From Reality Check

We all know that when it comes to character, actions speak louder than words. So let’s call the moral bankruptcy showcased daily what it is.

Let’s start with the bankers.

The Bankers 

To show you the moral bankruptcy displayed by people like Bryan Moynihan (Bank of America), Jamie Dimon (JPMorganChase), John Stumpf (Wells Fargo) and the rest as clearly as possible, I need to set the stage using a hypothetical top banking executive–Banker Bob.

Let’s be as sympathetic as possible to Banker Bob, and have him start his job with clean hands. Banker Bob came in as CEO from a different industry; he’s some kind of turnaround specialist. That already puts him on higher moral ground than the people running our bailed-out banks.

True, BofA’s Moynihan got the top job as of January 1, 2010. But Moynihan was promoted from within; he’d been with FleetBoston Financial, which was swallowed by BofA, since 1993. And since 2004 he’d held “senior leadership positions at Bank of America representing experience across virtually all business lines,” as the press release announcing Moynihan’s promotion pitched him.

Dimon’s an even more culpable insider; he’s been running JPMorgan Chase as President since 2004 and CEO since 2006. Dimon fully consolidated his control by becoming Chairman at the start of 2007. Over at Wells Fargo, Stumpf has 29 years of experience at the company, taking over as President in 2005 and CEO 2007, and Chairman in 2010.

Perhaps the closest big banker to Banker Bob in this regard is Citi’s Vikram Pandit, who came to Citi in 2007 and took over near the end of that year. That said, Pandit’s no newbie, having run Morgan Stanley’s investment banking division, followed by running his own hedge fund. And he took over at Citi before Citi finished wreaking all the havoc it did in the meltdown.

Unlike those guys, our Banker Bob is totally innocent the day he gets the top job; none of his company’s current ruin is his fault. And let’s be specific about the ruin the company is when Bob takes over.

The Ruins That Are Our Bailed Out Banks

First, the executives that preceded Banker Bob “built” the company by buying up other companies, exactly the way Bank of America, JPMorgan Chase, Citigroup, and Wells Fargo came to be the monstrosities that they are today. Each acquisition triggered major payouts to the executives, and each resulted in layoffs and reduced morale for the original companies’ employees. Such wealth for the executive few and pain for the worker many is justifiable if the executives deliver the shareholder value promised by the deals: a better, stronger, more profitable company. However, in the case of Banker Bob’s bank (and BofA, JPMorgan Chase and Wells Fargo) generally the executives failed to execute the acquisitions properly.

Instead of a new, integrated and more potent company, say, a solidly built tinkertoy creation, the companies were like a bunch of marbles in a bag too small to hold them snugly. That is, profits and share prices may have spiked, but at the expense of the company. Shareholders lost.

And that’s the first moral failing: doing a lousy job without being accountable for the failure. How do I know they weren’t accountable? They kept their jobs, took big payouts and heaped misery on those much weaker than them. The failure to integrate the companies is deeply ironic, if you think about it, since executing, such as implementing a plan of merger, is what “executives” are supposed to be good at, right? Nonetheless, in those failures, Banker Bob’s predecessors were merely following the law of averages; “70% of banking mergers fail“, a Bain & Co. consultant told USA Today when Dimon merged BankOne into JPMorgan Chase.

As a result of all the poorly executed mergers, Banker Bob’s company has databases that can’t effectively talk to each other, just like the problems at JPMorgan Chase described by whistleblower Linda Almonte. (Read my DailyFinance story on Almonte here, and her SEC letter here.) I mean, banks’ databases are so bad that the “never-event” of being wrong about what a borrower owes happens all too frequently.

Second, Banker Bob’s predecessors ruined the company with gambling, er, “trading”, and lies. In fact, when the bets were called and the lies exposed (by the surprise mark down of AAAs), the company’s only hope of continued existence was a government bail out to the tune of hundreds of billions of dollars. (See page 4 of the second link for a company-specific bailout breakdown current as of October 1, 2011, by Naomi Prins and Krisztina Ugrin).

