20120718-071357.jpgArticle of the day link: the continuing scandal of banks.

HSBC is being “grilled by lawmakers” for giving terrorists, drug cartels and other general criminals access to the US financial system. In addition to, what some angry liberals might call, “allowing themselves to go to work and earn these GIANT BONUSES that caused the fiscal cliff and global warming and starvation in Africa and the tsunami in Japan and other bad bad things”.

Unfortunately, many such liberals have become self-styled “public outcries”, which force many lawmakers to leap up and take moral stands***.

The head of compliance at the HSBC resigned mid-hearing. Which I think was widely acclaimed as a victory for the public outcriers.

But while I watch this all going on, you have to wonder what the outcome is here. Once you wade through all the adjectives, what we’re really talking about is the bank turning a blind eye to the fact that some of its clientele might be unsavoury and/or dealing with their cash might violate US foreign policy (like transacting with Iran during sanctions or banking drug money).

The “lawmakers” want the banks to not-turn-a-blind-eye. So they make it illegal to not-perform-compliance-procedures to check that your client isn’t a mexican drug lord.

Is this useful? Almost probably not at all.

Let’s examine the pay-offs here.

Generally speaking, most bankers expect to retire from banking and join a private equity firm while they’re in their early forties at the latest. This gives them about 15 years to make it. Thanks to public banking scandals (one every three to five years or so for each bank), heads are usually on the block for about three-to-five years right at the end.

If the guy (or girl) violates compliance procedures during his (or her) tenure on the block, they stand to earn a stack of money in bonuses. If they get caught, then they have to resign in the middle of a senate hearing. At worst, there’ll be the paying back of some bonuses. Then skipping off to play with the private equity folk.

Who pays the fine? The bank pays the fine.

To summarise:

  • If the banking guys comply with the legislation, they earn nothing extra.
  • If the banking guys violate the legislation and get away with it, they earn extra bonuses.
  • If the banking guys violate the legislation and get caught, they still earn extra bonuses, but may be forced to pay some (or all) of it back.

I leave it to you to decide what the dominant strategy is here****…

From a legislative point of view, we should probably take a leaf out of the Middle Eastern law-book and chop off a hand when someone get caught violating compliance.

At least there’ll be something on the line.

But that sounds extreme. And a little unsavoury. And frankly, wouldn’t that then make it illegal for HSBC to operate there?

Moral conundrum. Found it.

***A bizarre stand for many a politician.

****My tip-of-the-hat to game theory.