Yves here. In the US, Sarbanes Oxley as supposed to put paid to the “I’m the CEO and I know nothing” defense, although it still rears its ugly head all too often here. But as Bill Black demonstrates with HSBC, it’s deployed shamelessly in the City.
By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Jointly published with New Economic Perspectives
HSBC’s most recent scandal is the perfect holiday gift. Whatever genre of entertainment one favors – from blood diamonds to drug cartels to rollicking royals to sport stars HSBC was happy to aid the wealthiest stars of your genre to illegally evade their taxes. Taxes were once termed the price we paid for civilization, but they now represent the price the wealthy brag to each other about refusing to pay as they pillage civilization. Because the City of London “won” the “regulatory race to the bottom” it is the worst “vector” for the epidemic of sleaze led by our most elite bankers. Oh, sorry, I let reality intrude in that last sentence.
The “respectable” government people in the UK and the U.S. (and Ireland) insist that we are experiencing the first virgin crisis – consisting of hundreds of thousands of fraudulent transactions by bankers – in which not a single CEO of the largest banks knew that his bank was a massive criminal enterprise. The long-running (anti) morality play with an extended run in each of these three nations claims that we are experiencing the first “Virgin Crisis” conceived without sin in these bank C-Suites. In every case, the bank CEOs – paid like Croesus because they are financial geniuses and managerial wizards – has been bamboozled by the tiny folks in the banks’ “org charts.” Such a betrayal of the trust that the elite bank CEOs reposed in these unworthy junior officers and employees! The pain of the elite bank CEOs is palpable – having their reputation besmirched by their ungrateful and immoral lesser. We’ll put aside who it is that crafts the perverse incentives that created the City of London’s (and Wall Street’s) corrupt financial cultures for the same reason that the CEOs’ apologists put aside that unsettling question.
The latest installment from the UK comes in the testimony of Martin Wheatley, the chief executive of the Financial Conduct Authority (FCA) about HSBC’s latest scandal. Wheatley decried the “staggering” number of scandals the City of London’s banks have committed. Of course, “banks” can only commit scandals through “bankers,” so we all eagerly await which bank CEO will finally be prosecuted. As with the Rebbe’s response at the end of Fiddler on the Roof, we will all have to “wait somewhere else” for a real prosecutor to appear and redeem the promises to protect us from the unjust no matter how great their wealth and power.
Wheatley’s testimony began digging his own political grave.
He told MPs: “I think it’s quite clear that the number of scandals that we’ve seen in financial services, particularly in banks, has been staggering, and the latest allegations I think are equally scandalous.”
Mr Wheatley said he had not known about the specific latest claims about HSBC until they emerged in recent days, though the wider issue of its alleged misconduct had already been made public following leaks in 2007.
Wheatley’s shovel promptly dug deeper.
He said the FCA had not been handed details of the latest HSBC scandal by HM Revenue and Customs (HMRC).
‘I am not aware of a direct channel of information on this particular case,’ said Mr Wheatley, adding that he did not know whether HMRC had any obligation to do so.
To review the bidding, Wheatley says he doesn’t know anything beyond what he read in the newspapers, has no “channel” (as in English “channel”?), to the UK tax authorities even though any banking regulator has to work closely with the tax authorities, and doesn’t know whether his agency and the UK tax authorities even have a system of informing each other of vital information about bank frauds.
Run that last bit past us again … please. It’s 2015, and information documenting “scandalous” misconduct at what is generally called the world’s second largest bank that entered the public sphere in 2007 (over seven years ago) didn’t make it to the attention of the UK’s prudential banking regulator until yesterday. When it did make it to his attention, and knowing he was about to testify to members of parliament he did not find out the “details” of the latest scandal, call his counterpart leader of the UK tax authorities, or even discover whether there was a system for alerting each other to massive tax fraud.
Oh, and HSBC was beyond notorious for its “staggering” number (and magnitude) of frauds – several of which had to be called to the UK (non) regulators attention by the somnolent U.S. (non) regulators. In all those years of sickening HSBC scandals – and the publicity about the leak of the list of likely tax frauds – neither Wheatley nor his predecessors ever suffered from an attack of curiosity (or competence) and decided to find out HSBC’s role in aiding and abetting massive tax fraud by British elites. Indeed, when the Tories came to power they made the ex-HSBC leader a peer and put him in control of a ministry. Lest my readers think this a partisan statement, let me also emphasize that much (probably most) of the frauds occurred under Labor’s (neo-liberal) rule when Tony Blair and Gordon Brown made common cause with the City of London’s bankers against the peoples of the UK.
But wait, Wheatley is simply warming to the inevitable apologia for elite City of London bank CEOs by their (non) regulators.
He was asked whether the FCA has told the chief executives of the major banks to get all of their skeletons out of the cupboard now.
Mr Wheatley replied: “Yes. And we encourage the banks, and they have an obligation to come to us … and talk to us about skeletons early on. And we do have that conversation with the banks.”
But asked if he was confident that the FCA is at least peeking at banks’ skeletons that are not fully out of the cupboard, Mr Wheatley replied: “No, I’m not. Because, frankly, the CEOs don’t know about these skeletons in their organisations.”
Yes, you read that correctly. He doesn’t know the facts about the latest HSBC scandal, but “frankly” he knows already without benefit of facts or investigation that “the CEOs don’t know about these skeletons in their organisations.” If the CEOs never know about any of the “staggering” number of frauds and scandals – and in the case of HSBC we are talking about hundreds of thousands of felonious acts – then (1) might they be creating the system of “plausible deniability” by making sure they create the perverse incentive systems that will produce endemic fraud, (2) shouldn’t they have been fired years ago for incompetence, and (3) haven’t they proved that HSBC is too big not simply “to manage,” but too big for the CEO to prevent from becoming the world’s largest criminal enterprise?
Wheatley has said in the past that it was the compensation systems created by the top managers that created the perverse incentives that produced widespread fraud and abuse.
Martin Wheatley, the Managing Director of FSA described how “most of the incentive schemes we looked at were likely to drive people to mis-sell to meet targets and receive a bonus, and these risks were not being properly managed”.
Honest, competent bankers do not “manage” the “risks” of perverse incentives that lead to endemic fraud and abuse by bankers – they end the perverse “incentive schemes.” Indeed, they make sure they are never created.
Why does HSBC still exist? There is no more “creative destruction” possible than destroying HSBC as a criminal enterprise – ala Schumpeter. Instead, the lesson demonstrated every day by the UK and the City of London is that their financial “champion” is the sleaze of the global financial system – and they are proud to be home to the modern incarnation of BCCI (the Bank of Crooks and Criminals International). It’s what we call “revealed preferences” in the “econ” “business.” What level of depravity does HSBC have to commit before it is too much for Boris Johnson? Like an old drinker who scratches a line on his bottle of whiskey and says “so far, and no further” does Boris have any limit to the criminal conduct by banks and bankers he is willing to champion? Robert Bolt’s screenplay of A Man for All Seasons” contains a famous denunciation of Lord Norfolk’s ambition by his friend Thomas More that Boris and Wheatley should take to heart.
Is there no single sinew in the midst of this that serves no appetite of Norfolk’s but is just Norfolk? There is! Give that some exercise, my lord!
Aspiring to rule over the modern cesspool that is the City of London suggests a variant on Bolt’s most biting dismissal of those who let their ambition trump their integrity.
Why, Richard, it profits a man nothing to give his soul for the whole world . . . But for Wales!
Much of Wales is at least beautiful. “But for the City of London!” is waiting to inscribed on Boris’ tomb.