In a law firm, there are some things you just don't do. You never give or take money from clients outside a formal billing process. You don't help them to commit a crime, knowingly hide the fruits of wrongdoing, fall asleep on the job or bill twice for the same hours. And you never, ever, ever blow a deadline
Contrary to their reputation, lawyers have effectively chased these practices to the edges of the profession. It's not that they're a particularly virtuous breed. It's out of self-interest in a world with legal ethics and malpractice. Lawyers, like doctors, who are lazy, corrupt and incompetent risk their reputations, their finances and even their license to practice.
It's time to add bankers to that list.
In the wake of the recent Wells Fargo fraud, the topic of banking enforcement has come back to the fore, but deterrence is a serious problem. Fining the institutions has proven inconsequential thanks to regulators who chase after inconsequential numbers. Agents get multi-million dollar settlements that sound great in a headline, but are rounding errors when compared to the size of the target. Wells Fargo's record breaking $185 million fine, for example, amounted to 3% of the bank's $5.6 billion earnings for Q2 2016 alone.
The upshot is that these penalties become transactional.
"The problem with fining," said James Cox, a professor with Duke's Fuqua School of Business, "is that you're just identifying what the tariff is to conduct the business. The real choice is to impose sanctions that will hit the senior executives."
"They throw their low paid tellers under the bus," he added. "Actually it's under the Ferrari that their CEO is driving away in chuckling… I'd like to take that Ferrari away, quite frankly."
Cox is on to something very important here. The only way to change the culture of an industry is through the decision makers themselves. Consequences must be as personal to bankers as they are to the consumers victimized by this activity; when a banker chooses to see no evil while five percent of his accounts materialize out of thin air, he personally needs to pay for that.
Because, and this cannot be emphasized enough, nothing else will work. No matter how much an institution pays in fines, even to the point of bankruptcy, as long as individuals are getting rich then the incentive structure remains in place.
It's not easy though. As we cover in the companion piece to this story, criminal penalties are incredibly difficult due to the distributed nature of decision making at large banks. No one owns enough of the process to prove lawbreaking up to the standards of a criminal court. Civil suits might be more successful, except that the bank would almost certainly indemnify its employees, making this just a minor fine imposed on the institution.
If only we had a model for restraining the behavior of professionals in complex, highly technical industries who owe a duty of care to their consumers.
Oh wait. We do.
Licensing and malpractice liability are well established, well understood and they work.
Doctors and lawyers owe a duty of professionalism, one established by colleagues and overseen by courts and licensing associations. This duty forces practitioners to take ownership of their decisions, going so far as to criminalize practicing law or medicine without a license so that people who do give, say, legal advice can be identified and held to a certain standard.
At a law firm, no matter how many paralegals, secretaries or other attorneys touch something, nothing goes out the door without ownership. One or more licensed lawyers have put their name to the paper to say, "I am responsible for the advice and decisions represented above." Imagine how much differently the Wells Fargo fraud would have played out if each account had required the signature of someone for whom that act carried the weight of personal liability.
Along with licensure comes the self-policing inherent to any system of liability. Bankers who were found guilty of abusing a client's trust could face malpractice suits judged by courts free to adjust punitive damages as necessary to account for golden parachutes, insurance and indemnification. Boards of ethics could strip bankers of their right to ever work in the industry again. (Aren't there more than a few we would like to see drummed out of the profession?)
And, critically, the system would shift from the top-down duty of a handful of overworked regulators to the grass-roots enforcement that comes with a private right of action.
When every, single customer of every, single bank has the right to sue over wrongdoing, financial regulation would suddenly become the province of a network of plaintiff's attorneys all highly motivated to seek out and prove wrongdoing. Fraud like that at Wells Fargo would get noticed as soon as someone called their lawyer over a hinky credit report, rather than our current system's need for a problem to grow to Washington's scale.
Now, to be sure, this is not an unmitigated defense of the malpractice system. It has serious flaws, ranging from the well-known scourge of greed riddled patients who see doctors as walking cash pinatas to state bars who are notoriously slow to kick out the worst offenders. These flaws co-exist, however, with the system's overall successes: professionals who are personally incentivized not to take advantage of their rarified privilege, and who generally don't.
The bigger concern is whether this system could actually work against bankers. Sumit Agarwal thinks not.
Agarwal, a professor with Georgetown University who has worked as both a financial regulator and a senior vice president with Bank of America, argues that the banking system is simply too institutionally broken to respond to this kind of pressure.
"A good idea that's impossible to implement," he said of this proposal. "In a micro sense it works, we can revoke the licenses of lawyers or doctors… [But a banker], she's walking away with $100-plus million dollars. She'll say please revoke it. I don't think it matters in that context."
As to civil liability, he said, remember that you're dealing with people who are institutionally expert at moving money around and obscuring liability.
"Imagine, if the regulator cannot extract over $180 million, how much do you think the civil suit can extract?" he said. "And they [the bankers] will hide assets."
"At the end of the day you'll be fighting for peanuts," he said. "And the lawyers will say, 'why are we going after her, why not go after the deep pockets?'"
Perhaps. Certainly Agarwal's depth of expertise in this field is not to be discounted, but at the same time all of this could be said of other wealthy, specialized fields. Lawyers are experts at fudging the law, while doctors could unite and simply insist that any colleague's action meets the standard of care.
Yet, in practice, their colleagues hold them to account far more often than not. Should bankers try to hide assets the case would certainly become more difficult to collect, but on the other hand, there'd be a clear-cut felony to prosecute.
Financial regulation in America has failed, that much is the inescapable lesson of the past several years of fraud, wrongdoing and laughable penalties. Lawmakers need to stop treating banks as institutions and see them for what they are: a collection of decision makers following their best interest. The system won't change until fraud and individual self-interest no longer align. The best, most flexible way to do that, is by making bankers liable for malpractice.
It's time to make bankers responsible to their customers.