Congratulations to you, Tom Montag, named sole chief operating officer of Bank of America this past Wednesday. And first thing Thursday morning asked to sign a check to the government for $16,650,000,000 to settle complaints that the bank sold flawed mortgage securities in the days preceding the financial crisis. But don't feel too badly. Only $9.65bn will go to various regulatory agencies. Some, $7bn will go toward writing down the balances of homeowners struggling to meet mortgage payments, and to demolish foreclosed homes in blighted neighborhoods. Nice of you to arrange this gigantic transfer of wealth from your shareholders to the government's coffers and to stressed homeowners and communities, with that relief arriving in time for them to decide which party to vote for in the mid-term congressional elections 73 days hence. Do all of this and the Justice Department might not file criminal charges against you and the bank, which it has reserved the right to do.
Brian Moynihan, Bank of America's CEO, has reason to feel aggrieved. The mortgage mis-selling was done largely by Merrill Lynch and Countrywide before BofA acquired them -- at the urging of the government, which feared that failure of those institutions would exacerbate the financial crisis. Timothy Geithner, former secretary of the New York Fed and the U.S. Treasury writes in his recently published memoirs that BofA's acquisitions "eased fears of a collapse." This settlement, which brings total fines paid by the bank to an estimated $70bn, "allows us to continue to focus on the future," Mr. Moynihan told the press. Not a bad thing.
All of which makes the $300 million Standard Chartered forked over to regulators in New York State earlier this week for poor monitoring of money laundering by Asian and Arab clients seem a mere slap on the wrist, even though it follows an earlier $667 million fine for violating sanctions rules. Worse still, CEO Peter Sands cannot follow Mr. Moynihan in announcing that StanChart can now look to the future. The settlement bars the bank from accepting any new customers with dollar-clearing needs without the specific approval of the regulators. Analysts are saying that unless Sands reverses the bank's 20 percent drop in first-half profits, paying the fine might just prove to be his last act before he clears his desk for a successor.
Politicians and regulators who are cutting a swath through bank earnings know two things. One is that the public doesn't like bankers any more than it did twenty years ago, when polls showed that only 36 percent of Americans had a favorable opinion of banks. That figure today is a not-strictly comparable 27 percent, putting bankers a bit behind auto mechanics (29 percent) who aren't exactly trusted when they shake their heads sadly and say that you need a completely new something-or-other, but ahead of lawyers (20 percent), car salespeople (9 percent), members of Congress (8 percent), and lobbyists (6 percent) in public esteem, according to a recent Gallup poll of Americans' opinion of bankers and other tradesmen. So if you are a vote-seeking politician, fining banks is a good way to increase your popularity, especially if some of that money trickles down to your constituents, preferably close to Election Day.
The second thing regulators and politicians know is that bankers rarely miss an opportunity to miss an opportunity to soften the public's negative view of them and their profession. Yes, bankers do have to turn down excessively risky loans sought by potential home-buyers and small businessmen -- not a popularity winner. But no, they don't have to do all they can to make certain that the public sees them in an unfavorable light. Which is what they have been doing ever since the head of Goldman Sachs told a congressional committee that he is "doing God's work," implying that he and bankers had arranged a long-sought merger between God and Mammon.
The pity of it is that the banking industry now has an opportunity to tamp down public antipathy by ending opposition to the more sensible proposed regulations and concentrating on looking to the future, which needs a good deal of looking to if the industry is to survive the winds of change that are buffeting it.
There is little doubt that the volumes of regulations include many that are just plain silly, and many that are counter-productive. But neither is there any doubt that some are needed if the threat to the financial system posed by banks that remain too-big-to-fail is to be reduced -- it never can be eliminated entirely, since the woes that befall one big bank contain the seeds of the downfall of other big banks with which they are inevitably interconnected. Yet the bankers persist in fighting the wrong battles at the wrong time.
Now does not seem a good time to whine about the adverse effect of regulation on bank profits, even though there is little doubt that Dodd-Frank and the tens of thousands of pages of regulations it has spawned and will spawn are making life difficult. The $40.24 billion in net income that U.S. banks earned in the past quarter was the second largest total in 23 years, according to researchers at SNL Financial, only a tad below the $40.36 billion record in the first quarter of 2013.
Nor, in the face of near-record earnings and headlines about mortgage-market abuses, money laundering, and poor control procedures, does it seem wise for the largest banks to seek relief from what the Wall Street Journal calls "a central provision" of the Dodd-Frank law. That provision, generally known as the Volcker rule, requires banks to reduce their risk by disposing of their investments, estimated to be in the range of tens of billions of dollars, in private equity and venture capital funds. Reports from Washington are that the banks' lobbyists are seeking a seven-year delay in the implementation of this aspect of the Volcker rule. If they get the regulatory relief they seek, and if there is even a mild repeat of the recent near-meltdown in the financial system, a break-up of the big banks would be the inevitable solution to too-big-to fail.
Nor, given mounting concern, justified or not, about rising income inequality, and stagnant middle class wages, is it a propitious moment for major banks to use their rising profits to raise compensation, including bonuses, of recent college graduates to something like the $140,000 compensation experts Johnson Associates estimates, while reducing work schedules. "There's little left to control your banker envy....Young employees can have their cake (money) and eat it too (life-style balance)," joked (?) Bloomberg Businessweek. The banks say they had to do it to meet competition for talented entry-level employees. For those of us who believe in markets that is reason enough, and surely better than the decision of Silicon Valley CEOs to form a no-poaching cartel that is forcing them to settle claims of thousands of employees whose salaries were depressed. The cartel was put together after Steve Jobs threatened to declare "war" on any company making offers to his staff.
And yet, and yet ... If necessity was indeed the mother of the invention of the salary-increases, better not to whine about the pressure new regulations put on profits.
Meanwhile, the hold of the too-big-to-fail banks on the financial system is being loosened by the emergence of boutique lending institutions, peer-to-peer lending, and regional banks. No "disrupter" with the impact Uber has had on the taxi industry is in sight, but just a few years ago no one had ever heard of Uber.