As long as Wall Street banks believe they are above the law, it will be very difficult to prevent the financial industry from blowing up the world economy again, according to Federal Reserve Board of New York head William Dudley.
In a speech Friday in New York City, Dudley warned that the industry’s “lack of respect for law, regulation and the public trust” make it more likely that the country will see a repeat of the fraud epidemic that brought about the financial crisis and Great Recession, and called for a “cultural shift” on Wall Street.
Dudley’s remarks were focused on ending the problem of so-called “too big to fail” (TBTF) banks. While he expressed doubts about some remedies for the TBTF phenomenon that progressives support, such as reinstating the Glass-Steagall law that used to prevent the sorts of mergers that allowed the megabanks that exist today to get so dangerously large, Dudley’s decision to call out Wall Street’s culture is likely to resonate with critics of both the banking industry and the Obama administration’s law enforcement efforts. There is ample evidence to support Dudley’s suggestion that the industry considers itself above the law and excepted from societal responsibility.
In surveys probing Wall Street ethics, financial professionals say that crime pays. A quarter of survey respondents in 2012 said that illegal or unethical conduct was a prerequisite for success in the industry. The same survey in 2013 found similar levels of interest in breaking the law for profit, and also found that the willingness to commit crimes in order to get rich was much higher among the younger cadre of Wall Street employees. Nearly 40 percent of those with fewer than 10 years’ experience in the industry were willing to commit insider trading, compared to 24 percent in the whole survey. The law firm that conducts the survey labeled the results “a ticking economic time bomb.” Meanwhile, taxpayers continue to subsidize executive compensation packages that create huge incentives to commit fraud.
It appears the industry hasn’t learned anything from the financial crisis five years ago. Given how few legal consequences the big banks have faced for their actions in bringing about the recession, it makes sense that the culture remains a problem. The still-pending JP Morgan settlement over mortgage finance misdeeds is touted as a record fine of as much as $13 billion, but the fines are tax deductible, other components of it can be passed off onto government agencies, and almost a third of the total comes from accounting gimmicks that benefit the bank rather than fine payments that punish it. Similarly, the National Mortgage Settlement was billed as a $25 billion landmark deal, but that number gives an inflated impression of what the deal actually cost abusive mortgage servicers. Worse, it’s failed to stop those same companies from continuing to abuse homeowners.
Several high-profile figures have suggested the banks are “too big to jail,” including Attorney General Eric Holder and Sens. Elizabeth Warren (D-MA), Chuck Grassley (R-IA), and Sherrod Brown (D-OH). Frustration with Holder’s approach to the financial industry has in fact led to arrests, but it was protesters and foreclosed grandmothers rather than bankers who faced charges.
While the biggest banks have racked up tens of billions of dollars in legal bills in recent years, those costs are infinitesimally small next to the size of the economic harm caused by the financial crisis. The banking industry has returned to record profits and payouts, investigations have fizzled, and the CEOs who ran the worst-behaving banks during the run-up to the crisis walked away with immense wealth rather than in handcuffs.