USA TODAY International Edition
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When America’s second- most important central banker talks about an “apparent lack of respect for law” in our big banks, you know you’ve got a serious problem.
William Dudley, the president of the New York Federal Reserve Bank, is not some wild- eyed academic shooting from the hip. He is ex officio vice chairman of the Federal Open Market Committee, the Fed’s chief policymaking body — by definition the second- most powerful official at the Fed.
The New York Fed’s role in executing all central bank market activity and supervising the big banks headquartered in New York makes its president even more important than the Fed chairman in many practical matters.
And Dudley was talking about a very practical matter at a forum in New York last week. He was discuss- ing whether measures taken to prevent future government bailouts of banks “too big to fail” would actually work.
MORE MUST BE DONE
He conceded that the combination of higher capital requirements, better incentives to avoid failure and a living will on how to wind down big institutions in danger of collapse might be, as some argue, insufficient.
“Perhaps this is correct,” Dudley said at the Global Economic Policy Forum at New York University. “After all, collectively these enhancements to our current regime may not solve another important problem evident within some large financial institutions — the apparent lack of respect for law, regulation and the public trust.”
Stop for a moment and think about this. One of the country’s top central bankers and chief financial regulators is accusing bank executives and employees of a “lack of respect for law” — and he doesn’t mean running a stoplight, but major violations of laws against fraud and theft.
“There is evidence of deep- seated cultural and ethical failures at many large financial institutions,” Dudley continued. “Whether this is due to size and complexity, bad incentives or some other issues is difficult to judge, but it is another critical problem that needs to be addressed.”
With banks forking over billions in fines and the country’s biggest bank, JPMorgan Chase, reportedly balking at a preliminary agreement to pay $ 13 billion to settle allegations of mortgage fraud because it doesn’t guarantee there will be no criminal prosecutions, Dudley’s reference is clear.
But his statement goes further. These are not isolated instances or a few rotten apples, as the banks portray them, but “deep- seated cultural and ethical failures.”
‘ PATHOLOGICAL’ ENVIRONMENT
Columbia University economist Jeffrey Sachs delivered a blistering attack on Wall Street last April at an event at the Philadelphia Federal Reserve that was notable for its bluntness.
“I regard the moral environment ( on Wall Street) as pathological,” Sachs said. “And I’m talking about the human interactions that I have. I’ve not seen anything like this, not felt it so palpably. These people are out to make billions of dollars and nothing should stop them from that.”
But to have similarly blunt talk from a top Fed official takes the criticism to a new level.
Having dropped his bomb, Dudley does not offer any quick remedies.
“Tough enforcement and high penalties will certainly help focus management’s attention on this issue,” the central banker suggested. “But I am also hopeful that ending too big to fail and shifting the emphasis to longer- term sustainability will encourage the needed cultural shift necessary to restore public trust in the industry.” That may be too optimistic. Regulators have consistently preached the importance of the “tone from the top” in creating a culture of compliance with laws and regula- tions — meaning that top management must send out a consistent signal that ethical behavior is a value for the company.
FRESH LEADERSHIP NEEDED
Dudley stops short of blaming boards or top executives for this criminal mentality in banks, but there’s precious little evidence that the “tone from the top” at these big banks is instilling a respect for the law.
The current leadership at U. S. banks, in fact, might have a credibility problem if they suddenly abandoned their defensive posture and admitted something was wrong with their culture.
Real change might come only with a new crop of bank executives free enough from the mistakes of the past that they can exercise moral leadership.
New York Fed chief Dudley cannot indict or prosecute criminal behavior, nor can he fire bank executives who tolerate a business culture that puts greed ahead of the law and the welfare of clients. Those are the duties of law enforcement officials, boards of directors and shareholders.
But by addressing the issue so bluntly now, Dudley is doing his bit to ratchet up attention to a situation that is unacceptable.