It’s a sign of the times when Luis Suarez biting someone fails to get much of a reaction out of me.
Did you see the Uruguayan sink his teeth into Italian defender Giorgio Chiellini’s shoulder during last week’s World Cup game? You don’t have to follow football, it was all over the news!
I know, I know. I should be appalled, but I’m not. All the cynicism surrounding the modern game means my sense of outrage has become quite hard to provoke. At least football’s governing body FIFA took a firm view, and moved swiftly to fine Suarez and ban him for four months.
So why am I talking about football in an investing newsletter? Well, last week I argued that the beautiful game has more in common with the banking industry than you might think.
Now I’m picking up this story again, to answer an excellent comment from one Sleuth reader on last week’s issue.
Today’s question is how we should punish people who transgress – footballer or banker – and if banking could learn a few lessons from football.
Let’s dive right in.
The difference between football and banking
So, last time I mentioned a couple of similarities I see between banking and football.
But as one reader commented, there’s one key difference between them: “If a player commits a disciplinary offence, it’s he who pays the fine, not his club.”
In contrast, when bank employees transgress, it’s the shareholders who are left picking up the tab.
This is a really good point. Unlike in banking, the principle in football is to punish the player, not the organisation.
Of course, the Suarez case shows that even in football, an innocent organisation can still end up being damaged.
Suarez will end up suffering financially, but he’s so well rewarded that I doubt he’ll miss the money. Due to his ban, however, his club Liverpool will lose last year’s top Premier League goal scorer for at least 12 matches – even though he was on international duty when the incident occurred.
Still, I think there could be a lesson here. Is it time to start making naughty bankers, like naughty footballers, personally liable?
Who’s really getting punished here?
Why should we? Well, first of all, in banking as on the football pitch, fines have become so commonplace that the sense of shock has been lost.
But if you look at them, some of these numbers really are staggering.
Leading US bank JP Morgan has been fined more than $25bn over the last couple of years. That’s equivalent to the entire market value of BAE Systems!
Barclays is also back in the dock, despite having just settled a £290m fine for fixing Libor, the interest rate benchmark. This time it’s over the running of its ‘dark pool’ equity trading facility. The charge is a familiar one – failing to offer transparency and act in the best interests of clients.
If the charges are accepted or proved, another big fine seems inevitable.
And this is where the big problem lies. When a bank is fined, it doesn’t hit the perpetrators. No – it hits the shareholders.
Barclays’ shareholders have already taken a hit on this one – shares have fallen back to late 2012 levels. That’s not the only issue. Fines also weaken balance sheets, making it harder for banks to lend.
Will these banks’ management be punished as severely as they should be? Somehow I doubt it. JP Morgan’s CEO, Jamie Dimon, has remained in charge throughout – the best paid leader in the industry, earning around $20m last year.
Surely there must be a better way of doing things? Well, it seems that there is.
Light at the end of the tunnel
The current system clearly isn’t working. Big banks continue to nail their shareholders by incurring huge fines, showing that this ‘punishment’ is not an effective deterrent.
But there are signs that at last things might be moving in the right direction. French bank BNP Paribas has just been clobbered with an $8.9bn fine for sanctions busting.
As part of that, several dozen bankers have been demoted and had their pay cut as part of the punishment. About a dozen have lost their jobs.
A US government lawyer on the case seems to get the message. She said that the only way to stop this from happening again was for “employees who knowingly violated the law to face appropriate consequences for their actions”.
As with Suarez, we might argue about what exactly the appropriate punishment should be, but it has to be one that hits the individual perpetrators hard. Landing the shareholders with a headline-grabbing fine just isn’t going to do it.
I’d like to think the penny is dropping with BNP case. I’m not going to hold my breath, but it’s possible that things are starting to move in the right direction.
If employees keep acting against their clients’ interests, then as a society we have a big problem.