Rogues or Rotten System?

Have you noticed how Hollywood protects the villains? Whether the narrative is about 19th century cowboys, 20th century Cold War spies or 21st century virtual time travellers, the deviants are always singled out as lone rogues. By killing them off, the system is cathartically cleansed. But what if that behaviour was symptomatic of a deviant system?

The culture of cheating that now drives western society protects itself by censuring individual deeds as if they were deviations from the norm. Individuals or institutions that are exposed to the public gaze are immediately condemned as rogues. Meaning, that their behaviour was exceptional and not encouraged by the system.

That happened when New York State’s financial watchdog, the Department of Financial Services (DFS), threatened to revoke the license of a British bank, calling it a “rogue institution”. Standard Chartered was accused of hiding $250bn of transactions with Iran, leaving “the US financial system vulnerable to terrorists, weapons dealers, drug kingpins and corrupt regimes”.

The action, alleged the DFS, generated “hundreds of millions of dollars” in fees. Standard Chartered denied it had breached US economic sanctions against Iran. Lord Davies, a former Labour minister, was Chief Executive of the bank at the time of the transactions.

The bank’s chief, Peter Sands, admits that “mistakes were made” for which he was “very sorry”. It remains to be seen what the true extent of the errors was. The bank appears to have offered to pay $5m to settle the dispute, but insiders suggest that the settlement might cost $500m.

The Moral Compass

Was the transgression really exceptional or symptomatic of a money-making culture incubated by a general understanding that cheating was acceptable if you could get away with it?

It appears that disguising the identities of clients by stripping information out of documents is routine practice. Frank Partnoy, professor of law and finance at the University of San Diego, has put his finger on the real problem. Writing in the Financial Times (August 9, 2012) he explains how the in-house lawyers had failed to ensure the bank’s compliance with the US law on dealings with Iran. He notes:

“As recent debacles at Barclays, HSBC and now Standard Chartered demonstrate, employees of big global banks increasingly lack a moral compass. Some general counsels and compliance officers do provide ethical guidance. But many are facilitators or loophole instructors, there to show employees the best way to avoid the law. Not even mafia lawyers go that far.”

A Culture of Corruption

Slowly but surely the public is becoming aware that the rackets within the financial sector were not random events. They were symptoms of a system out of control. The primary villains are the agents of power, the people who occupy the positions of government who are supposed to be the guardians of what is called (with a straight face) the rule of law. That law is seriously distorted by what economists like to call “asymmetries”. In plain English, that means there is something fundamentally disconnected in the system.

We have known since Adam Smith what that problem is. The pricing mechanism has cut loose a large chunk of a nation’s income – economic rents – and that’s what the rent seekers are fighting over.

There is no excuse for the behaviour of bankers, but one of these days we will pin the blame where it belongs: on the law-makers. Those who are the breakers of natural law.

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