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Is Washington getting tougher on bad bank behavior?

Sally Herships Aug 13, 2013

Is Washington getting tougher on bad bank behavior?

Sally Herships Aug 13, 2013

Washington has had some wins against the banking industry this summer. Former Goldman Sachs trader Fabrice Tourre was found liable for misleading investors in a bond deal. JPMorgan Chase is under criminal investigation by the Justice Department related to bond deals during the financial crisis. It also faces civil lawsuits from the Securities and Exchange Commission.

For days, reports have said that prosecutors are set to arrest two traders suspected of fudging the numbers in the London Whale fiasco, which cost JPMorgan $6 billion. The SEC wants the bank to admit wrongdoing, not just pay a fine for the same deal.

All these lawsuits and investigations signal a new mood in Washington, says Dan Werner, an equity analyst at Morningstar.

“It does represent a stronger thrust from regulators and behind them, probably a stronger thrust from Congress trying to be accountable for what happened with the financial crisis and things that go wrong in the financial industry in general,” he says.

To date, when it comes to punishing banks for misbehavior, fines have been the go-to option. So far, SEC actions have cost companies over $2.7 billion, but bank profits dwarf that.

“Banks have seen these fines as a cost of doing business,” says Nick Verbitsky, the filmmaker behind “Confidence Game,” a documentary about the collapse of Bear Stearns.

He says fines to banks are like parking tickets to UPS: They won’t change a company’s behavior.

“You might do a very unethical deal that could run afoul of regulators for a billion dollars, but if you pay a $100 million fine, there’s still $900 million there.”

What’s more important, Verbitsky says, is the SEC’s new strategy — pushing JPMorgan and other banks to admit wrongdoing. That could open the way for pricey civil lawsuits from clients and shareholders. Criminal charges from the Justice Department could be an even stronger deterrent.

But is it the banks that should be punished?

“Just making the banks suffer even more hurts the people who own those banks,” says James Angel, a professor of finance at Georgetown’s McDonough School of Business. “Those banks are owned by you and me. It’s our pension funds. It’s our 401(k)s that are the biggest owners of these banks.”

Instead of banks, Angel says bankers should be prosecuted, like former trader Fabrice Tourre.  Prosecutors have also convicted several people of insider trading, but most are small players. So, are regulators making progress against the financial industry? 

Angel says, “We’ll believe it when we see the convictions.”

One big player who apparently won’t be tried: the London Whale himself. The former JPMorgan trader is cooperating with the investigation. 

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