Huffpost Business
Ryan McCarthy Headshot

'The Fourteenth Banker,' Anonymous Bank Insider, Describes His Moral Crisis: 'The System Is Built To Be Gamed'

Posted: Updated:

"The system is built to be gamed."

"The voices of dissent are not being heard."

These are the words of an anonymous executive at one of America's 10 largest banks, who after many years of watching the worst of Wall Street's ethics transform his company, has decided to speak out.

(Scroll down for the Q&A)

Despite the obvious risks to his banking career, the executive, who's been in the industry for more than 20 years, says he can't bear to keep quiet any longer: "I decided that I cannot live with the extent of the compromises to my value system."

In early April, the executive in question started the anonymous blog, The Fourteenth Banker. Intended as forum for bank insiders who feel muzzled by industry gag orders, the blog gets its name from a now infamous March 2009 White House meeting with the heads of the nation's largest banks. (It's also a reference to the book, "13 Bankers: The Wall Street Takeover and The Next Financial Crisis" by Simon Johnson and James Kwak.)

HuffPost recently spoke over the phone with "14" -- for lack of a better name -- about what exactly pushed him to speak out and why he thinks his industry is in dire need of reform. He agreed to speak on the condition that certain aspects of his career and employment were left out.

The executive, who currently works in a management role at a U.S. bank that took TARP funds, described the rapid dissolution of the traditional banking functions at his company in favor of short-term fixes and often exaggerated profits. He described a flawed incentive system that produced generous salaries for many of his colleagues, while reducing lending to credit-worthy Main Street borrowers. That system, he says, has caused his own moral crisis.

A self-described former disciple of the "Adam Smith, conservative lassez-faire school of thought," he has spent most of his career dealing with what's typically considered the backbone of banking: lending to small and medium-sized businesses. (It is also, incidentally what bailed-out banks have been widely criticized for reducing.)

As his industry experienced a wave of consolidation and mergers over the last few decades, he says his bank has become fully committed to the strategies that were once reserved for investment banks. In short, the money culture of Wall Street began to transform the familiar world of branch-based banking.

"Incentive is everything," he says of the changes. "The same sort of ethical and questions and compromises seen at investment banks have that infected the whole organization."

At the heart of the executive's moral crisis is his bank's compensation structure, which has come to resemble the pay schemes of bank trading operations. Though he hasn't been explicitly told to stop making loans, he says the retail banking industry's compensation systems have come to put an outsized emphasis on selling fee-based products (think credit cards) and acquiring deposits.

In other words, at his own bank it no longer pays for him to actually lend money to the kind of businesses that create 75 percent of jobs in America.

Since the downturn began, he says his bank overreacted to lagging profits by squeezing the availability and cost of loans for small and medium-sized companies. The simplistic argument, he says, is that the downturn has meant lower profits for businesses and therefore lending needed to fall. But the losses in business banking, he says, are only running between 1 and 2 percent a year -- a far cry from the massive losses suffered by banks' credit card portfolios.

When he talks about his "personal journey," 14 says that he's had to sit across from loyal clients and had to deliver the hard news that his bank is raising their interest rate -- or as he called it "squeezing profits out of relationships." He's been threatened with lawsuits, yelled at and he's observed how interactions with deflated customers have taken their toll on him. "They'll say, 'Why are you kicking me when I'm down? 2009 is the one year in which I have had really bad results which, by the way, big bank, you had bad results too.'"

Like a pre-crisis mortgage brokerage who pays its employees only on volume, but not on the quality of loans, he says his bank openly sponsors a compensation system that is actively manipulated by his peers. "People can game the system and receive large payoffs, and in my view those are violations of ethics."

He says he's raised these complaints with his bosses -- even providing proof, in at least one case. But he has been either politely brushed off, or told not to raise specific issues. Worse, his daily interactions with clients have begun to feel like just another opportunity to drain money from them. "The thing that I enjoy in my day-to-day work is dealing with businesses and individuals and in a way that helps them. And I can say that it is much more difficult to do that today."

Among the latest calls for financial reform, he thinks breaking up "Too Big To Fail" banks is one of the crucial steps. Reducing the size of America's megabanks, he says, would decrease systemic risk -- and he believes it would begin to shift resources away from trading operations and back to productive entrepreneurial businesses.

Whistleblower protection, 14 argues, should be included in any reform bill. "They don't want you to be heard, but the truth of the matter is you might be the canary in the coal mine."

He's seen fellow longtime bankers who've become depressed or dispirited by the new world of banking and the "severing" of the banker-client relationship. But changing his industry, he says, is what motivates him. "I really have a general faith that if I do the right thing, that I'm going to be OK," he says.

Which isn't to say he shares his colleagues' tendency to look the other way.

