(Double) Standards of Accountability

20130924 Double Standards

While much of the nation’s financial policy cognoscenti spent last week musing on the lessons learned since the Lehman Brothers bankruptcy, some FDIC officials spent the anniversary a little differently. Five years after the largest bankruptcy filing in U.S. history marked the Wall Street meltdown from which we are still recovering, the FDIC sued 16 community bankers from a failed bank in Georgia for nearly $22 million.

It’s not the first time representatives of a failed community bank were sued for Deposit Insurance Fund losses, and it won’t be the last. And this is neither the time nor the place to prosecute or to defend these individuals. But there is nevertheless something to be gained by comparing these Main Street bankers’ week with that of Wall Street, even if it is a bit like comparing apples and oranges.

In the community banking world, officials from the failed Security Bank in Macon, Ga., were publicly named in a lawsuit stemming from their bank’s July 2009 failure. Not only did regulators shut down the business, these individuals are also being sued four years later for more than $1 million each. They are accused of making faulty loans.

Contrast this with what happened last week on Wall Street. JPMorgan Chase, one of a handful of megabanks that contributed to a financial crisis that caused millions of Americans to lose their homes and jobs, agreed to pay more than $1 billion in fines in a single day. The largest of its financial penalties followed the “London Whale” fiasco, in which the bank funded high-risk trades in part with federally insured deposits, lost $6 billion, dodged regulatory inquiries and hid its losses.

With more than $1 billion in fines, JPMorgan almost looks like it got the short end of the stick. But let’s look at these penalties in context. Relative to each bank’s total assets, the Security Bank penalties are nearly 20 times bigger than JPMorgan’s. Further, these individuals would have to pay the fines out of their own pocket. For a colossus like JPM, even $1 billion is small beer.

Of course, it’s hard to match these cases one to one. They are different fines for different circumstances. After all, Security Bank officials are facing the repercussions of the very failure of their bank. JPMorgan, on the other hand, is paying penalties and fines for a series of violations of the law, which seemingly occur daily. JPM and the other megabanks have already had to deal with what regulators dished out when these institutions were at the brink of  failure—billions of dollars in taxpayer-funded assistance that kept them open. Meanwhile, in the eyes of the government, the little bank in Macon, Ga., was too small to save, and so are its directors.

Like I said: apples and oranges. In the banking world, anniversaries—and accountability—mean different things to different people.

2 thoughts on “(Double) Standards of Accountability

  1. Size does matter. A small retail pharmacist was fined and sentenced to jail for filing false drug claims which is against the law. No problem. However CVS paid a multimillion dollar fine for the same crime but on a much larger scale. No one went to jail, the only people that suffered any consequence were the shareholders. These situations are becoming more prevalent all the time. Type of business is not important, size is important. These problems are prevalent at the Federal level as well. No one goes to jail, no one gets fined. They take their pension and dance off into the sunset. Double standards thru and thru. The Justice system has become so expensive that it does not provide the justice it proclaims. I have no solution.

  2. The larger firms grew with the explicit intent to reduce individual liability. Every industry faces this battle because of the way we allow firms to structure themselves. It’s a blessing when they’re good citizens and a curse when they aren’t. As for small bankers: they can’t claim they’re too small to meet megabank requirements but too big to be responsible when they fail. Small bankers should have a better handle on their systems and customers by that argument. Their largest shareholders (in many cases their key execs) are thus largely responsible.

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