What kind of “trading” destroyed the banks? Rampant speculation, including betting that companies the traders had no interest in would fail, like betting your neighbor’s house will burn down. Similar wagers were made on whether or nothomeowners would default on their loans. And in the years leading to the crisis, the bankers and traders were these placing bets with lots of borrowed money. (See also here and here.) That’s right; the bankers and traders were using credit cards for cash advances at the casino.

Many people have long viewed gambling as immoral, or at least morally questionable. And gambling with borrowed money? How about gambling with thrice borrowed money, so that the collateral no longer backs the loans? (Check out “re-hypothecation” here.) That’s definitely immoral. Worst, the bankers and traders knew they were making disasters for others to deal with; they didn’t care so long as they got their fat bonuses. This attitude is embedded in the Wall Street slang “IBG, YBG“, for I’ll be gone, you’ll be gone (when the s–t hits the fan, after the bonus has been paid.)

But the immoral corporate self-immolation in the name of massive pay for the few went beyond gambling; it included lies. What kind of lies destroyed the banks? Let’s start with making the loans. Bankers lied to homeowners about the terms of the loans they’d get (see comment about bait & switch at closing here) and lied to their own computers by inputting mythical, magic numbers so the software would approve the loan (so many possible cites, here’s one “this is the figure that made the ratios fit”). After the loans were funded, bankers lied to investors (like pension funds) to get them to buy the loans your employees called “crappy” (though more crassly) behind the investors’ backs.

But the bankers’ lies to investors went beyond the loan quality. The lies generally included all the contractual promises about giving good title to the loans they were selling. That is, the company lied about doing mountains of necessary and important legal documents truthfully and on time. Those lies alone have the power to destroy the bankers’ companies, as the Congressional Oversight Panel discussed.

So that’s another form of immorality the bankers have so flagrantly displayed: lying. The wrongness of lying is so basic my four year old gets it. Again, our Banker Bob, unlike the current captains of the industry, didn’t tell any of these lies. And don’t waste any time on claims that the guys on top didn’t lie. That’s nonsense. The guys on top set the compensation structures that incentivized lying, and they fired the whistleblowers who tried to get the executives to stop the lying. And, most fundamentally, the buck stops at the top.

When the financial crisis caused housing prices to fall off a cliff, foreclosures spiked. Suddenly all those never-properly done documents were needed, so Banker Bob’s predecessors hired document fraud factories to fill in the gaps. In so doing the bank executives revealed their belief that they are allowed to break the law, if the law interferes with their profits. And the immorality of that position couldn’t be clearer.

Okay, so here’s the picture when Banker Bob takes the reins:

The bank’s financial statements are a mess, and since investors aren’t (always) stupid, the bank is trading at a steep discount to book value;

The bank’s databases are so flawed it continues to drive homeowners into foreclosure that are current on their mortgages;

The bank is continuing to commit document fraud, even after signing agreements with the government promising to stop;

The bank is failing to modify mortgages sustainably in violation of its promises to the government and its actions reek of bad faith; and

The bank faces massive but as yet unquantifiable liabilities for all the immoral and illegal acts of Banker Bob’s predecessors.

So what does Banker Bob do?

The Bankers’ Ongoing Moral Bankruptcy

Does Banker Bob insist on giving investors an honest accounting of his banks’ books, knowing he has to sign off on the financial statements under Sarbanes Oxley? That would be the moral and ethical thing to do. I mean, doesn’t his signature on those certificates mean anything to him? Unlike many of the mortgage loans with their legalese and lengthy riders, the Sarbanes Oxley certificates are short and easy to understand. And Banker Bob self-righteously points to homeowners’ signatures on the mortgage loans, doesn’t he?

Moreover, all the big banks are public companies, seeking all the benefits of the capital markets. And the lifeblood of the markets is timely and accurate information. (See, e.g., the SEC’s Fair Disclosure regulation, aimed at the profitable-for-executives distortions of “selective disclosure.”) So does Banker Bob insist his company comes clean? Sadly, the answer is “No.”

