Our society wouldn’t be much, if anything, without banks. Yay for banks! Yay for bankers! “It’s a Wonderful Life.” Mr. Potter for president! Well, maybe not that last one. But, banks are fundamental to our nation. They help fuel the economic engine of our democracy and they have serious symbolic significance. In fact, two banks – Bank of America and US Bank – have our nation’s name right in them. Our nation and banks, to some extent, are inextricably linked.
Unfortunately, the symbolism of banks – safety, solidity, security – has been tarnished in recent years. In candor, most of us realize that there are some not – too – pleasant and all-too-real reasons for that.
Worthy of Trust?
Most of us can’t even keep track of all the transgressions going on in our financial sector. We saw both Goldman Sachs and Citi establish these fake-out funds (Goldman called it Abacus and Citi called it their Class V Funding III Securities), where they pressed their customers to participate, then once the fake-out funds were populated with their own customers, the banks themselves took the opposite positions. Goldman paid $550 million in a settlement with the Securities and Exchange Commission (SEC), and Citi’s $285 million SEC settlement was tossed out by a judge as too lenient.
You remember the name Greg Smith? He was Goldman’s Executive Director and head of the firm’s US equity derivatives business in Europe, the Middle East and Africa. After 12 years with Goldman, he resigned, penning a letter that appeared in the New York Times in which he said he’d worked at the bank “. . . long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.” Smith went on to say:
“To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money [. . . .] It might sound surprising to a skeptical public, but culture was always a vital part of Goldman Sachs’s success. It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients. The culture was the secret sauce that made this place great and allowed us to earn our clients’ trust for 143 years. It wasn’t just about making money; this alone will only sustain a firm for so long. It had something to do with pride and belief in the organization. I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride, or the belief [. . .] I truly believe that this decline in the firm’s moral fiber represents the single most serious threat to its long-run survival.”
As far as I can tell, things are changing in a positive fashion at Goldman Sachs, and perhaps at other institutions. Things like this, however, don’t take place in the entire financial sector with a memorandum or a few pep talks. They take time, perseverance and a real cultural shift, in my view.
And it is by no means just those two banks that have experienced problematic issues. Wells Fargo – the largest home mortgage bank in the country – entered into a $175 million settlement with the Department of Justice (DoJ) – the second-largest residential fair lending settlement ever. That case involved brokers that charged higher fees and rates to more than 30,000 minority borrowers. From 2004-2009, Wells Fargo charged more to minorities than they did for white customers with the same credit ratings. Tom Perez, DoJ’s Assistant Attorney General for Civil Rights, said it amounted to a “racial surtax.”
Then there is Barclays – one of the largest banks in the world – and its attempted manipulation of Libor rates. As you know, Libor rates affect just about everything in the world involving credit extensions. They are at the foundation of our global economic system, and Barclays tried to rig the numbers. They settled with us for $200 million. They also settled with DoJ and with the U.K.’s Financial Services Authority (FSA).
And of course, there’s MF Global, in which hundreds of millions in customer funds went missing. In another case, The Peregrine Financial Group appears to have engaged in a $200 million fraud.
Last November, Bank of America agreed to a $410 million settlement for charging excessive amounts on overdraft and debit card fees to 13.2 million customers. The bank computer system organized customer debit card and ATM transactions from high to low dollar amounts, as opposed to when the purchase was made. Consequently, customers would enter into negative balance circumstances quicker. As a result, they’d bounce more times and the banks would receive more overdraft fees.