There are basically two ways for a big bank to do bad things:
- It can do bad things to itself.
- It can do bad things to someone else.
There is some blurring of the boundaries. The U.S. legal system being what it is, No. 2 quickly turns into No. 1 as well: If you, say, manipulate Libor, or sell someone a mortgage-backed security that is designed to fail, or whatever, then eventually you will get in trouble and have to pay big fines and generally end up regretting whatever bad thing you did. And, the banking system being what it is, No. 1 can become No. 2 as well: If you do enough harm to a bank, or more particularly to the banking system, it can blow up the economy for everyone else.
Still they are essentially different things. No. 1 is an error of business judgment: A bank can make bad trades or bad loans, just like any other company can make bad business decisions, and then it will lose money. Bad business decisions at big banks are perhaps of more societal concern than bad business decisions at tech companies or whatever, insofar as big banks are big and levered and funded by run-prone financial instruments. So you might want to regulate banks to try to keep them from making bad business decisions, and in fact we frequently do.1
No. 2 is, you know, fraud, or fraud-lite, or “the business model of Wall Street is fraud,” or some other fraud-adjacent concept. It is not unique to banks either; lots of companies in lots of industries find lots of ways to harm and deceive their customers. I suppose you could make a case that the financial industry is especially susceptible to fraud, in that its core products are complicated and somehow ethereal, but, you know, who really understands how their Volkswagen’s engine works? In any case, sure, you would probably want to regulate banks to try to keep them from defrauding their customers, and again we do.2
One loose thing you could say is that in 2008 there was a lot of reason to worry about banks doing bad things to themselves. They had all that money, and then they didn’t have it any more; where did it go? They must have done bad things to it, like invest it in risky mortgage-backed securities. And then there was a financial crisis and a recession, and regulators sensibly responded by trying to come up with ways to stop banks from doing bad things to themselves. And then the banks more or less did. There were some blips, like the London Whale, but by and large the regulatory push to make banking boring and safer has made banking boring and safer.
But that success is no reason to stop being mad at banks, because it turns out that banks also do bad things to other people, and there is still plenty of anger to go around. Some of it is related to the financial crisis — while banks were loading up on risky mortgage-backed securities, they were also perhaps misleadingly selling those securities to customers – but most of it isn’t. The Libor scandal, the foreign-exchange rigging scandal, State Street’s dumb sad scandal where it overbilled customers for SWIFT messages: None of these things have much to do with swashbuckling traders loading up on crazy risks that might put their employers into bankruptcy. Quite the reverse. Rigging Libor, or fixing FX exchange rates, reduces a bank’s risk: It turns a market risk into a known, predictable, manipulated thing. And honestly it is hard to think of a safer, or less exciting, revenue source than passing through out-of-pocket expenses to customers and adding a markup.
In some ways, those are the scandals that you would expect from boring banking: Not taking wild risks in the hope of obscene profits, but finding low-risk ways to squeeze extra money out of customers without their noticing.
Today, in a weird quirk of the U.S. financial regulatory system, the National Credit Union Administration released a new proposed rule requiring big banks to defer bonuses for four years and claw back pay from traders who cause big losses. (The National Credit Union Administration doesn’t actually, you know, regulate Goldman Sachs and JPMorgan, but there is something symbolically pleasing about it being the agency that announced the rule.3) The rule is a result of the 2010 Dodd-Frank Act, and ”regulators scrapped an earlier version of the rules in 2011 after a flood of criticism,” but there is still something somehow 2010-ish about the new rule. Its focus is on risk-taking. The rule requires big banks to hold back incentive pay for four years (with no faster than pro rata annual vesting) for “senior executive officers” (who have to have 60 percent of their bonuses held back) and “significant risk-takers” (who have to have 50 percent held back4). ”Significant risk-takers,” in turn, are employees who get at least one-third of their pay in the form of incentive-based bonuses and either:
- Are in the top 5 percent of employees by pay5; or
- “May commit or expose 0.5 percent or more of the net worth or total capital” of the bank.
The basic result is that executives, very senior managers, and traders with the power to lose money6 have to have their bonuses deferred. Most salespeople and advisers, on the other hand, seem to be more or less unrestricted. That 0.5 percent threshold is just for direct risk to the bank: