As Nassim Taleb observed, the problem here is no skin in the game. Bankers keep the upside, but shareholders have to carry the can. It's an agency problem. The fix to all this is dispensing some good solid jail time.
That's how most "bad things" work. Why would asinine banking practices be different?
This is not the case with banking penalties which are clearly only a net positive exchange for the banks.
Are you sure? In the most recent case they had to return all $2B taken from customers and pay a $1.7B fine.
I'd be willing to look at evidence to the contrary. (Cynicism is not evidence)
You see this cycle again and again. Until companies are killed or leadership is fired, and loses their potential for future employment/mayhem, goes to jail - if there is no immediate serious personal repercussions or the company might die, then there won't be much change.
Now that I think of it, Taleb's suggested that banking should be a civil servant job. So, no financial engineering or bonuses, just boring paperwork.
In the wake of the financial crisis of 2008 (IIRC), the role of regular banking and hedge fund activities was split in two. The idea is, of course, that if all the fancy derivatives blow up, it wouldn't take retail banking with it. I read recently that the UK government was thinking of dropping this, which seemed a bad idea.
https://www.finance-watch.org/still-going-round-in-circles-t...
Most banks are "too big to fail".
An interesting question is should the fed use that distinction at all? And if so should it be removed as a penalty for bad behavior.
This thing comes and goes in waves.
IIRC the requirement that retail banking and proprietary trading not be mixed was already part of the Glass-Steagall Act that came in the wake of the great depression. Clinton repealed it, which somehow played a role in the Citigroup-Salomon Brothers merger.
After the 2008 financial crisis, the "Volcker Rule" was a regulatory effort to bring back this separation, but it took long to implement, is still not fully rolled out (there are exceptions granted, allowing banks a very long time period to trade out of positions they previously held), and there's already talk of rolling it back again.
Hadn’t realised he was taking a break from the presidency and interning for the Republican Party at the time.
(The repeal was of course a Republican bill with voting more or less along party lines…)
Thanks for the correction.
Nobody really wants that. We all want to get high on new and inventive financial instruments, to fund our increasingly "chase that paper" lifestyles.
In theory it sounds great, in practice the whole world lives in the fast lane now.
You are ignorant of current regulation. While there is no paper license that you have to apply for in most cases there is tons of "if you do X you are a Y and must register yourself with some regulatory agency Z and follow our list of rules for your business to be lawful" which is functionally identical to a license.
That's slightly true already with SEC sanctions, but it doesn't really matter. If I make my millions in bonuses but then I can't practice banking anymore? Oh well nbd.
In the meantime how about fining companies so much that the bank will become insolvent if they don't give a crap and passing laws (if they don't exist already) to force a halt in trade for x-days/weeks?
Better to just let the banks doing stupid risky crap fail instead of even more regulation. And if the stupid risky crap they're doing is also illegal, then make the penalties matter, as others have already said.
In which ways? I cannot say I have noticed any difference pre and post 2008. If anything, the CFPB which was established after 2008, helped save me a ton of time and effort when I could not easily get a hold of a bank employee who could resolve my issue.
Why? These inequities exist all over the US legal system yet prison time is handed out for many offenses anyway.
Sales stuffs the channel with products that are later returned as they get their commission. Or they vastly oversell what the product can do.
Engineers rack up tech debt to keep the Scrum Master happy and choose technologies based on how good they look on a resume.
HR people pass around crappy or abusive employees to other departments rather than doing the hard work of terminating them.
Wells Fargo shareholders evidently don't care that much and a big reason for that is that the average shareholder is probably just a fund of sorts, so it isn't really their money either.
Talk about perverse incentives. Their customers, meaning the people who are directly affected, are like the only ones who don't have any power to influence what happens.
And everyone with power to influence the company just isn't affected and doesn't care ...
They do, but they would need to actually change their spending. That's the other thing. After scandal after scandal after scandal, plenty of people still bank at Wells Fargo.
It’s not always exactly a choice. Wells Fargo bought my mortgage from a local bank. The only way to change your lender is to do a refinance, which incurs closing costs. Despite several serious WF fuck ups like double and triple charging my mortgage payment, failing to correctly maintain escrow, etc there is literally nothing I could do without losing tens of thousands of dollars until market conditions had changed and enough time made it feasible to re-fi, which I did promptly.
The problem with big banks is not just that they’re criminally fraudulent assholes, it’s that they will straight buy your customership on the backend in ways you are locked into. The same thing temporarily made me a Bank of America customer when they just straight bought a local bank chain. I’m now with a credit union and moved everything there, but it’s non trivial to do.
