The banks got away with it

A New York hedge fund manager told the ADC Leadership Retreat at Hayman Island on the weekend that he expects US bankers to be led away in "handcuffs and pajamas” pretty soon over Libor rigging. What's more, he reckons, civil damages over the scandal could end up being greater than all bank capital.

Nobody believed him; the audience smiled politely and moved on, thinking: "yeah, sure”. The market's not too worried either: Barclays shares are up 22 per cent from their post Libor lows, and back to where they were in May, and shares in Standard Chartered Bank, which has been fined $340 million for breaking US sanctions on Iran, have gone up 16 per cent since that scandal broke.

But leaving aside the (remote) possibility of arrests over Libor rigging and the slap on the wrist for StanChart over Iran, you'd have to say the world's bankers have gotten away with the greatest two scams in history, which are the US Sub-prime Mortgage Affair and the Great Euro Periphery Heist. Not only have they not been arrested in their pajamas, they haven't had to give back their bonuses, regulators are getting nowhere and governments are still bailing them out with cash and cheap money.

The difference between their treatment and that of the tobacco companies is rather stark, you'd have to admit.

In Australia the banks didn't join in the two big scams, at least not much anyway, because they're better regulated and APRA wouldn't let them. But they're making hay now because their competitors have disappeared along with the swindle-ridden securitised mortgage market.

As a result, they have rebuilt their net interest margins and have become the world's most profitable banks according to return on net assets. Of them, Commonwealth Bank is the stand-out: it's the world's most expensive bank by market value to net assets and yesterday broke $7 billion in profit (still only about a quarter of JP Morgan's profit).

At this point after the 1929 crash, which was also caused by banks, US Congress had received the report of the Pecora Commission and already passed the Banking Act, also known as the Glass-Steagall Act, which separated the activities of banking and dealing in securities. In general, the regulatory attack and public opprobrium on banks in the 1930s was ferocious and effective.

The new law lasted for 66 years until it was repealed in 1999 as a result of bank lobbying. They were then free to do again what they did between 1922 and 1929, and the result was the same except this time politicians and central bankers are scared of them, not ferocious.

Not only has there been no Ferdinand Pecora, the fierce senior counsel to the US Senate Committee on Banking and Currency in 1932 whose name went on their report, but the efforts to re-regulate them have been pathetically easy to deal with (the banks have been playing whack-a-mole with politicians) and central bankers have been keeping the insolvent banks alive with cheap money.

This time, you see, the banks are 'too big to fail'. That means they are too big to prosecute as well, by the way, since prosecution usually means failure, and they're too rich to regulate. That means bankers are above the law as well as fantastically rich and powerful.

There is one potential as the new Ferdinand Pecora: Gary Gensler, the chairman of the US Commodity Futures Trading Commission, who led the investigation into Barclays and the $450 million settlement with it, and is now conducting a global investigation into rate-rigging by more than a dozen banks, and is pushing hard for a return to Glass-Steagall.

But how come the CFTC, which regulates futures, is suddenly leading the charge against the banks and emerging as the banking regulator? Because there was a little provision in the 2,319 page Dodd Frank Act that was passed in 2010 to respond to the GFC, that the banks didn't notice or didn't realise the importance of, so they didn't lobby to have removed. It greatly expanded the responsibility of the CFTC in regulating derivatives, and the 2008 banking crash, unlike the 1929 one, was all about derivatives. Every euphoria and panic has something new, and this time it was banking derivatives.

The thing the banks focused on in their lobbying was the Volcker Rule, the section of the Act that was meant to reintroduce a form of Glass-Steagall, specifically banning proprietary trading ("we must be able to gamble – it's vital”).

So far the banks have managed to emasculate that rule, although the recent epiphany of Sanford Weill, the former Citibank CEO who was responsible for the repeal of Glass-Steagall, has swung opinion back towards strengthening it again. Weill mused in an interview that, actually, maybe it wasn't a good idea to repeal Glass-Steagall after all and maybe banks shouldn't be allowed to do anything they want. The latest convert is Paul Ryan, the Republican vice-presidential candidate for this year's election.

But the underlying problem is that if they're too big to fail, they're too big to regulate, and the efforts to do something about that more fundamental problem are moving very slowly. In November last year, at their summit in Cannes – three years after the crash – G20 leaders asked the Basel Committee and the Financial Stability Board to look into it. They have come up with the idea of a capital surcharge for "globally systemically important banks” (G-SIBs) as well as "improving global recovery and resolution frameworks”, whatever that means.

The Basel Committee has just released a consultative document for dealing with "domestically systemically important banks” (D-SIBs) which is waffly and about as far from Ferdinand Pecora as is possible to be.

In fact, Australia's APRA could teach them what to do, and it's all about vigilance, not rules.

APRA has a wonderfully named system called PAIRS/SOARS, which stands for Probability and Impact Rating System (PAIRS) and the Supervisory Oversight and Response System (SOARS). Basically, and to cut out the jargon, APRA is all over them like a cheap suit, constantly issuing speeding tickets and forcing changed behaviour.

Unless you're going to break the banks up so there's lots of little ones instead of really big ones, that sort of principles-based, hands-on regulation is the only way to go.

It works in Australia but would it work in the United States? Perhaps not: money doesn't talk there, it shouts.

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