Wall Street Regulators: Whatever, We Give Up ¯\_(ツ)_/¯
On Nov 7, Zachary Warmbrodt reported for Politico Pro (paywalled) that top lawyers at two Wall Street regulators agreed there were limits to their ability to change culture at the banks they regulate.
That’s right! The Federal Reserve’s Scott Alvarez and the OCC’s Amy Friend, two of the people with the most power to change bank behavior just said, basically: ¯\_(ツ)_/¯
The comments came from two regulators who spoke at an American Bar Association’s “Banking Law Committee Meeting” at D.C.’s Ritz Carlton (the conference cost between $180-$355 to attend, though free for law students).
Wambrodt quotes the General Counsel of the Fed, Scott Alvarez, first:
“From our perspective, culture is not something that we feel we can regulate in the sense we put out a rule that says what a culture should be like or what the principles should be in designing culture”
This is an odd thing for Alvarez to say, given that two Fed officials (NY Fed chief William Dudley and Fed Governor Dan Tarullo) gave speeches last month pointing to ways the regulators could work to influence culture. Alvarez seemed to be trying to distance himself, and the Fed, from the comments of his colleagues, saying:
“The idea of the discussion isn’t to suggest the Fed suddenly has some view on how to shape culture and what culture should be”
Also present at the conference was Amy Friend, the chief counsel of the Office of the Comptroller of the Currency (another bank watchdog, that goes by "OCC” for short). According to Warmbrodt’s article, Friend agreed you can’t really regulate an “amorphous thing” like bank culture, that there is a “tone at the top that permeates,” and that the existing culture is “something that won’t go away any time soon.”
These attitudes are especially frustrating given how much power these regulators have. The OCC has on-site examiners that actually sit inside the banks they regulate. And the Fed has the power to break up the banks.
Alvarez and Friend aren’t the first regulators with vast, unused powers to complain about corruption anyway. Eric Holder took a similarly defeatist attitude back in September, when he lamented that in corporate America, “the buck still stops nowhere” because of diffuse responsibility that ensures that misconduct could “could again be considered more a symptom of the institution’s culture”
Holder complaining about the inability to change culture is as ridiculous as Friend and Alvarez’s protestations. They all have the power to bring enforcement actions against the banks. To levy fines. To refer cases to the Justice Department (or in Holder’s case, to try said cases!). Or even to ban offenders from doing business for a period of time, as NY’s Department of Financial Services head, Ben Lawsky, has done. Instead, the Fed, the Department of Justice and the OCC have all sat on their hands, giving out meager fines now and then that banks see as merely the “cost of doing business."
These attitudes all seem to distill down to this: Big banks misbehaving, and having an incentive to do so, is just the natural way of the world. You can’t fight it. You can’t regulate it away – because it will happen anyway. It’s like breathing. We can’t regulate BREATHING, you guys! So, we may as well not even try!
¯\_(ツ)_/¯
It’s worth elaborating a little bit on the two regulators making these comments.
Scott Alvarez is the Fed’s top lawyer, first brought to work at the Fed by Alan Greenspan. Jesse Eisinger reported for Dealbook that Alvarez attributed the financial crisis to "regular mortgage lending.”
Alvarez also has a reputation as being the legal architect behind the Fed’s emergency lending programs, aka their once-secret second bank bailouts.
And Amy Friend, top lawyer at the OCC, used to work to Promontory, the consultancy group that helped Bank of America bury its bodies from the foreclosure crisis, and helped Standard Chartered underestimate how badly the bank violated US sanctions. When Friend left Promontory, she switched jobs with the prior OCC general counsel, Julie Williams, who left to go to… Promontory!
Promontory is currently partnering with former NSA chief Keith Alexander to launch a cybersecurity consultancy.
So, perhaps it’s no surprise that a Fed lawyer who blames the financial crisis on mortgage lending instead of predatory behavior by banks, and an OCC lawyer who used to work for a firm that specializes in minimizing bank crime, doesn’t see how regulators can change bank culture.
It seems it’s not just the reckless banks who need a culture shift. The regulators could also use a drastic change in management.
