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”

Bloomberg Businessweek (Europe) - - Contents - −Ian Katz

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”

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