Bankers and Their Wounds
12:00 AM, Aug 9, 2014 • By IRWIN M. STELZER
The revising of living wills is to be no pro forma exercise. If the banks fail to come up with satisfactory instructions for the handling of their forced departure from the world of living financial institutions, regulators are threatening to raise capital requirements further, or force the banks to adopt less complex legal structures, or if all else fails to exit many of the businesses in which they remain players. The theory underlying these latter possible solutions is a new but still dim awareness by regulators that the problem is less too-big-to-fail than too-complex-to manage.
The executives of our largest banks have in effect confessed that they cannot adequately supervise their institutions. We have had the London Whale, price-fixing in the Libor market, rogue elephants of all sorts trampling on the internal controls of the major banks. Some few executives have had to slink off into retirement, golf clubs over their shoulders, personal fortunes intact. But the costs of these management failures are borne largely by shareholders, and by managers only to the extent that their extraordinary bonuses are sometimes pared or collection postponed. That is insufficient punishment to persuade top executives to grow the size and complexity of their institutions only so long as they can exercise responsibility for their operation. After all, if the bonuses to which bankers have grown accustomed are rewards for their contribution to their banks’ success, surely that implies that they are equally responsible for any failures of management on their watch.
Here our antitrust laws provide some guidance. When several companies were convicted some fifty years ago of conspiring to fix the prices of electrical equipment, key conspirators did jail time. Such cartelization immediately became rarer. When Gordon Brown included criminalization of such behavior in his revision of UK competition laws, there were howls of anguish from executives arguing that it is unreasonable to hold them responsible for the performance of their corporations -- except at bonus time in good years. Populist critics are not entirely wrong to complain that bankers have inflicted huge wounds on the capitalist economies, but none has been punished. To cite only one example, it must take more than a rogue banker to create and market securities that the firm pushing them is shorting because it believes they will decline in value. Perhaps this sort of thing would stop if regulators decided that executives important enough to be in the bonus pool are important enough to be held responsible for its misfeasances. Then, they might heed singer Lena Horne’s advice, “If you can’t take the punishment, baby, please don’t commit the crime.”
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