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Thursday, July 2, 2015

The Sacrifice of Virtue

Credit: Darren Walsh
  

On May 20, 2015, five multinational banks agreed to collectively pay roughly $5.6 billion in fines and penalties to regulators and law enforcement agencies in the United States and the United Kingdom.  Four of those banks (Citicorp, JPMorgan Chase & Co., Barclays PLC, and The Royal Bank of Scotland PLC) agreed to plead guilty to felony criminal charges of foreign exchange price manipulation between December 2007 and January 2013 (varies according to bank).  One bank, UBS AG pleaded guilty to wire fraud in relation to another matter, but was granted conditional immunity from the foreign exchange price manipulation charges because it was first to report it.  The banks also agreed to three years of corporate probation.

In keeping with the post-Enron C-suite tradition of using one's employees as human shields (by invoking memories of the 2002 demise of the public accounting firm Arthur Andersen) and by frightening regulators with hypothetical systemic apocalypse scenarios; these guilty pleas weren't even signed until the U.S. Securities and Exchange Commission (SEC) provided assurances that certain capital markets waivers would be granted to the banks involved.  Now, the U.S. Department of Labor is being heavily pressured to issue its own waiver as to whether these banks should be allowed to manage retirement accounts.

For the purposes of discussion, let's set aside the accountability that comes from government law enforcement and the inevitable follow-on civil litigation (as being one thing) and focus on our own collective behavior as consumers of financial services (as being another thing).

One would tend to think that in living rooms and in corporate boardrooms across the world, people would be reassessing their business relationships with financial services providers that fail to live up to our accepted standards of business ethics... one basic ethical standard being: not violating our criminal laws.

The American Bankers Association (ABA) stayed mum regarding this legal settlement.  Not a word of this in their Press Room and lists of public correspondence.  A policy of silence and disengagement was apparently chosen as the best way to handle family shame.

The energetic and feisty Independent Community Bankers of America (ICBA), on the other hand, sent this letter to U.S. financial regulators expressing sanctimonious outrage and declaring (once again) a regulatory double-standard in this legal settlement.

But surely, the virtuous members of both banking trade associations also scrambled to reassess any correspondent banking and vendor business relationships with the felon banks?

After all, would an employer hire a job applicant with a recent criminal record?  Would investors trust their personal wealth to a broker or financial advisor with a past criminal record?

Add to all that, the ample pool of alternative purchasing choices.  There are many law-abiding banks in the global marketplace that offer similar or identical financial services.

Sadly, you know the answer as well as I.

Scholars have done marketing research on topics like: Is information about whether a firm acts ethically an important consumer concern?  And, if so, will information about a firm's behavior influence their purchase decision?  You would think, in the abstract, that the answer would be an unequivocal "yes".

A research paper in the Journal of Consumer Marketing indicates that, except in the most egregious cases, "consumers do not wish to be inconvenienced, and ethical purchasing will only take place if there are no costs to the consumer in terms of added price, loss of quality, or having to 'shop around' " ...  "The depressing reality is that many ethical abuses can still continue to be carried out by companies without any negative impact on consumer buyer behavior."

I'm a little disappointed by our sacrifice of virtue, but we all get the point. However, there must be, after all, a ceiling (or is it a floor?) on corporate and individual consumers of financial services being numb and lethargic about business ethics?  Does our passivity also make us enablers?

An attorney once told me about a concept called "Does it pass the puke test?"... behavior so contemptible that it makes you want to throw up.  Apparently, at this juncture, we consumers of financial services have opted for living with a free-floating feeling of nausea about the behavior of bad players in the banking industry.  As the colloquial saying goes... we could taste it in our throats, but managed to keep it down.

In today's upside-down world of finance, federal law forbids a person with a criminal record, involving dishonesty or a breach of trust, to work for a bank (without a rare waiver from the FDIC); but, it's OK for a bank with a criminal record to work for us.