4 ms·

The one thing I can never wrap my head around in the banking industry is why this kind of behavior is tolerated by _customers_. Imagine if wherever you work ha

by kauffj 11y ago

The one thing I can never wrap my head around in the banking industry is why this kind of behavior is tolerated by _customers_. Imagine if wherever you work had to settle with the SEC / FTC / ABCXYZ for fraud. Wouldn't this devastate your customer base? Yet when a bank gets fined, it seems simply like business-as-usual. Even when a government agency levies a fine for fraud, or emails are released in which employees actively mock their customers for being suckers, investment banks' abilities to find customers seems unhindered. 1) Are my perceptions wrong? Do these events damage reputation more than it seems? 2) If banks acting in this manner is the standard... why? Why isn't a firm carving out the "niche" of not being assholes?

keketi 11y ago
It's almost as if there is no competition in banking... whistles the x-files theme
nickff 11y ago
Some time ago (>>10 years) SEC fines were rare and they did carry the stigma you speak of, but the SEC's enforcement actions have now increased to a point where all the banks regularly pay out fines whether or not they did anything wrong; the stigma is now gone, and the fines are just a cost of doing business. Fighting regulators is a very dangerous game for any company, as the government will usually settle for much less than the potential fine (, usually less than the cost of fighting the fine), and the looming threat of an ongoing prosecution adds costly uncertainty to the business. In addition, the executives have a large incentive to settle because this is just the shareholders' money, and a failure to comply could be met with a criminal prosecution.
- abakker 11y ago
  IIRC and IANAL, there is also a strange problem that if criminal charges are brought against companies, there is a lot of fallout, and potential for the company to barred from operation. https://www.justice.gov/sites/default/files/criminal-fraud/legacy/2010/04/11/charging-corps.PDF https://www.justice.gov/sites/default/files/criminal-fraud/l... Section IX B. seems to be the relevant one there, suggesting that regulators and prosecutors attempt to weigh the fallout that such a charge might have on innocent 3rd parties.
  - evanpw 11y ago
    That used to be true, but a bunch of banks have now pled guilty to criminal charges, and nothing really happened. [1] http://www.bloombergview.com/articles/2015-05-11/nobody-s-worried-about-too-big-to-jail-any-more http://www.bloombergview.com/articles/2015-05-11/nobody-s-wo...
TheSockStealer 11y ago
My guess is that the barrier to entry is too high and all of the players in the industry are already assholes. It could also be that investment banking attracts assholes so even if you did start a non asshole IB, you would soon be overrun with assholes because that is the available workforce. What a dilemma.
rm_-rf_slash 11y ago
People who benefit most from these financial institutions are either financial managers or wealthy people themselves. The former has the same mindset and the latter doesn't care as long as their wealth continues to grow without having to be too involved in the process. The sad dirty secret is that the other major players are usually pension funds, which are always under enormous pressure to make more money out of their investments. At the end of the day they don't care where the money comes from because turning a blind eye to evil is usually better for a fund manager's job security than asking for more contributions.
cm2187 11y ago
I would nuance that: 1. investors were fighting to get their hands on subprime assets. There was so much liquidity around that it was the only way to make a little bit of money, very much like today. Investors have been piling cash into tech companies and EM markets where they probably shouldn't have. Is it financial intermediaries' role to bar them from doing so? Is it the supermarket's role to bar you from buying snacks and sodas because it's bad for your health? 2. what annoys me is that these "unsuspecting investors" were professional buyers. It is people who's job it is to do their homework and understand these products. We are not talking about selling complex products to grannies. These are highly educated, highly paid finance professional who simply did not do their job of vetting what they were buying. Now if Goldman made misrepresentations (i.e. lied) on the nature of the assets, then there is clearly fraud, and by reading quickly the DoJ announcement it seems to be what Goldman is accused of. But in my opinion investors bear a very large part of the blame for this credit bubble. It's not a case of nasty Goldman vs nice unsuspecting investors.
- prostoalex 11y ago
  > It is people who's job it is to do their homework and understand these products. We are not talking about selling complex products to grannies. These are highly educated, highly paid finance professional who simply did not do their job of vetting what they were buying. Sure, but how many of professional money managers had their clients entire portfolios in subprime mortgages? My guess is that it was mainly allocated to the portions of portfolio deemed "high risk", and if they're not buying subprime mortgages, they're buying high-yield bonds, Puerto Rico munis, assets of bankrupt North Dakota frackers, and high-risk high-yield real estate projects like casinos and theme parks. There's daily trading activity on JNK and MORL and similar other instruments. I don't think there's any pretending going on that those are high-quality assets, and I also doubt anyone (in a clear state of mind with no gambling addiction) is going 100% into those ETFs.
  - cm2187 11y ago
    I am not sure of that. The financial system is built to absorb expected losses. Where things go really wrong is when a big loss occurs where it was not expected. A lot of senior tranches in subprime RMBS had AAA ratings, which made then eligible for safe, low yielding portfolios. Banks could also pile them up on the balance sheet because the RWA footprint was really small given the rating. And that's why when it went "bang" it really hurt.
Retric 11y ago
Major investment banks primary mission is best thought of as advertising not investment. They make money based on the size of transactions not how good they are at their jobs. The completion is brutal and they are really good at convincing people of things that are not true. We use artisanal ingredients ~= we employ people from the top programs. That said, for the largest transactions there is a tiny pool of qualified companies out there. And if you’re doing a 50 billion dollar merger a multi-million dollar premium can seem completely reasonable. Much like how search is a sideline for Google, their primary mission is to sell adds everything else is simply how they accomplish that.
Kalium 11y ago
> 2) If banks acting in this manner is the standard... why? Why isn't a firm carving out the "niche" of not being assholes? How much are you, personally, willing to pay this year for the services of a "not assholes" bank? I'm not sure I'd be willing to pay very much, myself. I'm not in a position to be putting a large number of digits of funds under management. I wonder if those who are may be more interested in returns than in the non-financial value of not being an asshole.
