“All this will seem impossibly weedy to some, but banking is risk-taking; without risk-taking, there is no investment and no growth. Bureaucratic overkill inevitably has become a factor in our slow-growth recovery. If a bank makes a loan and the loan goes bad, regulators may come with charges of fraud. If a bank makes a loan and the loan doesn’t go bad…

…regulators may find it was too profitable at the expense of some protected minority class or other, as seen in the “disparate impact” crackdown on banks that provide wholesale backing for loans auto dealers make to their customers. If a bank takes on a new client, the bank can be liable if the client engages in a verboten transaction. As part of its settlement with Standard Chartered, the New York regulator insisted on being consulted on every new demand deposit (i.e., checking account) opened by the New York branch. You can bet New York isn’t taking responsibility for culling out worrisome customers but will jump on Standard Chartered with more fines if any turn up after the fact……So the biggest conflict of interest may be between the American people—their notions of freedom, their hopes of prosperity—and a regulatory state that increasingly operates to benefit itself.”, Holman W. Jenkins, Jr., “Willie Sutton Could Have Been a Regulator”, The Wall Street Journal, August 15, 2015

Opinion

Willie Sutton Could Have Been a Regulator

A New York contretemps shows how the war on the banks has become a revenue shakedown.

By Holman W. Jenkins, Jr.

Conflicts of interest are endemic to professional life. How professionals deal with them is what makes them professionals. But that’s just the beginning of a story that has banking circles in New York buzzing. The episode suggests just how much bank bashing has become a fiscal racket.

Did a prominent, politically connected advisory firm, Promontory Financial Group, go easy on its client bank, Britain’s Standard Chartered? Promontory had been hired by the bank’s outside lawyers to help comply with an Iran sanctions-busting investigation. In emails produced by New York regulators, Promontory is seen changing wording of its final report after objections from the bank. One email says “the most important thing is that we get to the end of the project without jeopardizing our relationship” with the client.

Then again, such glimpses inside the sausage factory can be overinterpreted. Standard Chartered was the client; it had a right to be consulted. And, at the end of the day, Promontory’s work did help to produce what would become nearly $1 billion in fines and settlements paid by the bank.

But another kind of conflict of interest may be implicated. New York’s Department of Financial Services was investigating Promontory for two years. Negotiations reportedly broke down over Promontory’s unwillingness—along with paying a penalty—to acknowledge wrongdoing and accept a suspension of its ability to work with New York clients. (Reputation is important to such firms.)

Benjamin Lawsky, former superintendent of the New York State Department of Financial Services. Photo: Mike Groll/Associated Press

That’s when the New York agency issued an official yet informal report citing vague derelictions and effectively banning Promontory from business in New York by prohibiting local banks from sharing non-public documents with the advisory firm. This action came barely one month after the agency’s flamboyant chief, Benjamin Lawsky, who launched the investigation, left to create his own private consulting firm to compete with Promontory.

There’s more: Mr. Lawsky is a protégé of New York’s ambitious Gov. Andrew Cuomo. Mr. Cuomo created the New York Department of Financial Services, appointed Mr. Lawsky to head it, and publicly delighted in the $5 billion revenues Mr. Lawsky’s aggressive enforcement generated.

Promontory is run by Eugene Ludwig, connected to a rival power center in the Democratic Party—he was Bill Clinton’s law-school classmate and a top U.S. bank regulator in the Clinton administration.

Now you know why banking CEOs and lawyers in New York are in full gossip mode. The battle here smacks at least partly of rival networks of Democratic fixers fighting over a regulatory protection racket.

Regulatory actions against banks began in response to public demand for villains after the 2008 financial crisis. Now they have morphed into institutionalized revenue grabs. Every few months seems to come another “settlement” of real or imagined sins, in which billions are transferred from bank shareholders to the federal government and state treasuries. Gov. Cuomo himself has jokingly called the windfalls “a gift from above.”

Along the way, lesser sums land in the pockets of lawyers and revolving-door fixers who attend the racket, not to mention the campaign kitties of influential legislators. Promontory, with its retinue of advisers including Securities and Exchange Commission ex-chiefs Arthur Levitt Jr. and Mary Schapiro, is said to have earned $54.5 million for its work with Standard Chartered. Maybe this figure caught Mr. Lawsky’s eye when he decided to hang out his own shingle.

All this will seem impossibly weedy to some, but banking is risk-taking; without risk-taking, there is no investment and no growth. Bureaucratic overkill inevitably has become a factor in our slow-growth recovery.

If a bank makes a loan and the loan goes bad, regulators may come with charges of fraud. If a bank makes a loan and the loan doesn’t go bad, regulators may find it was too profitable at the expense of some protected minority class or other, as seen in the “disparate impact” crackdown on banks that provide wholesale backing for loans auto dealers make to their customers.

If a bank takes on a new client, the bank can be liable if the client engages in a verboten transaction. As part of its settlement with Standard Chartered, the New York regulator insisted on being consulted on every new demand deposit (i.e., checking account) opened by the New York branch. You can bet New York isn’t taking responsibility for culling out worrisome customers but will jump on Standard Chartered with more fines if any turn up after the fact.

So the biggest conflict of interest may be between the American people—their notions of freedom, their hopes of prosperity—and a regulatory state that increasingly operates to benefit itself.

Posted on August 17, 2015, in Postings. Bookmark the permalink. Leave a comment.

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