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Financial Sector Reform

Too Big to Fail: Enough is Enough


“Banks have done more injury to the religion, morality, tranquility, prosperity, and even wealth of the nation than they can have done or ever will do good.”

– John Adams

In February, the British Hong Kong-Shanghai Banking Corporation (HSBC) announced that it was setting aside $550 million dollars to cover potential fines related to “alleged”[1] manipulation of foreign exchange markets. This provision is in addition to the $611 million in fines already levied on HSBC in November by US, UK and Swiss regulators[2].  The bank had been engaged in this massive and persistent fraud for years; very lucrative violations that resulted in large profits for the bank’s currency trading division. The regulatory authorities found that the bank had acted consciously and in full-knowledge of the illegal nature of its activities; not only that, it had actively encouraged and incentivized its traders to act in this way. Beside HSBC, the megabanks RBS, Citibank, JPMorgan Chase, Bank of America and UBS all accepted fines for their involvement: a roll call of the usual suspects.


This is not the first time HSBC has been sanctioned for blatantly unethical and illegal behavior:

  • In 2012, the bank agreed to pay out $1.9 billion in fines for violating anti-money laundering laws by doing business with prohibited states, like Syria and Iran, as well as laundering money for Mexican drug cartels! But Chief Executive Stuart Gulliver said, “We have said we are profoundly sorry for them (past mistakes), and we do so again,” so rather than going to jail for aiding blood-soaked dictators and murderous drug kingpins, he got the merest slap on the wrist[3];
  • Again in 2012, HSBC also paid out $2.3 billion in fines for mis-selling financial products in the US and UK. In colloquial terms, this is a scam, a hustle; it is bilking old ladies out of their pensions. And while the bank was engaged in mis-selling payment protection insurance to consumers and interest rate swaps to small businesses, 200 executives received bonuses of greater than $1 million at year end, while the bonus to the top 16 executives exceeded $5 million each. Again, no one went to jail and there was no admission of wrongdoing, only “failed controls”[4];
  • Let’s not forget that at the same time, HSBC was implicated in the LIBOR rigging scandal. Though the storm centered on Barclays Bank, all the usual megabanks were found to have participated fully and willingly.[5]
  • Most recently, an HSBC insider revealed that the Private Banking division of the bank was in violation of tax laws of the United States, United Kingdom and other nations by knowingly assisting their clients in various tax evasion schemes[6]. These involved moving or purchasing assets in tax havens and then covering the trails from the competent tax authorities. This activity involved hundreds of thousands of high net worth clients and cost local and national governments hundreds of millions of dollars of tax revenue: shortfalls that have to be made up by the middle class either through increased taxes or decreased services.

HSBC is in good company: the top global banks have racked up over 180 billion dollars in sanctions since 2008. Stop and think about that number, which rolls so easily off the tongue. That is more than the entire cost of NASA’s Mercury, Gemini and Apollo space programs in current dollars ($116 billion)[7]. It is more than the entire annual GDP of Ukraine ($178 billion)[8], a nation with 44 million inhabitants. The fines alone could fund the US Department of Transportation for two years ($86.8 billion)[9]. The Federal Government doesn’t have a budget problem, it has a tax collection problem.


It also has a regulatory problem: these megabanks are operating in an environment where the regulators are incapable of preventing abuses, only of reacting to them… Even then, because of the difficulty of proving wrongdoing without a smoking gun, regulators prefer to slap whopping great fines on the banks rather than trying to prosecute. Smoking guns do exist, and some people are occasionally prosecuted, but these are typically lower level employees whose emails or telephone conversations serve to prove their knowledge and culpability. Their managers, the men and women who create the incentives and motivations for wrongdoing by their subordinates and for whom a wink is as good as a nod, are rarely so incautious as to be caught in this manner. The Attorney General is forced to settle for going after the foot soldiers rather than the capo regime.

This dynamic may also encourage governments to permit its continuation. In lieu of trying to gather up the ever-shrinking corporate taxes from these megabanks, governments may decide that it is simpler to fund themselves through mega-fines. Everyone is happy: the banks make their profits, the bankers make their bonuses, the governments get their penalty income, and there is no individual responsibility assigned to anyone that actually matters. But this logic leaves out the fact that the banks are engaged in pure robbery: their cartel-like manipulation of markets generates losses for consumers, businesses, municipalities and pension funds which are not made whole by the negotiated compensation. This leads to under-investment in the productive economy, in the under-funding of essential city and town services, and in the need for governments to make good the losses through taxpayer levies. This is nothing less than the plundering of national economies.