- ArtDev 11y ago
  It may take a while but it will happen. There are many people like me who have shifted all their banking to credit unions, including home loans. When the time comes for me to inherit financial products, the first thing I will do is shift investments away from sketchy companies like Gold Man Sacks.
- cm2187 11y ago
  In fact if you shop at Walmart, you specifically go for the "asshole" supermarket who will squeeze every penny from their employees and their supplier, and will sell you the cheapest knock off that still passes FCC/FDA regulations. Doesn't seem to turn off that many people. That being said reputation is important in banking and I like to think that investors are a bit more skeptical than before the crisis. Not that it is very difficult.
harryh 11y ago
Because the customers are, for the most part, sophisticated investors who know what they are getting into and these fines are more politically motivated theater than actual punishment for inflicted harm.
TheOtherHobbes 11y ago
>2) If banks acting in this manner is the standard... why? Why isn't a firm carving out the "niche" of not being assholes? If the only acceptable goal is short-term profit, actions and belief systems which maximise short-term profit are rewarded, and actions and beliefs which have a negative influence on short-term profit have negative incentives. This is often called "markets" being "efficient." In reality it's just an unstable self-destructive system with an inherently broken fitness function.
- justincormack 11y ago
  Well much of it is a zero sum game. You have to get these lousy customers to be stupid to win.
- neffy 11y ago
  Yes, that is the issue. Economics makes the mistake of assuming Banks can be modelled like other companies - it's not really the markets directly though. Banks make profit from the interest they make on their loans, minus the interest they pay to their depositors and minus other expenses. Other expenses include loan defaults. So as a bank you can be more profitable by 1) making more loans than your competitors (and inevitably that implies more risk), 2) paying less interest to your depositors - but that would lose you deposits, which would curtail your ability to lend, 3) be generally more efficient - but they all have computers now, and regulatory compliance is both a major, and commonly shared cost or 4) make safer loans, and suffer less loan defaults. The problem with 4) though is deposit insurance, means your customers don't care, but more critically that loan defaults aren't a nicely compartmentalised property of each individual bank's activities, since a big enough series of defaults from one of your more risk taking competitors is likely to trigger a default cascade that impacts your debtors as well. (Companies fail, their employees are fired, and can't pay their debts, their suppliers are similarly impacted, etc.) As you say, it's a very fragile system - and easy for excitable chimpanzees to break.
anexprogrammer 11y ago
> Why isn't a firm carving out the "niche" of not being assholes Well here in the UK one was claiming to be - the Co Op Bank. Ethical investing policy, mutual rather than floated on the stockmarket, and so forth. Not even based in London so hopefully free of any city groupthink. Also behind smile, one of the first online banks. £1.5bn bailout, forced into flotation with no benefit for mutual members, and turns out their ethics policies didn't stop them playing the same games as all the rest. (Bailout stemmed from them trying to takeover another failing bank, but they didn't realise they didn't have the money. Um, OK, a bank that can't add up). That's as well as being left holding tons of bad investments and loans. http://www.theguardian.com/business/2015/aug/11/co-op-bank-spared-fine-but-individuals-remain-under-investigation-says-fca http://www.theguardian.com/business/2015/aug/11/co-op-bank-s... Other mutuals here were just as keen to play the big boy games. Same for share dealing and investment funds. So where can a customer that gives a damn put his money? How can that customer have any confidence at all that they'll be honest, ethical, solvent and numerate? I see no choice at all on any of those measures.
rhino369 11y ago
The issue is that banks play various roles depending on the type of banking. In some roles they are basically salesmen and you aren't supposed to put much trust in them. In those roles, they are just supposed to not defraud the customers. Like you can get Goldman to create a product that hedges against oil prices going up. Goldman isn't fucking you over just because they think oil isn't going up. They are almost adverse to their customers. In other roles, they are directly advising the client. In those cases they have fiduciary duties to the client. They can't just sell you crap. They have to do their best. The real problem is there is a whole lot of inbetween roles. Where they are quasi salesmen and quasi advisors. Like in this case, Goldman is acting like a salesmen but is making some quality claims about how much diligence they did. Also, I think in the abstract that knowingly selling toxic assets would destroy a banks reputation, but the fact that everyone got caught in the sub-prime mess lessened the impact.
philrapo 11y ago
Broadly speaking, investment banks perform two roles: 1) Act as advisors in financial transactions. You expect them to have your best interest in mind here. That's the core reason you are paying them -- to give you good advice and look out for you. 2) Act as brokers when you want to buy or sell something. Sometimes it's hard to find buyers or sellers for your particular transaction. Imagine trying to sell a hotel... or a 10% stake in Tesla... or a few million barrels of oil. You might not know anyone who has interest in that, but you still want to buy or sell. An investment bank can help broker a transaction. In this case, you're (implicitly or expicitly) paying for liquidity, i.e. access to their relationships with buyers and sellers around the world. The service being provided is arranging a buyer(seller) for your transaction. (The service is not about providing advice in your best interest). There are certainly examples of shady dealings in role #1 above. But in role #2, a customer of an investment bank generally understands that the service is matching buyers/sellers, and you don't rely on the investment bank to do your diligence. You're not paying for advice in this case. It's like if your real estate agent was representing both the buyer and the seller, and you know they get compensated only if a transaction occurs. of course you expect that they are doing everything in their power to get everyone to transact.
inthewoods 11y ago
This. If I was in a transaction and Goldman was on the other side I would assume they were trying to screw me. But the reality is that for many large bank transactions there are very few players to go to - and that actually only got worse post-financial crisis with the consolidation of the banking industry. That being said, I can't think of a company outside of the world of finance that can repeatedly screw over their "clients" and still exist.

