[ed. Assuming the Justice Department or SEC were actually interested in prosecuting politically-connected bankers in the first place. Jon Corzine, anyone?]
The main problem with Wall Street isn’t that, as Bernie Sanders says, the banks are too big to fail. It is that the bankers who run them are too big to nail—to be held financially and personally liable for the bad or corrupt decisions they make. This is now, sadly, documented history. The heart of the subprime mortgage mania—the real reason it could go on for so many years, nearly sinking the world economy in the end—was that no one was really held responsible for any of his or her bad decisions. Ever.
Bank executives weren’t held responsible during the bubble as it was building, when banks stopped caring about their own mortgage lending standards because the bankers knew all those bad loans would be bundled into securities that could be sold around the world, thus relieving the bankers’ firms of liability (though many banks also fecklessly kept substantial amounts on their books). Executives weren’t held responsible during the crash, when they were bailed out by the federal government and barely had to promise any change of behavior in return. And they weren’t held responsible long afterwards, when the Justice Department and the SEC failed to convict (and barely put on trial)a single senior executive, or even to send any to the poorhouse by levying fines and penalties. No personal accountability whatsoever, from start to finish; on the contrary, bankers, traders and executives were rewardedfor their reckless behavior with big bonuses. Is there any better recipe for encouraging more greed, mania and irresponsibility by Wall Street—no matter how big the bank you’re working at is?
Federal regulators are gradually trying to get at this problem; on Thursday, they proposed new rules under the 2010 Dodd-Frank law intended to prevent executives at businesses with more than $1 billion of assets from earning “excessive” pay that encourages too-risky or aggressive tactics. The idea is to require the nation's largest banks and financial firms to hold back executives' bonus pay for longer than before—and require a minimum period of seven years for the biggest firms to "claw back" bonuses if it emerges that an executive's actions have hurt the institution.
But regulators need to go much further than this modest proposal and once again require—as in the long-ago days of private partnerships—that senior Wall Street executive put their entire personal wealth and holdings under threat of confiscation. In plain language, in the event of a bankruptcy, a bank’s bigwigs would be legally required to turn over to creditors or shareholders, until they are made whole, title to scores of Fifth Avenue co-ops, homes in the Hamptons or Palm Beach, or wherever they may be, plus brokerage and bank accounts filled with their accumulated billions. At the moment, of course, no such legal provisions exist. In fact, the whole purpose of a corporate structure is designed to shield executives from liabilities and make them the responsibility of creditors and shareholders.
But that protection can change–in fact should change—either voluntarily by a board of directors, or by federal regulators demanding it. Something very similar to this requirement already exists in the United Kingdom where, since March 1, senior bank executives are held personally liable for things that go wrong in their direct chain of command. In the United States, the big banks’ prudential regulators at the Federal Reserve could require this accountability just as the Financial Conduct Authority now does in the U.K.
Needless to say, this would not be a popular provision on Wall Street. But there is no question that this is the level of accountability that is required to make sure the leaders on Wall Street never again allow the behavior that occurred in the years leading up to the 2008 crisis to happen again.
In other words, the long-term solution to the causes of the 2008 financial crisis lies less in breaking up the nation’s largest banks—an idea that seems to be all the rage these days among some politicians and regulators, especially since many of the banks failed their “living will” test a couple of weeks ago—than in changing the behavior of the people who run and work at those banks.
The main problem with Wall Street isn’t that, as Bernie Sanders says, the banks are too big to fail. It is that the bankers who run them are too big to nail—to be held financially and personally liable for the bad or corrupt decisions they make. This is now, sadly, documented history. The heart of the subprime mortgage mania—the real reason it could go on for so many years, nearly sinking the world economy in the end—was that no one was really held responsible for any of his or her bad decisions. Ever.
Bank executives weren’t held responsible during the bubble as it was building, when banks stopped caring about their own mortgage lending standards because the bankers knew all those bad loans would be bundled into securities that could be sold around the world, thus relieving the bankers’ firms of liability (though many banks also fecklessly kept substantial amounts on their books). Executives weren’t held responsible during the crash, when they were bailed out by the federal government and barely had to promise any change of behavior in return. And they weren’t held responsible long afterwards, when the Justice Department and the SEC failed to convict (and barely put on trial)a single senior executive, or even to send any to the poorhouse by levying fines and penalties. No personal accountability whatsoever, from start to finish; on the contrary, bankers, traders and executives were rewardedfor their reckless behavior with big bonuses. Is there any better recipe for encouraging more greed, mania and irresponsibility by Wall Street—no matter how big the bank you’re working at is?Federal regulators are gradually trying to get at this problem; on Thursday, they proposed new rules under the 2010 Dodd-Frank law intended to prevent executives at businesses with more than $1 billion of assets from earning “excessive” pay that encourages too-risky or aggressive tactics. The idea is to require the nation's largest banks and financial firms to hold back executives' bonus pay for longer than before—and require a minimum period of seven years for the biggest firms to "claw back" bonuses if it emerges that an executive's actions have hurt the institution.
But regulators need to go much further than this modest proposal and once again require—as in the long-ago days of private partnerships—that senior Wall Street executive put their entire personal wealth and holdings under threat of confiscation. In plain language, in the event of a bankruptcy, a bank’s bigwigs would be legally required to turn over to creditors or shareholders, until they are made whole, title to scores of Fifth Avenue co-ops, homes in the Hamptons or Palm Beach, or wherever they may be, plus brokerage and bank accounts filled with their accumulated billions. At the moment, of course, no such legal provisions exist. In fact, the whole purpose of a corporate structure is designed to shield executives from liabilities and make them the responsibility of creditors and shareholders.
But that protection can change–in fact should change—either voluntarily by a board of directors, or by federal regulators demanding it. Something very similar to this requirement already exists in the United Kingdom where, since March 1, senior bank executives are held personally liable for things that go wrong in their direct chain of command. In the United States, the big banks’ prudential regulators at the Federal Reserve could require this accountability just as the Financial Conduct Authority now does in the U.K.
Needless to say, this would not be a popular provision on Wall Street. But there is no question that this is the level of accountability that is required to make sure the leaders on Wall Street never again allow the behavior that occurred in the years leading up to the 2008 crisis to happen again.
In other words, the long-term solution to the causes of the 2008 financial crisis lies less in breaking up the nation’s largest banks—an idea that seems to be all the rage these days among some politicians and regulators, especially since many of the banks failed their “living will” test a couple of weeks ago—than in changing the behavior of the people who run and work at those banks.
by William D. Cohan, Politico | Read more:
Image: uncredited
