Boomer Banker

Kleptopia, a new book by Tom Burgis was reviewed in the Financial Times of 14 November. The review provides a good summary of the book which uses real stories to show how autocrats have used the financial system to effectively steal money from their clients and move it to accounts primarily in Europe and North America. Whilst covering a variety of stories, as noted by the Financial Times they are ultimately “a similar tale of political and moral corruption, violence, weak regulation and complicity within the international financial system where money is quickly anonymised.”

And then reported the Financial Times on 17 December that Credit Suisse is being charged with money laundering for Bulgarian clients. Although this money laundering was related to crime including cocaine trafficking, it notes again how individuals within large banks work around policies to prevent money laundering. Both Credit Suisse and the individual are claiming innocence so it may well be that nothing wrong was done but only time will tell.

With both of these stories, it was therefore heartening to read about the official launch of an initiative in The Netherlands. Five of the largest Dutch banks have set up Transactie Monitoring Nederland. Under the interim leadership of Jeroen Rijpkema (a former colleague of mine with experience in private banking), TMN is a “collective initiative (to) enable the banks to improve their detection of these complex criminal money flows and networks and thereby help to improve the protection of the financial system.” As noted by TMN, only through seeing a full spectrum of transactions is it possible to identify those that are related to money laundering and criminal activity. Perhaps other large international banks should be considering a similar approach to address the issues raised in Kleptopia.

Just a week ago I wrote about the inability of Gary Cohn from Goldman to take responsibility for paying back his bonuses to Goldman as a result of losses Goldman incurred related to the IMDB funding scandal in Malaysia. His inability to accept responsibility is unfortunately consistent with the actions of far too many senior bankers for whom the misdeeds of their banks are never the responsibility of senior managers. This problem can be seen in banks besides Goldman.

Wells Fargo is a bank that has had a long history of issues in its dealing with clients. I provided some background on Wells Fargo in a post in March of this year. But the challenges there are laid out in great detail in a recent Slate article that is a version of a podcast Slate has produced. As noted many low level employees lost their jobs over their actions but one could question whether the senior managers responsible for the culture and policies that led to the mistreatment of clients paid an appropriate price for what happened.

Now it is the turn of Ralph Hamers, the former CEO of ING in the Netherlands, to be held to account. ING has had substantial issues related to money laundering. As a result the bank has paid substantial fines (nearly €800 million) in 2018. As part of that settlement, it was agreed that the board and management would not be subject to criminal charges. But as outlined in a Financial Times opinion column of John Plender as well as in other news stories, this immunity from prosecution has been challenged in the Dutch court system and may not be valid. As noted in the column: “The Hague court of appeal said it believed grounds were, in fact, sufficient for a successful prosecution of Mr Hamers ‘as the de facto supervisor of the criminal offences committed by ING.’ It added: ‘The facts are serious, no settlement has been reached with the director himself, nor has he taken public responsibility for his actions.'”

This column goes on to note that for far too many issues of banking malpractice, junior employees take the brunt of the pain whilst managers at the top are rarely held accountable in a meaningful way. Plender goes on to note that after the S&L crisis in the US in the ’80’s, there were many senior managers held accountable and some even went to jail. However, those held accountable were from smaller institutions and not from the largest banks in the world. It is possible that this lack of accountability for the senior managers of the largest banks in the world is one reason why the politics of today have a particular anti-elite tone. It would seem that if you can go to the World Economic Forum in Davos, you have a get out of jail card for any other responsibilities you have. The elite truly live by other rules than the rest of us.

The Bank of England under Mark Carney has been a leader in regulatory action regarding climate change. In June 2019 they published a report, The Future of Finance, by Huw Steenis. In addition the Bank of England provided a response to this report. Both highlight the importance for banks to take climate change seriously in their decision processes.

My good friend and colleague, Paul Malyon, has alerted me to the opportunity to hear directly from Mark Carney through his Reith Lectures. As noted on the BBC site that provides these lectures to be followed on line: “(T)he BBC each year invites a leading figure to deliver a series of lectures on radio. The aim is to advance public understanding and debate about significant issues of contemporary interest.”

