Many outside our industry wonder whether banks want to meet their legal obligations. They know banks have committed many crimes as well as civil injuries and that when occasionally caught, their punishment is usually a slap on the wrist—small compared to harm done or to what the bank gained by its offense. If so, then why would banks want to become or stay legal?
Unlike others, I don't believe that the prevalent negative view of bankers is actually doing us much harm. Like airlines, we are indispensable to customers. Believing bankers are crooks won't drive many consumers or corporations to PayPal or CIT. (People don't respect Congress, but they reelect them. A necessary evil.)
Nevertheless, nearly all bank directors and CEOs want to avoid legal culpability. They just don't know how to achieve this.
An anecdote: Long ago, the personal banking officer responsible for my account seemed assiduous and competent, as well as pleasant. One day she was gone. No one would say why. I eventually learned she had been peremptorily fired: "She intentionally entered wrong information on a transfer of funds."
At the time, this seemed to me a disproportionate punishment for a single, isolated offense. Maybe she had a good rather than a self-serving reason for what she did. Maybe it was harmless.
But I was wrong. Any and all falsification of bank records is intolerable.
Bankers doctored data on international transfers, facilitating billions of dollars of money laundering. Bankers falsified Libor rate inputs. Bankers solicited, approved and transmitted mortgage applications containing evidently untrue statements. Bankers sold mortgages based on false representations about their underwriting. Bankers mismarked or hid securities transactions. Banks or their agents lied to customers about the benefits available from protection products. Banks assessed overdraft fees as if debit card transactions been authorized much later than they actually were.
When banks fail or equity value falls precipitously, losses are almost always preceded and expanded by lying.
The common element is exactly that for which my personal banking officer was fired: lying. It's fatal. It destroys trust, safety and soundness. Investors will not provide needed capital, and bank equity is greatly devalued because we lie.
The golden rule of banking isn't to treat everyone as we'd want to be treated—telling them what they want to hear, cutting them lots of slack. It's the opposite. It's purely and simply not to lie.
That includes not obfuscating and not misleading anyone—colleague, customer, counterparty, regulator. It includes punishing negligent failure to verify.
As an industry, we've lost sight of that. Irrelevant complaints about complexity of rules obscure the obvious failure to follow the most fundamental rule: We can't afford to tolerate lying in, or on behalf of, banks – no matter the potential gain, the unfairness of the regulations, or the beneficence of the purpose, and no matter what the customer wants. Neither should we do business with anyone who has tried to deceive us.
Embracing this principle fully and conspicuously, driving it into action through training and management controls, enables us to make our banks legal not just from the top down but, much more important, from the bottom up.
There is no position in a bank so humble or peripheral that it can be exempted from the full rigor of this rule. There's no lawyer, compliance officer or risk manager who's worth a damn if he doesn't trumpet, test against and enforce it daily.
For every banking offense, there's the excuse "I didn't know there was a rule against that." We debate just what bosses and enforcers should have known or done. But you shouldn't even need a lawyer to tell you not to lie.
If we simply kept all our banking information and communications explicit, honest and accurate, without regard to any other requirements or prohibitions, then 90% of the billions of dollars of civil and criminal liabilities piled up over the last five years could not have happened, or would have been nipped in the bud.
In antique times, bankers were expected to belong to the local Rotary Club, where the first rule was to tell the truth. Now they go to business school instead.
If the words and numbers are truthful, then risk officers, examiners and regulators can do their jobs reliably and banks as well as the financial system will be free of internal rot and much more resilient against external shocks.
Andrew Kahr is a principal in Credit Builders LLC, a financial product development company, and was for six years the founding CEO of First Deposit, later known as Providian.