A New Privileged Class?

It often looks as if banks are being punished for their infractions and crimes, but appearances can be deceptive. Huge fines are levied and “settlements” announced for manipulating rates, misleading customers, misrepresenting risk, conflicts of interests and “creative” bookkeeping, etc. But no one goes on trial or ends up in jail.

To be sure, there are occasional efforts to cut salaries, limit bonuses and even “claw back” bonuses when it turns out the bank suffered from incompetent or deceptive practices. But as Daniel Gross, reporting for The Daily Beast, put it recently: “A pretty clear rule of thumb has emerged: if you work at a well-known, large, systematically important financial institution, you may lose your bonus—but not your freedom.”

Gross went on to detail scandals involving the manipulation of the LIBOR and mortgage backed securities, noting that “Essentially, executives and traders at the world’s elite banks, over a period of years, blatantly, willfully, and persistently agreed to fix benchmark interbank lending rates.” RBS paid $600 million in fines. Barclays agreed to pay $453 million. More recently several US banks agreed to a “$8.5 billion settlement with federal authorities over the improper handling of foreclosures.” But those responsible for the misdeeds are seldom punished. (See “Why Do Banks Get Away With Murder?”)

The ones who end up losing are the shareholders, and that may be one reason banks are increasingly viewed as poor investments. Their fines end up being absorbed into the even-increasing cost of doing business.

Why is this tolerated? Gross suggests: “Prosecutors fear that indicting a highly leveraged, highly indebted institution would trigger a cascade of unwanted outcomes—capital flight, bank runs, disruptions in vital markets.” He cites Barry Ritholtz, author of Bailout Nation: “The greatest triumph of the banking industry wasn’t ATMs or even depositing a check via the camera of your mobile phone. It was convincing Treasury and Justice Department officials that prosecuting bankers for their crimes would destabilize the global economy.”

So just as banks deemed “too big to fail” are supported to keep the economy robust, now, the argument goes, all but the most inconsequential financial institutions have to be supported because prosecuting those who violated the guidelines and laws would send the wrong message. This is not only an extraordinary vulnerability in our jerry-built financial system, but also “moral hazard” on an astonishing scale.

Can Gross be correct? Do the people who regulate our financial system really believe this – or is it yet another rationale for a system that perpetuates our growing inequality? Perhaps the greatest sign of privilege is not needing to struggle oneself to be successful or safe because others are already worrying about your motivation and guarding your security.

If so, this might be the best indicator yet that we truly have established a new caste system. If those who now make up our financial elite feel entitled to do what they want with impunity, if there is no risk for them, where are the benefits of free markets? It looks increasingly like a game rigged by the players.