The Carney lectures began on 2 December with the final episode airing on 23 December. They could be great listening over the holiday season as we all celebrate quietly due to COVID-19 restrictions.

Martin Wolf in the Financial Times alerted me to a very interesting and important e-book made available through ProMarket, a publication of the Stigler Center at Booth Business School (disclosure – I received an MBA from Booth in 1977). This book compiles 28 essays, including one from Martin Wolf, that comment on Milton Friedman’s essay of 50 years ago in the New York Times that stated: “a corporation’s only social responsibility was to increase its profits.” The book contains a variety of views and makes for very interesting reading, especially for those of us who believe corporations should look beyond pure profitability in their actions.

I found the most interesting essay to be that of Luis Zingales who is currently at Booth. He was the one of the editors of the book and his essay is the final one included. His essay was a nuanced and important criticism and refinement of the original Friedman views. Key quotes from that essay include the following:

This summary provides good insight into the critical views of Zingales but the final words of his essay provide very useful and nuanced perspective

I have previously written about the IMDB scandal in Malaysia involving Goldman Sachs. But that story just continues to show how bankers do not take responsibility as reported this week in the Financial Times. At the time that Goldman reached several settlements, it announced that it would also claw back bonuses paid to individuals either directly involved in the IMDB transaction or in senior positions of responsibility at Goldman when the transaction occurred. As noted in the Financial Times, Gary Cohn “is holding out on the bank’s request for him to return millions of dollars of his pay.”

I suspect his decision is not due to lack of the ability to repay. In the Goldman Proxy Statement of 2015 (he resigned to work for the Trump administration in 2016), it was noted that from 2013 to 2015 Mr. Cohn earned just under $60 million. A rather tidy sum. To put it in perspective, Mr. Cohn’s earnings over those years were equal to the average income of about 30,000 households in Malaysia. Those are the households whose taxes will be used to pay in part for the missing billions.

So as noted in the Lex column in the Financial Times on 3 December, “Sometimes a polite request is not enough.” What will it take for Mr. Cohn not to continue to do the wrong thing? I suspect 30,000 Malaysian households would want to know.

The business case for ESG investing is a strong one based upon financial returns as shown in research by George Serafeim from Harvard Business School. I worked on a research project regarding banks using his approach with the Global Alliance for Banking on Values along with Deloitte and the European Investment Bank. This research showed a better ESG focus delivered better financial returns (see report here).

However, it is possible that a focus on financial returns dilutes the real mission and goal of impact investing, delivering positive impact on society. Whilst it is a “nice to have” if financial returns are better, those returns should not overshadow the core reason for values-based investing which is improving society relative to economic prosperity, social empowerment and environmental regeneration.

This dilemma and challenge was very helpfully discussed in an opinion piece in the Financial Times. Jonathan Ford, the author, correctly notes: “‘(i)mpact’ investment only has real meaning if it means funding activities that would not otherwise happen.” He provides several examples of “greenwashing” in his comments. But most importantly he reminds us of the basic fact – impact investing should not be primarily about financial returns but about delivering impact. As he notes: “. . . why does everyone want decarbonisation, fair wages or the encouragement of diversity on boards? Not because they raise returns but because they are the right thing to do.”

Balancing the mix of impact, return and risk is a challenge but one we should embrace with all its complexity and ambiguity.

Payments continues to be an interesting area to follow in the evolution of banking. Unfortunately most banks have forgotten the importance of this bank product leaving the field open to competitors who have been creating substantial value for their stakeholders. But it appears that this traditional neglect by mainstream banks that tended to favour the more “sexy” investment banking activities is starting to shift.

The latest example of this shift is with Deutsche Bank as reported in the Financial Times. Of interest is that Deutsche Bank sold a portion of its payment business to a non-bank entity earlier in 2012. It did so at a time that Deutsche appeared to be earning high returns in investment bank (subsequently seen not to be real returns) and a view that payments were risky (as if investment banking has not been risky for Deutsche).

But of course the question for Deutsche and other banks is: Are they too late to the party?

