THE BLOG

The Brazenly Illegal Behavior of Big Banks

05/27/2015 01:22 pm ET | Updated May 27, 2016

Three strikes and you are out in baseball. Three strikes -- irrespective of the crime -- and you're in prison long-term in the United States. Now, the bankers need to be subjected to the "Three Strikes and You're Out" rule.

A few days ago some of the world's major banks again were in the headlines for criminal acts. U.S. Attorney General Loretta Lynch said the banks engaged in "brazenly illegal behavior."

As one banking scandal topples upon another, so it appears that the tone at the top of some of the world's largest banks has been set by that character Gordon Gekko, played by Michael Douglas in the 1987 movie Wall Street, who declared: "Greed, for lack of a better word, is good. Greed is right. Greed works."

The men that run the banks that are pleading guilty to crimes are not being personally prosecuted. They are not being fired. They continue to take home multi-million dollar pay checks. Their institutions are repeat offenders, yet they face no danger of losing their banking licenses -- "Three Strikes and You're Out" does not apply in the world of finance.

For example, Jamie Dimon is both the chairman of the board of directors and chief executive officer of the world's largest bank, JPMorgan Chase, which has been embroiled in vast scandals, including the very latest one, yet he continues to run Chase. And, Dimon's total compensation continues to exceed an annual $20 million.

Currency Manipulation

Bankers have repeatedly used the power entrusted to them by their clients to enrich themselves and their institutions at the expense of their clients. This is corruption, yet the bankers appear to view this as just business as usual. The bankers operate with impunity, striding across the world as if they are above the law and above even the basic rules of sound corporate governance.

Many of the major banks have been involved in one or more of the following crimes -- cheating their home mortgage customers, laundering money for organized crime, violating U.S. sanctions on Iran, Sudan and Cuba, manipulating international interest rates, aiding the wealthy to evade taxes, and rigging the currency markets.

It was currency market swindles that was at the center of the most recent set of actions against the banks. U.S. Attorney General Lynch stated at a Washington press conference on May 20, 2015, that Citicorp, JPMorgan Chase, Barclays and The Royal Bank of Scotland, paid a combined $3 billion in fines and pleaded guilty for running what they called, "The Cartel."

Attorney General Lynch explained: "They acted as partners -- not competitors -- in an effort to push the exchange rate in directions favorable to their banks but detrimental to many others. The prices the market sets for those currencies influence virtually every sector of every economy in the world, and their actions inflated the bank's profits while harming countless consumers, investors and institutions around the globe -- from pension funds to major corporations, and including the banks own customers -- who placed their faith in the market and relied on it to produce a competitive exchange rate."

In fact, total fines paid by Citicorp, JPMorgan Chase, Barclays, HSBC, BankAmerica, The Royal Bank of Scotland, and UBS, related to cheating in the currency markets has exceeded $10 billion. The various charges have been brought by the U.S. Department of Justice, the U.K. and Swiss banking authorities, the U.S. Federal Reserve Board, Commodities Futures Trading Commission and New York State regulator of banks.

In a remarkable understatement, Citigroup chief executive Michael Corbett said shortly after the Justice Department's announcement of Citigroup's high involvement in the currency market manipulation that the behavior uncovered at the firm by the Justice Department, "is an embarrassment."

Boards of directors are meant to oversee the activities of the managers of their institutions, but they have been negligent. After all, the combined total of fines paid by big banks is now over $200 billion when fines levied in recent months are added to the total of $184 billion that was reported last November as the total of fines on 43 banks in 117 cases since 2009. The data comes from Wall Street financial services firm, Keefe, Bruyette & Woods, who added that at least a further 174 cases have still to be resolved.

Banking Culture and Punishment

Banks will never reform their rotten cultures so long as they are run by people who turn a blind eye to crime and who ensure that their own positions and high incomes are safe. The executives who held high managerial positions at the times when the crimes were committed should be fired. Those members of the boards of directors who were also in their positions when the crimes were perpetrated should be ousted.

It is against this background and in light of the latest guilty pleas by major banks for currency rigging that, for example, both The New York Times and The Economist have published editorials in recent days that highlighted the need to prosecute individual bankers.

The New York Times on May 22, 2014, ran an editorial headlined "Banks as Felons, or Criminality Lite" that started by stressing, "There is no meaningful accountability in the plea deals and, by extension, no meaningful deterrence from future wrongdoing."

It concluded, "The Justice Department intended the criminal pleas to look tough. Instead, they reflect at bottom the same prosecutorial indulgence that has plagued the pursuit of the banks in the many financial scandals of recent years."

"America's approach to punishing financial crime is muddled, lenient and self-defeating," runs the headline statement under the title "Unfair Cop" in an editorial in the May 23, 2015 edition of The Economist.

The Economist concluded,

"There is nothing to stop prosecutors pursuing individuals, and being more open and consistent about how they strike deals. At least some cases should go to trial. In the longer term, Congress should make the consequences for banks of a criminal conviction commensurate with the gravity of the crime. That would both serve justice and make America a more attractive financial centre."

I don't think major national banking and justice authorities on either side of the Atlantic will put top bankers on trial because they will find it exceedingly difficult to find the smoking guns that explicitly link the top folks to the crimes perpetrated by less senior employees. Nor, do I expect that new laws will be enacted that could make it easier to prosecute top bankers because the power of the banking lobbies is formidable.

But, at an absolute minimum, there has to be the appearance of good governance in these mega-banks. Their boards of directors and the top managers must be seen to be responsible and accountable. Those who have clearly failed need to draw the logical consequences and resign.