and kept going. And if they were to get caught, it would be the bank – that is, the shareholders – not them, who would be on the hook for fines worth fortunes.
The bank fines are getting so big and frequent that you can be forgiven for suspecting a mutually beneficial racket is in progress. The banks pay big fines for settlements that leave their businesses and executive ranks largely intact. The regulators typically pocket some of the fines and pad out government treasuries. Shareholders are the main losers. To break this absurd cycle, and to encourage banks to operate morally, a little prison time would do the trick.