I don't think that terminating an at-will employee is any hard work.
What's hard is to hire a replacement; it can easily take months, and cost months of the employee's salary in the interviewing costs. And somebody got to do the jerk employee's work in the meantime.
(And this is in the US; I can't start imagining the hurdles of firing somebody in the EU.)
German (and Workers Council member at my employer) here. Firing incompetent workers is possible here, although you do have to show efforts on your part as well to have improved the situation (e.g. by providing training to the employee), and firing malicious-acting employees (e.g. in cases of theft, violence or intentional property damage) is easy.
European worker protection laws demand good will from both sides, not just from the employee - so for example you can't be fired because you damaged or destroyed a piece of machinery in an accident if the employer hasn't taken reasonable steps to prevent such accidents, including not overloading your employees with work.
Contrary to what HN may have implied, you still have to comply with federal labor law in at-will states and if you want to terminate someone in a manner where you can be all but guaranteed you will not have to settle a frivolous wrongful termination lawsuit there is a pretty decent amount of coordination and documentation work that needs to be done. I wouldn't call it hard work but it's not non-work and it does take time.
Shareholders hold shares by choice, so they don't "have to" do anything.
If there are 22 years of records about which fines were paid, then the market must have already priced in this information a long time ago. Shareholders chose to pay that market price.
That's not how pensions, ETFs, index funds or pretty much anything works.
If it's not actually underperforming, that is, a lot of the market does comparably, not much better, them $1B / year is just the cost of doing business, however cynical this may sound.
https://g.co/finance/WFC:NYSE?window=5Y&comparison=NYSEARCA%...
This way if you own a share in a fund or have a right in pension, if the fund chooses to buy shares of company A, when there is a shareholder vote of company A instead having the fund manager to vote, the fund manager would transmit this voting rights to you.
Everybody would give management their proxy, same as fund managers do now, or corporate governorship would grind to a halt as they never reached quorum at shareholder votes.
Yes, it's exactly how that stuff works.
Why is it not the pension managers responsibility to make sure his clients are not invested in these things if there is financial risk?
Or, if you decide to invest in a market-wide ETF, you are explicitly choosing to take the bad with the good.
I love how people think you can outsource decision making to absolve yourself of responsibility.
That's the problem, there is no financial risk, check out Wells Fargo stock price.
These are social problems these companies are spinning off, any financial problems are externalized.
> I love how people think you can outsource decision making to absolve yourself of responsibility.
Real "and yet you participate in society" vibes.
Can you respond with a detailed plan for how my 80 year old father can get his pension plan to divest itself of misbehaving companies.
Be specific.
A Wells Fargo stock holder would have lost out on ~70% of returns over the last 5 years compared to a relatively riskless investment in sp500.
https://g.co/finance/WFC:NYSE?window=5Y&comparison=NYSEARCA%...
Total return for past 10 years is 4.79% per year.
https://dqydj.com/stock-return-calculator/
JPM 10 year return is is 15% and BAC is 13%.
5y -33%
Chase +21%
SP500 +44%
All of a sudden you are in a situation where no one has any accountability and long term thinking is not a viable strategy.
While I'm not against throwing corrupt bank execs in jail, shareholders could also take their job seriously and only send people to the board of directors that actually hold the company officials accountable.
Unfortunately, an increasingly large amount of stocks is held by "neutral" investors (=passive ETFs) or neutral-ish investors (pension funds, insurances and the uber wealthy's private wealth management), which creates a lot of leverage for "activist investors" that push for short-term beneficial actions even if these end up damaging to the company long term, such as going for questionably legal operations.
[1] https://blogs.cfainstitute.org/investor/2022/01/21/myth-bust...
To reply to your point... I agree that broad market funds are a problem, but I would not place the blame on the buyers. We can't expect people to be hobby traders for their retirement funds and it's incredibly risky as well, if going by the regular loss porn on r/wallstreetbets. The problem for me rather lies in the system that the US have set up in the first place by forcing people to invest into the stock markets for their retirement - it gives an insane amount of political leverage to the big corporations (i.e. at least S&P 500), as politicians always have to consider the impact of a political move (e.g. the banning of ICE car sale) on the stock markets because sending the stocks for affected companies tanking has a real impact on voters' retirement security.
Ah yes, incarceration, the solution to all of American's problems.
How many of these fines are even criminal, let alone worthy of prison time?
[0] https://twitter.com/search?q=from%3A%40nntaleb%20bankers
Sociopaths follow the rules if there are repercussions to breaking them, a fine is not really a repercussion.