Asymmetry

Typically, risks and rewards move in tandem.  In other words, those seeking substantial outcomes are required to accept large levels of risk.  Put one more way, the relationship between risk and reward is symmetrical. Of course, this only applies if you are not a bank.  These institutions, led by some of their employees who have fewer scruples than average, tend to find ways to decouple this relationship.

A shot may have been fired across the bow on October 20, 2014 by a Governor of the Federal Reserve during a conference centered on reforming culture and behavior in the financial services industry.  Governor Daniel K. Tarullo noted that the financial system is more resilient than before the 2008-09 crisis but also pointed out that headlines describing misconduct within financial firms continue to appear regularly.  He went on to suggest that this was more pervasive that just “a few bad apples” within a couple of institutions.  As a reminder, a few of the more egregious post financial-crisis  infractions include interest rate and foreign exchange price fixing, tax evasion facilitation, inadequate controls against money laundering, and front running their clients via esoteric and opaque trading platforms.  It starts to sound like the system is rigged when you put it that way!

Tarullo is concerned that “corporate culture” allows for such malfeasance. He is concerned about compliance department being nothing more than window dressing; departments willing to follow the letter of the laws but not the spirit of the rules.  Some companies do not seem willing to punish those folks who choose to operate outside of internally set guidelines.  Lack of action by superiors has created environments where workers are not concerned about the risks they are taking because their personal downside has been minimized by the firm’s culture.  Instead, they are able to focus more on the potential upside of their questionable behavior.

As greater rewards are sought, their corresponding risks must exist somewhere.  Atlas contends that it is being placed on the shoulders of Americans via a less stable financial system.  From this perspective, it appears that the individual actors who are marginally destabilizing the financial structure are sharing the risk with the nation while hoarding the bounty, when outcomes go their way, among a few.  Perhaps folks like Daniel K. Tarullo will begin to speak up more frequently, and more Americans will begin to take notice.    (by C. Cox)