by Roger Childs

corruption = dishonest or fraudulent conduct by food-for-thoughtthose in power / the misuse of entrusted power for private gain.

The arrogance of top bankers and financiers

About ten years ago it was revealed that the Westpac CEO was earning over $4 million a year (this didn’t include stock issues, shares, expenses etc.). The Dominion Post ran a front page story about it and calculated that he was earning 48 times more than a front-line teller. 

Money makingHistorically, the banking industry world-wide has not had a great reputation. Self interest, dishonesty and greed have often been hallmarks of their operations (and those of mortgage and insurance companies), and the devastating 2007 – 2009 Global Financial Crisis (GFC), occurred because of their fraudulent and risky activities.  

Trading in toxic bonds; excessive risk taking in property investments and futures; reckless borrowing on housing when the institutions knew the borrowers would be unlikely to be able pay to back the loans; a lack of government or institutional regulation – these were all factors in the crisis which led to a recession.  Many companies here and world-wide went down the gurgler and others were bailed out by governments.

The David Hisco fiasco

David HiscoThe details of the recently “retired” ANZ Bank Chief Executive’s massive salary and extravagant lifestyle, and the “cheap” purchase of an Auckland luxury home owned by a bank subsidary, have been a major talking point. Obviously, Hisco’s excessive expenses were well known to the bank’s senior management and its ethics committee. 

David Hisco had done well for ANZ. He had piloted through the absorption of the National Bank into the ANZ; repaid clients who had been misled over the Diversified Yield Fund and Regular Income Funds, and has overseen an annual profit presently reported as over $2 billion annually during his time at the helm. However, he had been extremely well rewarded with a salary of over $3 million and benefits in excess of $400,000. 

The latter are unprecedented in the bank’s history.

Did he jump or was he pushed?

It was probably the latter. Despite Hisco’s successes in the CE’s role, in the end his extravagance became an embarrassment to the bank and the unions were furious. ANZ Chairman, John Key, called a press conference and his message was that like any errant bank employee, David Hisco was accountable and had to go.

Really?

Key was his usual smooth, relaxed self, but was unconvincing. As DominionPost columnist Phil Quin remarked:  “How stupid do these people think we are?”  Financial commentator Janine Starks summed up the view of many: “To say his ethics didn’t match a newly minted teller was more than a little twisted on a big picture view.”

 Will lessons be learned?

Banking historyThe banking industry needs regulation, restraint and sound ethics. The last 300 years has been littered with financial disasters which resulted from unwise investments, reckless lending, unjustified speculation, lack of financial reserves or borrowing safeguards, and a greedy desire for profits. 

Some examples — 

  • The South Sea Bubble in Britain in the early 18th century
  • The collapse of banks in the late 1870s – early 1880s leading to the Long Depression
  • The frantic lending in the U.S. in the late 1920s on stocks and shares which led to the Great Depression
  • The stock market crashes in 1987 and 1997
  • The 2007 – 2009 GFC mentioned above.

All of these were followed by attempts at regulation, often by way of legislation. But with good times returning, the temptation to reduce the oversight of banking and stock markets has often been too great.

The repeal of the 1933 Glass – Steagall Act in the U.S. in 1999 was a catalyst for the Global Financial Crisis

The Act had wisely separated commercial from investment banking after the Great Depression, however, President Clinton couldn’t resist the pressure from financial institutions to get rid of it.

In New Zealand the Reserve Bank technically oversees the operations of the trading banks and they are obliged to keep the regulator informed about their policies related to lending and reserves among other things. Sadly, this doesn’t always happen. 

The Hisco Affair has not caused a financial crisis, but it has shown up how bank bosses can get away with a lack of ethics and enjoy hyper-extravagant expense accounts.  In the case of the ANZ Chief Executives’ behaviour, there has been the misuse of entrusted power for private gain: in other words, corrupt practises. 

There are two issues which come out of this sorry saga – whether banks can act as a law unto themselves, and whether the leaders of big companies can get away with dishonesty, exploitation and extravagant spending.

Is it time for a Royal Commission into the industry as in Australia?