Finance, like a cancer, grows

Roberto Savio trains the spotlight on the dangerous “new ethic” of the financial sector.

It is astonishing that every week we see action being taken in various parts of the world against the financial sector, without any noticeable reaction of public opinion.

It is astonishing because at the same time we are experiencing a very serious crisis, with high unemployment, precarious jobs and an unprecedented growth of inequality, which can all be attributed largely to speculative finance.

This all began in 2008 with the mortgage crisis and the bursting of the derivatives bubble in the United States, followed by the bursting of the sovereign bonds bubble in Europe. It is calculated that we will need to wait until at least 2020 to be able to go back to the levels of 2008 – so we are talking of a lost decade.

To bail out the banks, the world has collectively spent around $4 trillion of taxpayers’ money. Just to hit home the point, Spain has dedicated more than its annual budget on education and health to bailing out the banking sector ... and the saga continues.

Financial skulduggery

In the week of 18 May, five major banks agreed to pay $5.6 billion to the US authorities because of their manipulations in the currency market. The banks are household names: JPMorgan Chase and Citigroup from the US, Barclays and the Royal Bank of Scotland from the UK, and the Swiss UBS.

In the case of UBS, the US Department of Justice took the unusual step of tearing up a non-prosecution agreement it had reached earlier, saying that it had taken that step because of the bank’s repeated offences. “UBS has a ‘rap sheet’ that cannot be ignored,” said Assistant US Attorney-General Leslie Caldwell.

This is a significant departure from the Justice Department’s guidelines issued in 2008, according to which collateral consequences have to be taken into account when indicting financial institutions.

“The collateral consequences consideration is designed to address the risk that a particular criminal charge might inflict disproportionate harm to shareholders, pension holders and employees who are not even alleged to be culpable or to have profited potentially from wrongdoing,” said Mark Filip, the Justice Department official who wrote the 2008 memo.

Referring to the case of accounting giant Arthur Andersen, which certified as valid the accounts of the Enron energy company that went into bankruptcy for faking its budget, Filip said that “Arthur Andersen was ultimately never convicted of anything, but the mere act of indicting it destroyed one of the cornerstones of the Midwest’s economy.”

This was in fact a declaration of impunity, which did not escape the managers of the financial system, under the telling title of “Too Big to Fail”.

In the week of 11 May, a judge from the Federal District Court of Manhattan, Denise L. Cote, condemned two major banks – the Japanese Nomura Holdings and the British Royal Bank of Scotland – for misleading two public mortgage institutions, Fannie Mae [Federal National Mortgage Association] and Freddie Mac [Federal Home Loan Mortgage Corporation], by selling them mortgage bonds that contained countless errors and misrepresentations. “The magnitude of falsity, conservatively measured, is enormous,” she wrote in her scathing decision.

Nomura Holdings and the Royal Bank of Scotland were just two of 18 banks that had been accused of manipulating the housing market. The other 16 settled out of court to pay nearly $18 billion in penalties and avoid having their misdeeds aired in public. Nomura Holdings and the Royal Bank of Scotland refused any settlement and instead went to court against the US government, arguing that it was the housing crash which caused their mortgage bonds to collapse. Judge Cote, however, wrote that it was precisely the banks’ criminal behaviour which had exacerbated the collapse in the mortgage market.

It is worth noting that, until now, the cumulative fines inflicted by the US government on just five major banks since 2008 amount to a quarter of a trillion dollars. No one has yet gone to jail – fines have been paid and the matter closed.

Now the question: is all this due to the misconduct of a few greedy managers or is it due to the new “ethics” of the financial sector?

By the way, let us not forget that it was revealed recently that 25 hedge fund managers took close to $14 billion only last year and that the highest-paid manager took for himself the unthinkable amount of $1.3 billion, equal to the combined average salaries of 200,000 US professionals.

Well, in mid-May, the respected University of Notre Dame was reported as having published a startling report, based on a survey of more than 1,200 hedge fund professionals, investment bankers, traders and portfolio managers from the US and the UK, in which about one-third of those earning more than $500,000 a year said they “have witnessed or have first-hand knowledge of wrongdoing in their workplace.”

The report went on to say that “nearly one in five respondents feel financial services professionals must sometimes engage in unethical or illegal activity to be successful in the current financial environment”, and in any case, nearly half of the high-income professionals consider authorities to be “ineffective in detecting, investigating and prosecuting securities violations.”

A quarter of respondents stated that if they saw that there was no chance of being arrested for insider trading to earn a guaranteed $10 million, they would do so. And nearly one-third “believe compensation structures or bonus plans in place at their companies could incentivize employees to compromise ethics or violate the law.”

It should also be noted that the majority were worried their employer “would likely retaliate if they reported wrongdoing in the workplace.”

So, the bonus that goes to those in the financial sector every year practically amounts to a bribe for silence on misconduct. At the same time, we have learnt that in Guatemala, the governor of the central bank has been arrested for embezzling $10 million.

Of course, everything is a question of scale ... but in sociology there is a mechanism called the “demonstration effect”. The example of Wall Street and the City will increasingly seep down once a new “ethic” is in place. It will propagate if it is not stopped, but this is not happening.

A final note. In the same week (how many things have happened in such a short space of time!), the US Federal Trade Commission accused four respected cancer charities of misusing donations worth millions of dollars.

One of them, the Cancer Fund of America, had declared that it spent 100% of its proceeds on hospice care, transporting patients to chemotherapy sessions and buying medication for children. The Federal Trade Commission found that in fact less than 3% of donations were spent on cancer patients.

The “new ethic” is itself a cancer, and it is metastasizing rapidly. (IPS Columnist Service)                                     

Roberto Savio is founder and president emeritus of the Inter Press Service (IPS) news agency and publisher of Other News. The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, IPS.

Third World Economics, Issue No. 594, 1-15 Jun 2015, pp15-16