Sometimes banks do bad things and then they get in trouble.
The form of trouble that they get in is, for the most part, that they have to pay big fines. Many people find this to be an unsatisfying form of trouble. In particular, a fine looks a lot like a price, and raises the specter that big banks are just running around paying for the right to do bad things. People don’t like the idea that penalties for misconduct might be just a “cost of doing business” for big banks. Back when Bank of America was getting fined billions of dollars every two weeks for mortgage badness, I took this line myself: Constant negotiated fines suck the moral dimension out of bank punishments, making it easier for bankers to rationalize misbehavior as just a losing trade rather than as something about which they should be ashamed.1
Here is a Bloomberg News story about JPMorgan’s use of algorithms “to identify rogue employees before they go astray.” It is partly interesting for the algorithms, which will look at “dozens of inputs, including whether workers skip compliance classes, violate personal trading rules or breach market-risk limits,” and then “refine those data points to help predict patterns of behavior.” I suppose there is a certain creepiness to the algorithms — “We’re taking technology that was built for counter-terrorism and using it against human language, because that’s where intentions are shown,” says a guy,2 creepily — though I don’t want to overstate that. I used to work at a bank that blocked curse words in e-mail,3 because cursing in e-mail is apparently an early warning sign of a propensity to structure bad synthetic CDO-squareds.
I am not especially troubled by the notion that people who break rules or skip compliance classes should be monitored a bit more closely for compliance. Seems like a pretty sensible algorithm to me.
What I think is more interesting, though, is what drove JPMorgan into the arms of the algorithms:
A February memo from executives including Chief Operating Officer Matt Zames urged employees to flag compliance concerns to managers and reminded them that scandals hurt bonuses for everyone.
Meeting the company’s financial targets depends on reducing legal bills. The investment bank’s return on equity will rise to 13 percent from last year’s 10 percent largely by cutting legal and other expenses, according to a February presentation.
Talk about taking the moral dimension out of bank punishments! The most unhinged fantasies of big-bank evil do not encompass a PowerPoint slide weighing the costs and benefits, from a bonus and/or return-on-equity perspective, of not committing any more fraud. Let’s go look at the slide:
JPMorgan managed to translate, “Let’s stop manipulating currencies and electricity and whatever else we were going to manipulate” into a green bar with a 2.5% label on it. It’s so beautifully bland.
Here’s the thing though. When you run a big bank, you will have misbehavior. Any big group of people will include some people who do bad things. That’s not a problem of banking; it’s a problem of statistics.4 Here is Warren Buffett:
Somebody is doing something today at Berkshire that you and I would be unhappy about if we knew of it. That’s inevitable: We now employ more than 330,000 people and the chances of that number getting through the day without any bad behavior occurring is nil.
And he’s jolly and beloved; imagine Jamie Dimon saying that.
On the other hand, the nice thing about banks is that they are good at managing problems of statistics. It’s their whole business.