by kauffj 11y ago

keketi 11y ago

It's almost as if there is no competition in banking... whistles the x-files theme

nickff 11y ago

Some time ago (>>10 years) SEC fines were rare and they did carry the stigma you speak of, but the SEC's enforcement actions have now increased to a point where all the banks regularly pay out fines whether or not they did anything wrong; the stigma is now gone, and the fines are just a cost of doing business. Fighting regulators is a very dangerous game for any company, as the government will usually settle for much less than the potential fine (, usually less than the cost of fighting the fine), and the looming threat of an ongoing prosecution adds costly uncertainty to the business. In addition, the executives have a large incentive to settle because this is just the shareholders' money, and a failure to comply could be met with a criminal prosecution.

abakker 11y ago
IIRC and IANAL, there is also a strange problem that if criminal charges are brought against companies, there is a lot of fallout, and potential for the company to barred from operation. https://www.justice.gov/sites/default/files/criminal-fraud/legacy/2010/04/11/charging-corps.PDF https://www.justice.gov/sites/default/files/criminal-fraud/l... Section IX B. seems to be the relevant one there, suggesting that regulators and prosecutors attempt to weigh the fallout that such a charge might have on innocent 3rd parties.
- evanpw 11y ago
  That used to be true, but a bunch of banks have now pled guilty to criminal charges, and nothing really happened. [1] http://www.bloombergview.com/articles/2015-05-11/nobody-s-worried-about-too-big-to-jail-any-more http://www.bloombergview.com/articles/2015-05-11/nobody-s-wo...

