The Big Banks Are Corrupt -- And Getting Worse

A system that rewards antisocial behavior begets social tragedy. It's also a law enforcement nightmare. Criminology teaches that the presence of reward for criminal behavior, along with the absence of deterrence, almost inevitably leads to more crime.

The song says "you've got to be taught," and this lesson apparently hasn't been lost on the newest generations of bankers. "We are particularly dismayed by the ethical standards of the most junior employees in the industry," write the authors of the Labaton Sucharow study, who found that younger bank employees were much more likely than their elders to admit a willingness to commit fraud if given the opportunity to get rich illegally and get away with it.

But then, why wouldn't they? The banking industry's incentive system, combined with the government's refusal to prosecute, has taught them that the old saying is wrong: crime does pay.

Back On Top

Wall Street certainly isn't suffering in the wake of the financial crisis it created. The financial industry is nearly as large as it was before the crisis. In fact, its profits are as large a chunk of the total economy today as they were before Wall Street imploded (and was rescued by taxpayers).

Neil Irwin of the New York Times notes that current bank profits are "more than double their average level over the 70 years ended in 1999." That's called financialization. It's what happens when the productive economy of building, selling, and servicing things is crowded out by unproductive activities that redirect profits toward the manipulation of money.

As Irwin notes, bankers' incomes are rising again, and the World Financial Center's vacancy rate has fallen to 5 percent from a post-crisis high of 41 percent.

The Wall Street Journal reports, "Top executives from the biggest U.S. banks, concerned about anti-Wall Street rhetoric already bubbling up on the 2016 campaign trail, are working to push back against the prevailing narrative that banks are bad."

Are they rooting out corruption inside their own institutions? Changing their incentive plans? No. According to the Journal, discussions centered on "finding ways to emphasize the positive role banks play in the economy and the changes big firms have made since the 2008 crisis ... by engaging with local media, elected officials and community leaders."

That's not likely to move hearts and minds among the public at large. Two-thirds of voters polled last year for Better Markets said they believe "the stock market is rigged for insiders and people who know how manipulate the system."

"Deep-Seated Cultural and Ethical Failures"

These voters are right -- and they're not alone. William Dudley, president of the Federal Reserve Bank of New York, spoke in 2013 of "deep-seated cultural and ethical failures" and "the apparent lack of respect for law, regulation and the public trust" in the culture of our biggest banks.

Dudley reached that conclusion in 2013, and the Labaton Sucharow study suggests that banker ethics have gotten worse since then.

Our banking system has a design problem, because its incentives are broken. Financialization is stifling the productive economy. And the systemic threat posed by our biggest banks has made them immune from real punishment.

These massive financial institutions don't need a PR campaign. They need to be cleaned up -- and they need to be broken up.

"If you ain't cheating," said one of the traders involved in the currency exchange scandal, "you ain't trying." If we're not addressing the financial sector's systemic threat to our economy, or its affronts to our system of justice, then we ain't trying either.