"When we're trained about the Patriot Act and money laundering, every year we have to take new training courses and sign off that we understand. And we're all told that willful blindness is not acceptable, that you cannot be aware that there might be money laundering and not bring it to the attention of the company. And yet in our incentive programs and in the way credit is given for things, willful blindness is tolerated."

Read the full Q&A on the next page.

HuffPost Q&A With the anonymous bank industry veteran behind The Fourteenth Banker blog.

Why did you choose to speak up now?
If you read some of the comments on the blog, there's a lot of passion coming there. I was trying to think about where does that come from. And I think it happens when you work in an organization [that] comes into conflict with your value system. There are things you are either asked to participate in or you observe that are in conflict with your value system -- and that creates a reaction.

People then begin to consider for themselves the risk versus the reward. There's a reward for your work. You have your job, your security, your personal income and in some cases generous compensation. And then, and in a sense that's reward, but that's what also at risk. When you speak out, the reward you've been getting is also the risk. You have to have strong enough feelings to take that risk.

I decided that I cannot live with the extent of the compromises to my value system. My choices then are to leave or to try and change things. But when you leave, then you leave behind the system intact, you leave behind your customers, your fellow employees and you leave behind the system. The reason I'm choosing to speak out now is that neither of those are acceptable choices to me.

And I'm willing to take the risk that I'm unemployed in order to effect some change.

Do you get a sense that there are others out there in your profession who share your feelings?

Yes, a whole host of people. I think there's internal conflict [at large banks]. The truth in this industry is that people have the ability to individually make massively higher amounts of money than they could, say, in some other profession. If you've got that on the one hand, and on the other, then you've got the fact that they don't like a lot of the way things are done -- and those two things are in conflict.

There are a lot of morale issues. Yet [many people] continue to choose to please the organization. I'm beginning to see some cracks in the system. There's turnover. And this leads into the way incentives have been put in place. I've seen where people are having to choose between being pretty honest and being somewhat dishonest. And this all goes into the way incentives are put in place...

Much of the focus of the press and the Congress is always on the CEO, and CEO pay and investment bank's pay. And those things are huge issues, and absolutely going to contribute to systemic risk.

The other side of it, is that this investment bank thinking has trickled down to some extent all the way through the organization. There are the same sort of ethical and questions and compromises that investment banks have that have infected the whole organization. This is where you see more people who will be motivated to speak out.

I guess I just generally believe people have some good aspects to them. They have an innate value system and when the organization crosses that line, then some of them want to speak out.

Can you pinpoint a time in your career or a moment when you first realized you needed to speak out?
With my particular organization in the last few years, there has been change in management in the particular business and that I've seen several layers of management have come to embrace the whole ethic of "incentive is everything." That money is everything.

Over that period of time there's been an Implementation, a series of steps, which turned the whole organization to this whole philosophy.

In my part [of the bank] we had different people with different values. The Wall Street mentality has been pushed into the traditional bank, and it's not always welcome there. It's welcome to the extent that people can make a lot money, but it's not welcome to the extent that it becomes all about money.

Can you give me some idea of the specific role you play at your job?

I deal [in] traditional bank branch activities, commercial lending and lending to businesses below the large corporate level.

It would be what banks did 30 years ago. We've gotten more sophisticated products now, but I still handle the traditional bank activities that involve getting money out into the community.

Over time, [securitized products and credit cards] were profitable and therefore it led to a diversion of resources away from the core business. And, in my view, and if you look at the at the growth of manufacturing and entrepreneurship versus the growth of the financial sector, clearly, if money had not been diverted to the financial sector, if those more resources and intellectual capital hadn't been allocated to sectors that don't create benefit for the society at large, you'd have more funding available now. And maybe we'd have more jobs now.

Is that dispiriting to you to see your industry drained like that?
The thing that I enjoy in my day-to-day work, is the thing is dealing with businesses and individuals and in a way that helps them. And I can say that it is much more difficult to do that today.

It sounds like there's a mandate to change the way you've been loaning money. Are you told to not make loans?

They're not being told not to make loans. However, the difficulty of making loans has gone up several magnitudes. And the metrics have changed. In the past the organization has valued loans, now the organization values deposits and fee-based products... The question is what does that mean? There may not be a directive given that you will make fewer loans, but the practical effect is the you will make fewer loans. But also the skill set of your people will change to being skilled at loans to being skilled at other things.

Are there fewer loans because of the downturn, or is this aversion to lend money a structural change prior to the recession?

There was a structural change prior to the downturn. In the downturn, two things have happened. One is there's less loan demand, because when the future is uncertain, small businesses are less likely to make commitments. But loan demand is not down as much as lending is down. So there are people who are qualified, and the fact is that it is much more difficult for them to find credit. There's also been an overreaction within the part of the bank...