The behavior of the banks over the past 15 years simply reaffirms two old, but still valid, adages: “the best way to rob a bank is to own one”; and also, “if you steal 200 dollars, you go to jail; if you steal $200 million dollars, you get a bonus.”

city and street

There is a separate issue at play here. Take another look at the list: you will notice that most of the banks on it are either American or British (to the extent that any multinational corporation can truly be called by a nationality anymore). There are three reasons for this:

  1. The United States and the United Kingdom both have outsized financial services sectors which have been allowed, even encouraged, to grow to monstrous size in the past 30 years. Fueled by the relentless growth in liquidity and coddled by disastrously ill-advised deregulation, these were among the first institutions to become global, full-spectrum banks. During the Glass-Steagall era of US banking regulation, there was a firewall between consumer depository banks and business banks, in order to prevent the use of deposits – which were guaranteed by the Federal government – to fund the riskier business investments of the latter institutions and thus avoid moral hazard[10]. This regime was instituted on the advice of the Pecora Committee at the height of the Great Depression; and it worked so well that the United States did not suffer a single economic recession or depression provoked by a banking crisis until the Glass-Steagall Act began to be rolled back[11] in the 1980’s under the Reagan Administration.


  1. US and UK banks are not however inherently more wicked or degenerate than banks in other countries, they have merely had the greatest opportunities in the past two decades to engage in what is essentially financial racketeering. The banks of other nations are happy to emulate them, when given the opportunity: Deutsche Bank, BNP Paribas, ABN Amro have all been investigated and fined for violating their countries’ banking laws and engaging in illegal and unethical practices. As soon as a bank has reached a certain size, is operating in a certain number of markets and is engaged across a a certain number of financial services activities, you almost might as well start investigating them for wrong-doing because they are almost guaranteed to be engaged in it somewhere, somehow. Whether rigging currency markets, fixing LIBOR, assisting clients in tax evasion, or something else, the relentless pressure to squeeze more profits out of their assets together with the enormous (and somewhat deliberate) complexity of financial markets ensures that the opportunities for “creativity” will exist and will be taken advantage of.


  1. The other reason that more global banks are not in the cross-hairs of regulators is not because they are somehow more immaculate than their Anglo-American peers. If they meet the conditions of global, multiservice banking in point #2 above, you can be sure there is a rat somewhere. They are not being punished because they exist in a more tolerant political environment. The largest Chinese or Russian banks are not more scrupulous in obeying banking regulations; but they are instruments of state policy. So long as they do not attempt to act as independent agents, they are safe. If there is an investigation and fine, you can be sure that it is politically motivated; someone has fallen out of favor with the CCP so they and their friends are being purged. Corruption “scandals” in China often end up with a firing squad rather than a slap-on-the-wrist fine precisely because the motivation is elimination of a rival rather than a better regulated banking system. Nor is there a need to look at authoritarian regimes like those of China and Russia; even in democratic Europe, banks serve the interests of the political and economic elites. So long as they serve them well, there is little enough scrutiny into their shadier dealings. It ought not to come as a surprise that corruption investigations have shown time and again how Spanish politicians have laundered their spoils into fiscal paradises – yet the facilitators of this laundering are never mentioned. Is it a coincidence that Spain’s political parties are in hock to the banks to the tune of 238 million euros? Similar examples can undoubtedly be found in other markets.

Citizens decry it, but then do nothing about it. Despite trillions of dollars in wealth destroyed by banks’ transgressions prior to the 2008 crisis, there is still only limited public support for a break-up of the megabanks and the reintroduction of firewalls. The Bank of England came closest to implementing a UK version of Glass-Steagall; but one suspects that the City of London and their pocket politicians gave the BoE an earful and put them back in their place. What we have in its place in the US is Dodd-Frank, a piece of regulatory legislation so complex that parts of it have yet to be implemented five years after the bill became law, because no one knows how to put it into practice. Yet we have seen that complexity is the enemy of good regulation: the more byzantine the rules, the easier it is for the banks to find and exploit loopholes, or simply hoodwink the regulators, who are no more omniscient than you or I.

The solution is actually simple and it comes in three parts: all require citizens to be active rather than passive actors:


  1. First, citizens must demand that their legislators impose (or in the case of the US, re-impose) a legal separation of banking activities. Institutions that take citizen’s deposits and engage in consumer lending must be spun off as separate entities, the types of activities these banks can engage in will be strictly limited, and no legal or financial relationship between consumer banks, business banks, or any other financial institutions should be permitted. Public guarantees for the consumer banks will be maintained to protect Main Street’s deposits, not to subsidize the egregious risk-taking of megabank management, governance boards and shareholders. That is only a start; it might protect the consumer banks from rampant speculation, but you can bet that management, boards and shareholders of the business banks will still find ways to skirt the regulations and get themselves into trouble: the motors of demands for ever higher returns, excess liquidity and insufficient profitable investments in the productive economy will inevitably lead to “financial engineering”.