TheSockStealer 11y ago

My guess is that the barrier to entry is too high and all of the players in the industry are already assholes. It could also be that investment banking attracts assholes so even if you did start a non asshole IB, you would soon be overrun with assholes because that is the available workforce. What a dilemma.

rm_-rf_slash 11y ago

People who benefit most from these financial institutions are either financial managers or wealthy people themselves. The former has the same mindset and the latter doesn't care as long as their wealth continues to grow without having to be too involved in the process. The sad dirty secret is that the other major players are usually pension funds, which are always under enormous pressure to make more money out of their investments. At the end of the day they don't care where the money comes from because turning a blind eye to evil is usually better for a fund manager's job security than asking for more contributions.

cm2187 11y ago

I would nuance that: 1. investors were fighting to get their hands on subprime assets. There was so much liquidity around that it was the only way to make a little bit of money, very much like today. Investors have been piling cash into tech companies and EM markets where they probably shouldn't have. Is it financial intermediaries' role to bar them from doing so? Is it the supermarket's role to bar you from buying snacks and sodas because it's bad for your health? 2. what annoys me is that these "unsuspecting investors" were professional buyers. It is people who's job it is to do their homework and understand these products. We are not talking about selling complex products to grannies. These are highly educated, highly paid finance professional who simply did not do their job of vetting what they were buying. Now if Goldman made misrepresentations (i.e. lied) on the nature of the assets, then there is clearly fraud, and by reading quickly the DoJ announcement it seems to be what Goldman is accused of. But in my opinion investors bear a very large part of the blame for this credit bubble. It's not a case of nasty Goldman vs nice unsuspecting investors.

prostoalex 11y ago
> It is people who's job it is to do their homework and understand these products. We are not talking about selling complex products to grannies. These are highly educated, highly paid finance professional who simply did not do their job of vetting what they were buying. Sure, but how many of professional money managers had their clients entire portfolios in subprime mortgages? My guess is that it was mainly allocated to the portions of portfolio deemed "high risk", and if they're not buying subprime mortgages, they're buying high-yield bonds, Puerto Rico munis, assets of bankrupt North Dakota frackers, and high-risk high-yield real estate projects like casinos and theme parks. There's daily trading activity on JNK and MORL and similar other instruments. I don't think there's any pretending going on that those are high-quality assets, and I also doubt anyone (in a clear state of mind with no gambling addiction) is going 100% into those ETFs.
- cm2187 11y ago
  I am not sure of that. The financial system is built to absorb expected losses. Where things go really wrong is when a big loss occurs where it was not expected. A lot of senior tranches in subprime RMBS had AAA ratings, which made then eligible for safe, low yielding portfolios. Banks could also pile them up on the balance sheet because the RWA footprint was really small given the rating. And that's why when it went "bang" it really hurt.

Retric 11y ago

Major investment banks primary mission is best thought of as advertising not investment. They make money based on the size of transactions not how good they are at their jobs. The completion is brutal and they are really good at convincing people of things that are not true. We use artisanal ingredients ~= we employ people from the top programs. That said, for the largest transactions there is a tiny pool of qualified companies out there. And if you’re doing a 50 billion dollar merger a multi-million dollar premium can seem completely reasonable. Much like how search is a sideline for Google, their primary mission is to sell adds everything else is simply how they accomplish that.

Kalium 11y ago

> 2) If banks acting in this manner is the standard... why? Why isn't a firm carving out the "niche" of not being assholes? How much are you, personally, willing to pay this year for the services of a "not assholes" bank? I'm not sure I'd be willing to pay very much, myself. I'm not in a position to be putting a large number of digits of funds under management. I wonder if those who are may be more interested in returns than in the non-financial value of not being an asshole.

ArtDev 11y ago
It may take a while but it will happen. There are many people like me who have shifted all their banking to credit unions, including home loans. When the time comes for me to inherit financial products, the first thing I will do is shift investments away from sketchy companies like Gold Man Sacks.
cm2187 11y ago
In fact if you shop at Walmart, you specifically go for the "asshole" supermarket who will squeeze every penny from their employees and their supplier, and will sell you the cheapest knock off that still passes FCC/FDA regulations. Doesn't seem to turn off that many people. That being said reputation is important in banking and I like to think that investors are a bit more skeptical than before the crisis. Not that it is very difficult.

harryh 11y ago

Because the customers are, for the most part, sophisticated investors who know what they are getting into and these fines are more politically motivated theater than actual punishment for inflicted harm.