Someone can make a simplistic argument that, well, there's an economic tightening going there and therefore it was appropriate to tighten credit standards. And that's true. But if you got more granular about it there are areas where there are losses and areas where the losses are [relatively small.]

Take small business. The losses in loans to traditional businesses are, as a percentage, a fraction of what they are in other areas. You can take credit cards, which is a high-profit area that you can do all sorts of things with -- securitize it, take them off balance -- those losses are now massive... Losses in small business or business banking are probably running between 1 and 2 percent per annum.

So you're saying that during a time when banks have been struggling to get back on their feet, they're actually looking to move away from low-risk products like traditional lending?

Nobody would ever say that. But what would happen [is] that you would begin to do [certain things to earn more profit]. There's a lot of other ways to effect that same result.

A company's relationship with it's bank is usually pretty sacrosanct. Have you had a real visceral reaction from clients when you've been forced to raise their rate or otherwise increase their costs?

Yes, there are surveys out there that show that more business clients are prepared to change banks than at any time in which it's been measured. So why would that be? It's because they feel like that relationship has had somewhat of a severing. That can happen in a number of ways. I mean, I've sat across from people that have talked about "we're going to sue you." I've sat with people been who've been deflated. They'll say, "Why are you kicking me when I'm down? 2009 is the one year in which I have had really bad results which, by the way, big bank, you had bad results too, and yet you're in the position of power and you're kicking me when I'm down?" That's a natural human reaction...

But those kind of conflicts are now coming up more often then they should. [It happens] where really the risk of loss is not that different. You could have a well-capitalized business and they still had a down year... But it's a temporary condition.

There's a centralization of decision-making, and the people that make the decisions are very often removed from the client. They don't have to sit across the table from the client. They don't have to engage in that personal emotional interaction. They're not invested in it, therefore it's easier to make decisions that are strictly objective. Objective in the sense that they're based on numbers. They're not objective in the sense that they make for good logic.

What sort of holes do you see in the regulatory reforms that have been put out there? The issue of "Too Big To Fail" is a big part of this, but may not be fixed

I'm not 100 percent sure that Too Big To Fail [reform] isn't going to happen. There's a lot of people that are beginning to say, 'This is an absolute requirement.' If the politics can change then... and that's one of the reason for the blog too. Can it get to enough people where it changes the political balance?

It's not impossible. This is going to take a while for this legislation to happen. It's not impossible that TBTF is going to be entrenched -- or if the economy starts to slip again, that might reopen the whole discussion.

The other part as far as reform goes, when I spoke about the incentive plans have been pushed down throughout the bank, I don't think [regulators] have really tackled at all the motivational systems. They haven't looked at the incentive systems, the behavioral economics of how these basic decisions are made.

The industry made decisions based on mathematical projections and that turned out to be a faulty way of making decisions. Then the question is what other ways are there of making decisions that might have worked?

And this is a really big one for financial reform. The voices of dissent aren't being heard. I believe any legislation should have strong whistleblower protection. I have done things in my company and kind of been pushed back, but I haven't spoken so loudly that I get myself fired because I know I would have been fired.

There should be protections for people that have a different point of view from management. The psychological environment in most banks is that if you speak against the prevailing belief system, you're perceived to have attitude, and that attitude is going to be infectious. And they don't want you to be heard, but the truth of the matter is you might be the canary in the coal mine.

What's your sense of the top management at your company?
I think they're largely captured by the whole [Wall Street] mentality. And I don't know enough to say that it's all out of certain business schools, but I sort of suspect it its. The "Art of War" philosophy that business is a battle, that it's us versus them. That it's a win-lose kind of proposition. I think that kind of prevails... the preeminence of money in the way individual compensation is structured. I think they're captured by that whole mentality.

I don't think that they tend to see the whole picture. You have to have curiosity about a lot of different things and have been exposed to a lot of different things in order to have a perspective. And a lot people because they're so specialized they're narrowly focused, so they don't really think how what's going on in their day-to-day world what that might mean for a different part of the organization.

What has happened to you when you've spoken up at your job?
Well, there's been more than one occasion [laughs]...

One thing I have brought up is that the system is built to be gamed. People can game the system and receive large payoffs, and in my view those are violations of ethics. I've called those to attention of supervisors... But then I see the behavior being allowed to continue. The reasons in my opinion are that I don't think these people really grasp what this really is and, two, they benefit. The numbers that are created by the gaming of the system make you look really good. Any incentive system based only on production statistics can be gamed.

I put in my blog the term willful blindness. When we're trained about the Patriot Act and money laundering every year we have to take new training courses and sign of and sign off that we understand it and all that. And we're all told that willful blindness is not acceptable, that you cannot be aware that there might be money laundering and not bring it to the attention of the company. And, yet, in our incentive programs and in the way credit is given for things, willful blindness is tolerated.