Activist investors do not always have a great reputation for their support for broader societal goals. But that is starting to change as some of them are now also focusing on climate change as an area needing more attention. A recent effort by The Children’s Investment Fund Foundation (CIFF) has contacted several asset managers requesting that they “highlight the need to ensure companies publish climate transition action plans and put these to an annual shareholder vote.”  The announcement goes on to note that “it is essential for companies to publish a credible action plan to show how they will survive and prosper during this transition.”

There is a bit of personal interest in this effort as CIFF was a key player in the eventual breakup of the ABN AMRO where I worked for more than 25 years. And ABN AMRO was a bank that actively pursued sustainability issues including taking a leading role in the development of the Equator Principles. One wonders if Sir Christopher Hohn of CIFF sees any irony between his current demands and his support for the ending of the ABN AMRO?

In the last days of any US presidency, the potential for efforts to limit the flexibility of the following administration exists. So it is not surprising that the Office of the Comptroller of the Currency (OCC) is busy proposing a new rule that would make it difficult for banks to stop supporting fossil fuel activities. The proposal reads rather straightforward in the language announcing the proposal.  It states “that banks should provide access to services, capital, and credit based on the risk assessment of individual customers, rather than broad-based decisions affecting whole categories or classes of customers.” But as always the devil is in the details.

Going to the more detailed release in the Federal Register, gives much more insight into the special pleading (from swamp creatures perhaps) that is behind the proposal. As noted in this more detailed announcement: “over the course of 2019 and 2020, . . . banks had decided to cease providing financial services to one or more major energy industry categories, including coal mining, coal-fired electricity generation, and/or oil exploration in the Arctic region.” It goes on to note: “)i)t is one thing for a bank not to lend to oil companies because it lacks the expertise to value or manage the associated collateral rights; it is another for a bank to make that decision because it believes the United States should abide by the standards set in an international climate treaty.”

Therefore it is a clear aim of this rule to prohibit banks from taking decisions on providing banking services consistent with achieving the goals of the Paris Climate Accord. There is clearly a dilemma for both banks and the OCC in the balance between providing banking services on a non-discriminatory basis and meeting demands from stakeholders including large investors for banks to be responsible relative to climate change which will create substantial economic disruption. But it seems to me that the key issue in the proposal is an attempt by the OCC to force banks to continue to lend into the carbon economy forcing private banks to support a policy that is self destructive.

The proposal is in a comment period until 4 January. Will it survive and be approved prior to the change in administration on 20 January? Clearly an area needing attention from all concerned about climate change.

The increased use of technology for banking will continue to threaten traditional banks – especially in payment processing. Several articles over the last few weeks highlight the need for banks to think strategically and smartly over their digital strategies. And with whom they might consider partnering for the future. There are no easy or obvious choices making it a difficult time for bank management.

In the US there are increasing numbers of digital entities that are securing banking licenses allowing them to take deposits. The Financial Times reported early this month about the first digital entity that has received a national banking license. Varo received this license whilst others such as Chime have chosen a route that partners with existing banks. As reported this week in the Financial Times, it appears that Google will follow the partner route. But as with all digital companies, the question should always be how long will they continue to want to be just a partner and not own the client relationship. Or will they find a way to only pick off the profitable elements of the client relationship and leave the rest with the partner bank. In any case all banks need to think clearly about the threats and opportunities in digital banking and their approach to investing in this area.

Meanwhile in Europe there continues to be significant merger and acquisition activity in the payment processing space. This area has been perhaps too quickly abandoned by traditional banks as reported yesterday in the Financial Times. Over the last several years payment processing companies originally owned by banks have been spun off and subsequently purchased by private equity investors. These investors are now involved in rolling up these investments into larger entities that can benefit from economies of scale. Most likely banks should be as afraid of private equity as they should be of technology companies.

Meanwhile in Europe the impact of COVID-19 has impacted the client relationship process for many banks. Europe has been somewhat slower about reducing branches but the impact of the virus has created change. As reported in the Financial Times, older clients that have been hesitant to take on digital delivery of banking services including advice via video conferencing are now much more willing to speak virtually with their bank to reduce health risks. This change comes with the risk that communities will lose the value of bank branch personnel that know the local economy as well as leaving behind the portion of the older population that does not or can not adjust to the new technology.