Four Reasons To Chill Out Over Endless Bank Scandals
Will it ever end?
After Wall Street nearly bankrupted the entire universe in 2008, you'd think the bankers would have gotten their act together and the rest of us would have enacted a zero-tolerance policy toward financial shenanigans.
You'd be wrong, of course.
The latest scandal involves an Iowa brokerage firm called Peregrine Financial which may have misappropriated as much as $200 million of customer money. Peregrine filed for Chapter 7 liquidation recently and its CEO, Russell Wasendorf, apparently attempted suicide outside company headquarters. Various regulators and the FBI are still trying to figure out what happened.
This comes after revelations that Barclays and several other big banks manipulated one of the world's most important interest rates, the Libor, from 2005 to 2009, as a way of disguising their own financial woes. That calls into question the way trillions of dollars' worth of financial contracts based on Libor were priced.
Before that, we were treated to Morgan Stanley botching the Facebook IPO, deemed by many the most important ever, even though Morgan Stanley's favored clients may have gotten preferred treatment that allowed them to fare better than ordinary investors.
And before that, we heard how J.P. Morgan Chase, once thought trustworthy, lost several billion dollars on a foolish gamble it shouldn't have taken.
And before that, the brokerage firm MF Global went bust while misplacing more than $1 billion of customer money that still hasn't been located.
[See why rigging the Libor rate is a big, rotten deal.]
And before that, well, the whole sordid industry seemed to have dragged us into a Madoff-ian nightmare, with nearly every prominent bank tarred by some allegation of shoddy or manipulative practices.
Public trust in banks, not surprisingly, has plummeted, with just 21 percent of Americans saying they have confidence in banks, according to Gallup, down from 53 percent just eight years ago. When banks try to raise fees by even a couple of bucks, consumers howl. A nonprofit operation called Move Your Money has even sprung up to help consumers find smaller community banks in order to "invest in Main Street, not Wall Street."
The outrage is justified, and continued efforts to re-regulate Wall Street and rein in its legalized gambling probably make sense. But we may also have reached a turning point at which consumers and regulators are starting to gain the upper hand, with banks and their indomitable leaders in retreat for once. Here are four signs that bankers are finally getting a bit of comeuppance:
Renegade bankers are paying a price. Barclays CEO Bob Diamond was forced to resign over the Libor scandal, and the bank made him forfeit $31 million worth of bonuses. J.P. Morgan Chase plans to invoke "clawback" provisions to reclaim millions of dollars worth of company stock from the bankers responsible for a huge trading loss that could total $5 billion or more. These types of penalties were virtually unheard of during the financial crisis that began to smolder in 2006, with the CEOs of firms such as Citigroup, Merrill Lynch and AIG departing with pay packages that totaled eight or nine figures, even though they left their firms in disastrous shape.
[See why there are fewer rich Americans, and more rich Chinese.]
Shareholders are punishing wayward banks. J.P. Morgan's stock price has fallen by more than $10 per share since the news surfaced about its embarrassing loss and the failure of internal controls to prevent it, slicing roughly $40 billion off the company's market value. Overall bank stocks have significantly underperformed compared to the market as a whole over the last five years. There are a lot of reasons for that, but one of them is investor concern that bank misdeeds will invite heavy regulation that will depress profitability. And lower profitability means less money for bankers. It's happening in an indirect way, but the sins of bankers are coming full circle.
Litigation attorneys are circling like vultures. The New York Times reports that banks which manipulated the Libor could face dozens of costly lawsuits, especially from cash-strapped municipalities that may have lost money on financial contracts pegged to Libor rates. Official investigations into MF Global and other firms, meanwhile, have uncovered loads of information that litigators can use to try to recover damages. It may be impossible to know why Wasendorf attempted suicide, but it's probably a good guess that he didn't foresee an easy escape from whatever misdeeds may have occurred at his firm. After all, it's no longer 2006.
Distrust of banks may be a good thing. If Americans lose confidence in their banks, so what? A strong dose of skepticism may be exactly what we need, in the aftermath of an anything-goes decade in which greed trumped common sense and Machiavellian financiers skewered the gullible. Greed may still rule, but we're more prepared for it now. That will make it less profitable.
Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.