A new chapter in social and economic history was opened on 15 September 2008 when Lehman Brothers Holding Inc. collapsed under debts of $613bn (£395bn) in the US’s largest ever bankruptcy. Ripples swelled to waves and one by one the major names in international finance became engulfed by the threat of total ruin. Governments across the globe pumped trillions into the global financial system to calm the waters and halt contagion.
Six years after the crisis started, the dominos are still falling: job seekers, evicted homeowners, and users of public health and education systems worldwide continue to experience cuts and austerity. As the spotlight has remained on the industry, other harmful and abusive practices have been revealed, with new scandals emerging with monotonous regularity. Despite this, the discourse around preventing a repeat of the events of 2008 appears to be sliding down the agenda, especially with recent figures indicating that economies are in recovery and the World Bank proposing that the global economy had reached a ‘turning point’ in 2014.
I propose that a commonality of causal factors underlies a spectrum of harmful conduct, from excessive risk taking of the type seen in the run-up to the Lehman collapse, to mis-selling, fixing, sanctions evasion and the finance industry’s role in money laundering and the facilitation of crime. An aversion to identifying, examining, and remedying the causes of the global recession is mirrored in the treatment of financial crime. Now we are at the stage where legislation and regulatory action risks reaching a point of diminishing returns, further reform is called for – not only to avoid another 2008-style meltdown, but also to specifically address money laundering and the facilitation of crime by the finance industry.
Nobody could dispute that an unprecedented amount of time, energy, and money has been poured into understanding the gremlins in the system, and there have, of course, been some significant developments as a consequence. The Financial Services Act has overhauled the UK regulatory system, calling time on the FSA and instituting the Prudential Regulation Authority and the Financial Conduct Authority; the Banking Reform Act has separated high street from investment banking and, in the US, the Dodd Frank Act has resulted in the largest reforms to the regulation of the banking industry since the Great Depression.
But there can be no denying that what remains is a tangible sense that the sum total of measures taken globally since 2008 fall short. In May 2014, Christine Lagarde, managing director of the IMF, said of banking reform: ‘The bad news is that progress is still too slow, and the finish line is still too far off. Some of this arises from the sheer complexity of the task at hand. Yet, we must acknowledge that it also stems from fierce industry pushback, and from the fatigue that is bound to set in at this point in a long race”.
Given the interconnectivity between all of the parties involved in oiling the money machine, plotted against a host of jurisdictional variables, knowing how to approach risk and effectively anticipate impacts can seem a little like joining a game of three-dimensional chess halfway through. Set against a backdrop of lobbyist rhetoric, regulatory capture, and other kinds of conflicts of interest, the task sometimes seems almost impossible. Certainly it is not just a few rogue overpaid bankers operating beyond the wit of legislators, regulators, and the banks themselves who pose the greatest threat; although approached from the view that greed is to blame, bankers and their bonuses are commonly painted bullseye red.
Clearly the pursuers of profit are prominent actors in shaping the behaviours of the financial industry, but financial institutions and their employees do not operate in a vacuum. Uprooting the underlying causes of institutional weakness turns up a tangle of responsibilities borne not only by the banks themselves, but also by lawmakers and regulators.
Meaningful reform is dependent on robust and properly enforced regulation and legislation, which is meshed with systems within financial institutions that are adequately designed, implemented, and governed.
Stephen Platt is the author of Criminal Capital: How the Finance Industry Facilitates Crime