The New York tourist sitting next to me on the London Underground with the map of the city spread out on his lap asked where he could find the London Whale. Seriously. Unlike the London Eye, I told him, the London Whale was a human being, albeit a metaphorical landmark.
The London-based JP Morgan trader’s nickname derived from his large positions in the credit market, which in the summer of 2012 resulted in the bank declaring a $5.8bn loss. It subsequently faced major fines from both the UK and US regulators for, among other things, its lax supervision and for not “adequately updating” its audit committee on the findings of an internal review. Bereft of its legalese, the Securities and Investment Board’s (SEC) phrase can be translated as “deceitful behaviour”. In other words, culture. A recent survey highlighted that two-thirds of global banks agree that a big part of the financial crisis was due to culture – but only one-third of banks thought there was anything wrong with their culture.
Transforming an institution’s culture is a lengthy journey, like chasing Moby Dick, the symbolism-laden whale in Herman Melville’s classic book of that name. As well as obvious factors like overhauling compensation, banks need to exercise integrity through sound judgement and rewarding decision-makers who have the guts to say no.
A very sensible suggestion on culture put forward in the 2013 Salz Review (an assessment of what went wrong at Barclays Bank pre and post the financial crisis ) was for bankers to spend two years on secondment to the financial regulator and vice versa. It appears to have sunk without a trace, despite the fact that there is a model for how to do it in the Takeover Panel, the UK’s mergers and acquisitions regulator, which regularly hosts top bankers and lawyers who then return to their firms.
Box-ticking is not the way forward. Unfortunately, though, the plethora of rules spewing forth from different regulators, like water from a whale’s blowhole, makes it overwhelmingly necessary. How else can universal banks active in a number of countries deal with the US’s Volcker Rule, the UK’s Vickers, the EU’s Liikanen, let alone Basel III, which appears to already be disintegrating? In fact, each country seems to be setting its own rules and banks are retreating home, capital in tow.
To add insult to injury, no sooner have banks complied with a rule, than the regulator changes it. The Basel Committee admitted over recent months that perhaps securitizations per se were not “bad”. Without saying it in so many words, the implication was that forcing banks in 2009 to post higher capital requirements against them – as though all securitizations were similar to sub-prime mortgages – was wrong. The committee is set to review the issue in 2014. Meanwhile, the absurdity of zero or very low capital requirements on holding sovereign debt has steered banks to load up on it. This may be useful for over-indebted governments, but as Jens Weidmann, Deutsche Bundesbank president, noted in The Financial Times in October, ‘the current regulation’s assumption that government bonds are risk-free has been dismissed by current experience’.
In truth, it doesn’t take familiarity with the last few years to realise that “risk-free government bonds” has always been an oxymoron. In the best of cases, their value has been damaged by inflation or currency devaluation; at worst, it has been destroyed by restructuring or default. Moby Dick evaded his pursuers, but most of the crew of the Pequod, the whaling ship, met their death because they dared not stand up to Captain Ahab and his lack of judgement. The Pequod had a problem of culture. We shall see how the tale unfolds for some of the banks.