  1. Thus the need for an official, permanent wind-up authority with the national regulators. Dodd-Frank does provide such an authority, but it is not sufficient. The law must ensure that the first step in any bail-out operation is the replacement of senior management and board members, as well as the clawback of 2 years’ worth of performance-based payouts to the same. The liability should exist even after a manager has left the bank. Nor should liabilities stop at a fine for the bank, no matter how large. Until personal liability leads to criminal prosecution, and jail time, bankers simply won’t have an incentive to stop. The next step is to wipe out the shareholders; they have a responsibility equal to that of the board members to oversee and enforce the proper conduct of their managerial hirelings. If they fail that duty, they certainly shouldn’t be rewarded with tax-payer money. The purpose of a bail-out is to allow the bank to continue to operate if only in a limited fashion, and thus to avoid collateral damage to the economy and contagion across the financial system. It is most certainly NOT to preserve the income of managers or shareholders. Of course, in modern American corporate governance, shareholders have almost no power, it is management and then boards that run the show. Nonetheless, by holding shareholders equally responsible, it might lead to a rebalancing of the power arrangements, as institutional shareholders might not remain so tolerant of their powerless position if there were real financial consequences to it. Neither measure #1 or #2 will be easy to achieve. If we weren’t able to do it in the wake of the Great Recession, it seems unlikely that we’ll be able to achieve it under more normal circumstances – though the “new normal” is frighteningly dissimilar to what people would have considered normal 20 years ago. The influence of the banks on the politicians is enormous whether it be in Washington or in London; consequently, the pressure that the public must exert must be equally enormous and constant. It may seem unlikely, but it is possible.


  1. Finally, consumers have the ability to vote with their feet. Even if a 21st century Glass-Steagall Act and an enhanced roll-up authority are long-term and highly uncertain prospects, there is no reason consumers need put up with the s of the megabanks. When your bank is in the news for gross violations of legal, regulatory and ethical standards, bank somewhere else! There are always more banks!! Find a regional bank with solid financials and plenty of capital and put your money there. The FDIC’s guarantee is just as valid at a regional bank or savings & loan as it is at a megabank. While consumer banking is not a particularly profitable activity for the megabanks, the availability of consumer deposits is what keeps their cost of funds low and allows them to engage in the more lucrative lending and investing that does make them money. Take away their deposits and the banks would be forced to pay much more for open market financing, which would in turn eat into their margins and lead to the rapid dismissal of the management team that had overseen this unfortunate and costly downturn in EPS[12]. Bankers are – evidently – not stupid: if there is a real and direct personal cost to their activities, they are less likely to undertake them. So long as fines can be treated as merely a “cost of doing business”, then business will continue; and brother, the business for the banks is good.

The great American tribune[13], Andrew Jackson, once said in a similar but earlier banking dispute: ““The bank, Mr. Van Buren, is trying to kill me, but I will kill it.” (emphasis added).

That the government of our Republic should be rendered impotent and contemptible in the face of the unmitigated greed of a small clique of bankers is unconscionable. Nor are we alone: this is a global challenge. That the greater portion of humanity should have our fortunes and our future prospects depend on that same unelected, unaccountable and self-interested group is simply monstrous. It is past time we took control over our financial sectors once again; that we rein in these unethical and unscrupulous people; and we make banking a “boring”, but safe, profession again. Wizardry should be left to books and movies, not to our financial institutions. The way is clear enough; and it is up to the people to impose a heavy enough electoral and social cost to force the necessary change upon our unwilling politicians.


Sources and Notes

 [1] I write “alleged” because, by accepting and paying the fines, these banks (and their managers) avoid any admission of wrongdoing…. as if paying over a billion dollars in fines to regulators were an admission of moral rectitude!!

[2] Steve Slater, “HSBC may face extra $1 billion in FX fines, U.S. compensation costs,” Reuters, 23 February 2015

[3] “HSBC to pay $1.9bn in US money laundering penalties,” BBC News, 11 December 2012

[4] “HSBC pays $4.2bn for fines and mis-selling in 2012,” BBC News, 04 March 2013

[5] James O’Toole, “Explaining the Libor interest rate mess,” CNN Money, 10 July 2012

[6] “HSBC bank ‘helped clients dodge millions in tax’” BBC News, 09 February 2015

[7] Congressional Budget Office

[8] International Monetary Fund Key Statistics

[9] United States Federal Budget for FY2015. Figure is for USDOT budget authority, not outlays.

[10] In this context “moral hazard” refers to a bank taking even greater risks than it normally would, because it knows that the government will be forced to rescue it to avoid the loss of consumer deposits and a subsequent economic crash.

[11] The Depositary Institutions Deregulation and Monetary Control Act (1980) and the Garn-St. Germain Depositary Institutions Act (1982) began the decade long process of deregulation of the American banking industry, the long-sought after goal of Wall Street. This culminated in the Gramm-Leach-Bliley Act of 1999, tragically and unfathomably signed into law by President William Jefferson Clinton. So was FDR’s legacy betrayed by a fellow Democrat. The former two acts were the catalysts of the Savings & Loans crises, in which 1,000 of the nation’s 3,000 S&L and thrifts failed; the biggest US banking crash and public bail-out in 50 years until dwarfed by the 2009/2010 bailouts.

[12] Earnings Per Share, one of the basic measures of stock value and a major deity in the stock broker’s and CFO’s pantheon.

[13] I use the word “tribune” only in the ancient Roman sense of a defender of the rights of the people against the oligarchy. Andrew Jackson had many faults, among them racism and support for slavery; but he did play a crucial role in broadening the male franchise in the United States to include many “little men” who were regarded with contempt by the East Coast establishment.

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“Our obligations to our country never cease but with our lives.“

John Adams


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