TheOtherHobbes 11y ago

>2) If banks acting in this manner is the standard... why? Why isn't a firm carving out the "niche" of not being assholes? If the only acceptable goal is short-term profit, actions and belief systems which maximise short-term profit are rewarded, and actions and beliefs which have a negative influence on short-term profit have negative incentives. This is often called "markets" being "efficient." In reality it's just an unstable self-destructive system with an inherently broken fitness function.

justincormack 11y ago
Well much of it is a zero sum game. You have to get these lousy customers to be stupid to win.
neffy 11y ago
Yes, that is the issue. Economics makes the mistake of assuming Banks can be modelled like other companies - it's not really the markets directly though. Banks make profit from the interest they make on their loans, minus the interest they pay to their depositors and minus other expenses. Other expenses include loan defaults. So as a bank you can be more profitable by 1) making more loans than your competitors (and inevitably that implies more risk), 2) paying less interest to your depositors - but that would lose you deposits, which would curtail your ability to lend, 3) be generally more efficient - but they all have computers now, and regulatory compliance is both a major, and commonly shared cost or 4) make safer loans, and suffer less loan defaults. The problem with 4) though is deposit insurance, means your customers don't care, but more critically that loan defaults aren't a nicely compartmentalised property of each individual bank's activities, since a big enough series of defaults from one of your more risk taking competitors is likely to trigger a default cascade that impacts your debtors as well. (Companies fail, their employees are fired, and can't pay their debts, their suppliers are similarly impacted, etc.) As you say, it's a very fragile system - and easy for excitable chimpanzees to break.

anexprogrammer 11y ago

> Why isn't a firm carving out the "niche" of not being assholes Well here in the UK one was claiming to be - the Co Op Bank. Ethical investing policy, mutual rather than floated on the stockmarket, and so forth. Not even based in London so hopefully free of any city groupthink. Also behind smile, one of the first online banks. £1.5bn bailout, forced into flotation with no benefit for mutual members, and turns out their ethics policies didn't stop them playing the same games as all the rest. (Bailout stemmed from them trying to takeover another failing bank, but they didn't realise they didn't have the money. Um, OK, a bank that can't add up). That's as well as being left holding tons of bad investments and loans. http://www.theguardian.com/business/2015/aug/11/co-op-bank-spared-fine-but-individuals-remain-under-investigation-says-fca http://www.theguardian.com/business/2015/aug/11/co-op-bank-s... Other mutuals here were just as keen to play the big boy games. Same for share dealing and investment funds. So where can a customer that gives a damn put his money? How can that customer have any confidence at all that they'll be honest, ethical, solvent and numerate? I see no choice at all on any of those measures.

rhino369 11y ago

The issue is that banks play various roles depending on the type of banking. In some roles they are basically salesmen and you aren't supposed to put much trust in them. In those roles, they are just supposed to not defraud the customers. Like you can get Goldman to create a product that hedges against oil prices going up. Goldman isn't fucking you over just because they think oil isn't going up. They are almost adverse to their customers. In other roles, they are directly advising the client. In those cases they have fiduciary duties to the client. They can't just sell you crap. They have to do their best. The real problem is there is a whole lot of inbetween roles. Where they are quasi salesmen and quasi advisors. Like in this case, Goldman is acting like a salesmen but is making some quality claims about how much diligence they did. Also, I think in the abstract that knowingly selling toxic assets would destroy a banks reputation, but the fact that everyone got caught in the sub-prime mess lessened the impact.

philrapo 11y ago

Broadly speaking, investment banks perform two roles: 1) Act as advisors in financial transactions. You expect them to have your best interest in mind here. That's the core reason you are paying them -- to give you good advice and look out for you. 2) Act as brokers when you want to buy or sell something. Sometimes it's hard to find buyers or sellers for your particular transaction. Imagine trying to sell a hotel... or a 10% stake in Tesla... or a few million barrels of oil. You might not know anyone who has interest in that, but you still want to buy or sell. An investment bank can help broker a transaction. In this case, you're (implicitly or expicitly) paying for liquidity, i.e. access to their relationships with buyers and sellers around the world. The service being provided is arranging a buyer(seller) for your transaction. (The service is not about providing advice in your best interest). There are certainly examples of shady dealings in role #1 above. But in role #2, a customer of an investment bank generally understands that the service is matching buyers/sellers, and you don't rely on the investment bank to do your diligence. You're not paying for advice in this case. It's like if your real estate agent was representing both the buyer and the seller, and you know they get compensated only if a transaction occurs. of course you expect that they are doing everything in their power to get everyone to transact.

inthewoods 11y ago

This. If I was in a transaction and Goldman was on the other side I would assume they were trying to screw me. But the reality is that for many large bank transactions there are very few players to go to - and that actually only got worse post-financial crisis with the consolidation of the banking industry. That being said, I can't think of a company outside of the world of finance that can repeatedly screw over their "clients" and still exist.