Weaving a dragnet for naughty bankers
Misbehaving bankers wouldn’t be able to cover their tracks A database could have “a kind of implicit shaming effect”
Bankers and traders move frequently between firms, but their records don’t go with them. If they’ve been fired for breaking a bank’s ethics rules or codes of conduct, or managed to quit just before the ax fell, those violations have usually remained invisible to the outside world. Now a proposal to create a private registry of their misdeeds is gaining traction in the industry. Federal Reserve Bank of New York President William Dudley, who laid out the idea in a 2014 speech, has likened it to a credit score for bankers.
Regulators and bank executives discussed the registry in a closed-door session at a conference in November. Several argued for a searchable database, according to a summary
released by the New York Fed, which hosted the meeting. They debated whether the rap sheet should report only the cause of an employee’s departure or include other warnings and reprimands.
The information wouldn’t be public— only hiring managers and some top executives would see it. The hope is that it could stop offenders from moving easily between banks: “We can see a fair number of people who’ve been bad actors who have recirculated at institutions and created havoc wherever they’ve gone,” says attorney H. Rodgin Cohen of Sullivan & Cromwell, who’s represented large U.S. banks.
Executives from Citigroup, Goldman Sachs, Morgan Stanley, JPMorgan Chase, Deutsche Bank, and UBS were in the room for the discussions; none raised an objection to the concept of a registry. Outside the earshot of regulators, however, some in the industry express concern that it could trample the rights of individuals. One attendee, who asked not to be identified, says a registry would be terrifying for bankers if due process and privacy standards aren’t met. For example, bank executives say, employees would need to be able challenge an accusation in court.
At the same time, global banks need to restore reputations damaged by the financial crisis and scandals involving traders accused of rigging foreign exchange markets and the key London interbank offered rate. Penalties in the foreign exchange probe have surpassed $10 billion, and a dozen banks and brokerages have together been fined about $9 billion in the Libor case.
Dudley is on the defensive as well. Some lawmakers say the New York Fed has been too deferential to the Wall Street banks it oversees. During a congressional hearing in 2014, Senator Elizabeth Warren (D-Mass.) told him if he couldn’t fix the “cultural problem” at the reserve bank, “we need to get someone who will.”
Under a plan due to take effect in the U.K. in March, banks and insurance companies must get information for some new hires going back six years, and employers must say whether former employees have received disciplinary warnings or punishments.
A U.S. registry could be helpful “at the margins,” says Robert Hockett, a law professor at Cornell. “There’s a kind of implicit shaming effect.” Still, many bankers and traders are comfortable “pushing the envelope” and will continue to do so even at the risk of getting a black mark, says Hockett, who’s worked as a part-time consultant to the New York Fed.
Banks supervised by the Fed and two other federal regulators would have to report misconduct to the registry and check it before making a hiring decision. They could still decide to take on a candidate with a spotty record. Since 2014, several traders involved in the foreign exchange and Libor investigations have been hired by nonbank financial firms.
Banking lawyers and executives say the database will likely need congressional action, to protect banks reporting the misconduct of former employees from liability. There’s also the question of whether offenses would be deleted after several years. Ironing out the specifics isn’t the biggest obstacle, according to Cohen: “The devil is truly not in the details,” he says. “The devil is in having the will to do it in the first place.”
The bottom line Wall Street is talking about creating a database to keep track of traders and bankers who break their firms’ rules.
Elizabeth Warren told Dudley that if he couldn’t improve oversight, the Senate would “need to get someone who will”