Watching the CEOs of America's largest banks testifying this week to Congress about their roles in starting The Great Recession with varying levels of contrition and defiance raises the question: exactly who are banks really accountable to in these post-TARP days?
Who's the boss? Shareholders? Taxpayers? Customers (whom they routinely bet against)? The government? Some banks have repaid their TARP money but still borrow nightly from the Fed for next to nothing. Where do their allegiances lie?
If you read the law, banks are supposed to serve a public purpose. That's why they are licensed and enjoy the benefits of limited entry, which theoretically keeps banks from being threatened by, say, Wal-Mart, which might like to take over the money business itself. Banks have their funding sources protected by the state: they
can borrow from the Fed and we can't.
The trade-off to get these perks used to be that their risk-taking was limited and they were allowed to be reasonably, but not terribly, profitable. In theory, banks that did not serve a public purpose could be shut down. That all changed with deregulation in the 1980s and 1990s, and with it, apparently, that sense of public purpose.
An informal poll of top economic bloggers seems to indicate that these banking executives are accountable mainly to themselves.
"They are certainly not accountable to customers," says the aptly-named Adam Smith, dean of American financial writers, author of The Money Game
and a blogger for Asset International. "Customers are complaining about teaser loans and service charges to their accounts, and it is shortsighted of the banks to keep twisting the corkscrew when there is this rumbling anger in America. Note the banks aren't out there lending the money, that anyone has noticed. You have a yield curve built for speculation -- borrow at zero percent, lend at nine -- and that's not just the banks."
If not their customers, maybe the banks are accountable then to their shareholders. Maximizing shareholder value
has been a mantra on Wall Street for many years, justifying any number of bad corporate behaviors. But doesn't the government still own shares in some banks? CitiCorp and Wells haven't repaid their TARP funds, yet neither seems more accountable to the government as a result.
"I don't think the shareholders (even if they're in charge) will make any difference, " says Sramana Mitra, a serial entrepreneur and columnist for Forbes
. "Team Obama can (make a difference), though, and so does the media."
"The real problem is that governments are now supporting capital markets firms with nothing even remotely resembling adequate oversight and control, " says Yves Smith, editor of the popular Naked Capitalism
blog. "(Jamie) Dimon gets high and mighty at the hearing about how (JP Morgan Chase) didn't do the stupid stuff many of its peers did. Hello? It's a $1.3 trillion bank attached to a $76 trillion derivatives exchange. Tell me it's not exposed. Any serious bad stuff its peers does blow up on JPM too. The capital markets firms are in charge, running their enterprises for the sole benefit of their employees. "
So maybe huge bonuses ARE the issue after all.