On the incompetence resulting from busted acquisitions, what does Banker Bob do? Does overhaul procedures and dedicate resources to ensure that payments are no longer processed inaccurately? Does he stop his bank from charging inappropriate fees? Does he stop his company from forcing unnecessary and exorbitantly expensive insurance on borrowers? All those would be the moral things to do, since generally being competent is a basic part of good faith and fair dealing. But I can’t find any sign that Banker Bob’s doing any such thing.

How about the most blatant lawbreaking? Does Banker Bob shut down document fraud, insisting that his company will obey the letter and the spirit of all the laws that apply to it? This time the answer isn’t no. It’s Heck, NO!. At least there’s no sign any bank or mortgage servicer has quit the document fraud habit, not in any form visible in any court or land record office in the nation.

Does Banker Bob investigate his bank’s inability to modify mortgages as mandated, and fix the problems by dedicating the staff and resources necessary to do the job? That would be the moral thing to do, since the banks’ current practices are deceptive and abusive, and are harming homeowners in incalculable but devastating ways. Again, no.

Does Banker Bob make a Japenese-style show of contrition to save face while he struggles mightily to fix the bank he runs? Ha. American bank executives have responded to the situation by whining, while Japanese executives have been known to commit suicide in the face of humiliating failures by their companies. So that’s a “No.”

Does Banker Bob at least insist that he won’t take another dime in compensation–not another penny from shareholders–until he has fixed the company he’s running? I mean, his millions could hire an awful lot of people to make his company run better. Again, the answer is no. In fact, it’s more like, no, no, absolutely not, over my dead body will I give up any compensation even though my company sucks.

(To be fair, Citi’s Pandit has offered to work for $1/year, but it’s worth noting he cleared almost $80 million from Citi when it bought his company, and that’s money he only really gets to keep if he stays at Citi through the end of this year.)

The Damage Done

In total, the malfeasance and incompetence of the bank Banker Bob leads is devastating our economy. The banks’ securities fraud cut off the capital that used to fuel the mortgage market, destroying demand and pushing home prices into the free fall that’s drowning so many homeowners. The banks’ lies and incompetence of all sorts mock the rule of law daily, wrecking our land records, and evicting millions of people who rightfully should still be in their homes. (Millions when you count both servicer driven foreclosures and failures to appropriately modify loans.) And in the face of all this the only thing Banker Bob tries to do aggressively is settle lawsuits on terms abusive of investors and homeowners.

Let’s recap. After incompetently building bank behemoths by piling little banks up on one another like badly built cairns, bank executives lied to everybody, borrowed all the money they could to fuel their gambling, and demanded taxpayers bail them out. Throughout that time and after, their companies functioned incompetently, consistently abusing homeowners and wrongfully rendering many people homeless. And the bankers, including even mythical, initially innocent Banker Bob, have been paying themselves millions of shareholders’ dollars each year.

If that’s not moral bankruptcy in motion, what is it?

And I haven’t even mentioned how the bankers consistently push the “irresponsible borrower” myth and all the policy-paralyzing consequences that flow from it. Manufacturing and propagating that myth is in itself a demonstration of moral bankruptcy.

Beyond Morally Bankrupt Bankers: Our Government

The only thing worse than the moral bankruptcy so vividly on display by our top bankers is its reflection in our Government. I mean, beyond the need to obey the law, transact with good faith and fair dealing, and occasionally honor a fiduciary duty, it’s fundamentally not bankers’ jobs to look out for ordinary Americans. But it is our government’s job. And even a cursory look at our Government’s actions regarding bank and housing policy reveals a moral bankruptcy that makes bankers look, well, not quite alter-boyish, but certainly much better.

In future posts on this theme, I’m going to look at our most bank-captured regulator, the Office of the Comptroller of the Currency; our most bank-captured cabinet positions, the Secretary of the Treasury (yes you, Mr. Timothy Geithner) and the Attorney General (yes you, Mr. Eric Holder); our indefensibly banker-wannabe Fannie and Freddie; our most bank-captured members of Congress (yes you, Consumer Bureau-blocking Congressional Republicans); and finally, our shockingly bank-cowed President Obama.

Right now though, I’m going to go scrub my hands over and over with warm soapy water, typing this up has just made me feel so gross.

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