Where is Eliot Ness when we need him?
Eliot Ness was the incorruptible U.S. Treasury agent who went after Al Capone, the Prohibition gangster, and brought him down -- not with a gun but with the law (for income tax evasion). He was the implacable face of the law in the 1920s and '30s, first in a lawless Chicago, then in Cleveland and Cincinnati. Ness was revered, and feared, for his toughness and honesty. Fittingly, the unit of government agents he headed -- in real life and in the popular TV series of the '50s and '60s -- was dubbed The Untouchables.
Oh for that implacability today!
Had regulators of the Eliot Ness mold been on duty, two major banking scandals still unfolding -- the British bank Barclays' manipulation of the interbank lending rate and JPMorgan Chase's $5 billion-and-counting losses from outsized hedging of risky credit-derivatives trades -- might never have happened. (Bank regulators of course don't carry a gun, as Eliot Ness did; I am talking of Ness' implacable and unshakeable professionalism.)
In the Barclays scandal, which the estimable Economist magazine characterizes as "the rotten heart of finance," the bank's traders fixed each day's LIBOR -- the London Interbank Offered Rate, the rate by which banks loan to each other, "the most important figure in finance" because of its worldwide reach -- to enhance, greatly, Barclays' profits and appearance of stability. No small thing, this fixing has a titanic effect, influencing (according to The Economist) "about $800 trillion worth of financial instruments" internationally. Yet Barclays' traders went at it in the most flippant way, as reflected in their emails: "Dude. I owe you big time!....I'm opening a bottle of Bollinger." Can anyone imagine Eliot Ness not coming down hard on "Dude" and insisting on real numbers rather than fictional estimates?
Where were the regulators as the Barclays LIBOR scandal played out over the years, going as far back as 2005? In short, as The Economist quotes "an industry veteran," speaking of the Financial Services Authority: "The regulator was asleep." Eliot Ness would be wide awake and auditing hard. (See also here and here.)
In the JPMorgan Chase scandal, increasingly grandiose hedging in the Chief Investment Office, a "profit center" located in London, finally went bust, leading to a startling initial $2 billion loss that experts estimate could go as high as $9 billion. Unlike the Barclays scandal, this one centers on one individual, dubbed "the London whale" because his hedges were so huge they dominated the market. Yet the London whale himself got swamped, tarnishing the reputation of one of the few banks (along with Barclays, it should be noted) that came through the '08 crash relatively intact.
And where were the regulators this time? Astonishingly, "scores of federal regulators are stationed inside [emphasis mine] JPMorgan Chase's Manhattan headquarters," reports the New York Times. These "embeds" include roughly 40 examiners from the Federal Reserve Bank of New York and 70 staff members from the Office of the Comptroller of the Currency (OCC).
The question then has to become: What regulating were they doing? The OCC conceded its failure. CNN Money waggishly asked about "just how many regulators it takes to spot a London whale." The answer is, if there'd been any regulators assigned to the London office -- where, again astonishingly, none were -- that whale might have been beached.
JPMorgan head Jamie Dimon dismissed early signs of trouble in the London office as "a tempest in a teapot." Historically, according to more than a dozen regulators interviewed by the Times, the bank has "a pattern of pushing back against regulators": "'JPMorgan has been screaming bloody murder about not needing regulators hovering, especially in their London office,' said a former examiner embedded at the bank, adding, in a reference to Mr. Dimon, 'but he was trusted because he had done so well through the turmoil.'"
One can imagine Eliot Ness saying "nuts to that," calling a spade a spade -- that such hedging is betting -- closing down the London profit center, going toe to toe with Mr. Dimon.
Instead, we get the chair of the Commodity Futures Trading Commission (CFTC) testifying before Congress recently, admitting, "The system failed" (here and here). He was referring to his agency's failure to spot the criminality of Peregrine Financial Group, one of the many lesser scandals now unfolding, but he could have been speaking of myriad others.
Yet, sometimes the system is made to work: The CFTC won big in being the American regulatory agency that, after conducting a multi-year investigation into the Barclays case, forced the bank to admit wrongdoing and pay a $450-million penalty (here and here).
(In the Peregrine scandal cited above, the CEO, who bilked his clients of millions of dollars over 20 years, described in a suicide note how the Photo-shopped statements he submitted to regulators were always accepted "without question." We need regulators who pummel with question after question after question.)
All this is not to say federal regulators are corrupt or lazy; no doubt many regulators go into the field, and persevere over the years, with the most conscientious of intentions to serve the public, to serve a vocation. But it is to say that the iron implacability in enforcing the law is not there. In its portrait of "the rotten heart of finance," The Economist refers to the "clubby" relations between Barclays (and other banks too) and their regulators.
A recent Bloomberg editorial, equally tough, describes the financial industry as "amoral," citing details. "In each case, bankers put profits ahead of probity while regulators either ignored or failed to spot red flags." The good news? "Regulators don't need new tools, they simply need to make better use of those already at their disposal, including new powers in the 2010 Dodd-Frank financial reform law."
Then, making a point Eliot Ness would make, the Bloomberg editorial declares: "Perhaps most important, regulators must stop treating the companies they oversee like their buddies" (my emphasis again). I would add this: That to be "clubby" or "buddies" with a financial industry that has a "rotten heart" and is "amoral" is to be -- moral bottom line -- complicit. So not Eliot Ness.
It can be said that Society has a lot of regulating of its own to do in cleaning up the current "Greed is good, anything goes" ethos. Regulators don't create an ethos, Society does, and to imply a regulator's complicity in the financial rottenness may seem harsh, but rottenness is the pool we all swim in these days. It takes the implacability of an Eliot Ness to prevail.
We need many, many more like him. Regulators who, in addition to the behaviors proscribed above ("embeds" can't do lunch with host institutions, for one), are truly untouchable, are not "clubbable," to use Samuel Johnson's definition of sociability. Regulators who'd ask every question conceivable, sniff out any impropriety, call a spade a spade, in plain language and not mush-speak. Who, in regulating a financial institution, could never be seduced by the pay and perks that institution confers on its own, could never look the other way because of the prospect of future employment there, could never be guilty of "regulatory capture." Who, in helping to write the regulations, could never be seduced by a lobbyist's blandishments to go easy, insert loopholes. Who, if all these actions uncover a crime, would blow the whistle loud and long, until the handcuffs go on and indictments are filed...
Who'd be, in short, a bankster's worst nightmare -- and, conversely, the best friend Main Street (and the honest bankers) could ever want or need.
By the way, Main Street needs to see those honest bankers step forth, be the Eliot Ness to their own industry.
Only in this way, with the implacable application on all fronts of the rules and regulations, can trust -- that long-lost keystone to an economy -- be restored. We'd also see restored the hero, displacing the anti-hero who's held sway too long. And we'd see the restoration of the "G-man," the man and woman representing a trusted Government.
Sadly, in his later years Eliot Ness met with professional, financial, and marital setbacks, dying nearly destitute at age 54, just before his co-authored memoir The Untouchables was published. But in his prime, he was peerless. He earned his myth, he was death on vice.
Calling Eliot Ness, calling Eliot Ness...
For information on Eliot Ness' memoir, The Untouchables, co-authored with Oscar Fraley, see here.
Carla Seaquist is author of a book of commentary, Manufacturing Hope: Post-9/11 Notes on Politics, Culture, Torture, and the American Character. Also a playwright, she is author of the just-published volume, Two Plays of Life and Death, and is working on a play titled Prodigal.