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Tuesday, 29 July 2014

Banks' daily business of risk should not be a punishable offence

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In a brief email exchange I had with a young lady journo from one of the trade rags yesterday, I received a suggestion from her that I ought to think of becoming an investigative journalist myself. My reply read: “I prefer life as a freelance polemicist”. Oh yes! And the events surrounding Standard Chartered Bank bring out the very best polemic genes in me even though I have held back in the subject for several days.

Anthony Peters, SwissInvest Strategist

When the New York DFS (Department for Financial Services) began by taking its roundhouse kick at StanChart on Monday, I was, I must confess, utterly perplexed. A rogue institution? The bank received its Royal Charter in 1853 and had set up its first branches in Bombay and Calcutta a decade before the Americans set about killing off 10% of their male population in a dispute over the ownership of slaves, their subsequent emancipation and the assassination of the president who was prepared to fight this fight.

While certain New York-based investment banks which shall be nameless were encouraging European governments to falsify their accounts while earning hundreds of millions for doing so, StanChart was going about the boring business of being a bank, of financing trade and business.

I might care to recall that that when I entered the banking business in the late 1980s, one did it because one couldn’t get a proper job and because the alternatives of the army or the church did not appeal. Banking was boring unless one joined an international outfit with a wide global network which meant that one might get to serve in exotic but primitive locations and could therefore retire earlier on full pension for having done “dirty service”. It wasn’t all New York and Tokyo but Nigeria, Malawi, Vanuatu or even Tuvalu (a friend of mine did a stint there as a graduate trainee). Great for a week’s holiday, maybe but two year stints? You could choose between malaria, civil wars or both. The people at Standard Chartered knew about globalisation before the Yanks had invented the word.

On banking in the 80s: one might get to serve in exotic but primitive locations and could therefore retire earlier on full pension for having done “dirty service”. It wasn’t all New York and Tokyo but Nigeria, Malawi, Vanuatu or even Tuvalu

So this venerable, 150-year old bank is supposed to have left the US “vulnerable to terrorists, weapon dealers, drug kings and corrupt regimes”. Is that a fact? Strong stuff coming from the home of Major Oliver North. Can anyone remember the “Iran-Contra Scandal” of the 1980s in which, supposedly with the knowledge and approval of the Reagan White House, US arms were illegally sold to Iran, the devil incarnate, in order to help to secure the release of US hostages in Lebanon while conveniently throwing off surplus cash which was in turn syphoned off and used to fund the Contras, the insurgent movement which opposed the left-wing Sandinista government in Nicaragua. Where did I hear the word “rogue institution”?

The DFS (just perchance and quite ironically, there is a furniture discount group in the UK, also called DFS, who’s motto is “Making Everyday More Comfortable!”) under the leadership of Benjamin Lawsky, has not only put StanChart’s nose out of joint but manifestly failed to inform and co-ordinate with the major regulators, the SEC, the Bank of England and so on, thus shooting from the hip and finding itself accused of behaving like a “rogue institution”. Rudy Giuliani and Eliot Spitzer both launched their political careers by single-mindedly pursuing single “rogue” cases and although I would not want to suggest that anything similar might be in the mind of Mr Lawsky, the manner in which he burst into the public arena with his allegations renders comparisons rather inevitable.

The fightback

Now StanChart has come out fighting. It is not common for banks to toy with the idea of fighting regulators which is a risky strategy and one only worth taking if the bank in question is mighty sure that it is standing on very solid ground. The tone of Peter Sands, the bank’s CEO, is one of polite belligerence. It was not one of “I know of no wrongdoings” but one of “I know exactly what we did and it was not wrong”. In other words, he is coming as close as one can to suggesting that the DFS’s interpretation of the law is wrong and that therefore there is no case for the bank to answer. The FT goes one further this morning in indicating that the bank might be considering legal action against the DFS for causing reputational damage. Now that is different!

We laugh at the rulings which come down from the health and safety people who insist that children have to wear protective eye wear when playing conkers or who order one hundred year-old trees on a high street to be cut down because someone might walk into one but we stand back as regulators strangle the living daylights out of banking.

One might be able to reduce risks in every day life, even if it is at the cost of making that life barely worthwhile living but banks are here to take risks; that is what they do. The more risk they take, the more they stand to make. Fact. The regulators were caught napping and the banks blew themselves up. Fact. But we have fallen into a culture where the banks are being punished not only for their own failings but for those of the regulators as well. This has not been an environment conducive to banks balking at the demands being put on them but I have a sneaking suspicion that the actions of the DFS might prove to be the straw that breaks the camel’s back.

StanChart points out that if it had been trying to hide 10 years of illegal payments, it would have done so and not left the transactions open for everyone to see. It justifies the wire stripping with a simple explanation of maintaining internal confidentiality. I don’t know enough about the ins and outs of this case yet but it is good to see that StanChart is not taking all of this lying down. If the DFS has overstepped its mark, then the bank is well within its rights to fight back.

I watch with interest…

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