The Role of Whistleblowers in Avoiding the Next Financial Crisis

Nobody really has the answer to the size and dominance of the major banks over all financial life. Or, I guess, if they have the answer they can’t sell it to everyone in power.

This was pretty much the admission fostered by the New York Times in its editorial today “Banks Still Too Big to Regulate.”

The editorial focused on the process of living wills the banks are supposed to create to explain how they would dismantle operations in the event of a failure. This is another of the Dodd-Frank legislative reforms enacted in the wake of the 2007-2008 fiscal crisis. A crisis for which we are all, one way or the other, still paying.

It seems like a good idea, but it is subject to the real world limits in what it can do. According to the Times, five banks have been given more time to revise these plans, because presumably their current ones don’t really work.

In theory, the Times says, could be broken up.  In reality it seems unlikely, to say the least, that anyone has the nerve to tell the likes of the Bank of America, JP. Morgan Chase, State Street or Bank of New York Mellon to break up no matter what rules or regulations they fail.  This particular provision is useful but according to the Times living wills:

    “… do not fully account for the ways that the failure of one bank could cause the failure of another and, in that way, become a system wide problem.”

Of course, the threat of system-wide failure is precisely the issue. It is terrible, particularly for investors and users of the bank, if one takes a hit much less fails. The system-wide consequences, however are why the bailouts invariably occur if such a failure is threatened.

We can put up any regulations we want, but if the potential failure of one of these institutions means the entire financial world is coming down on us, no matter what anybody says today, when it happens we will get stuck with the tab of bailing out the big boys.

Two things help. First we should pay more attention to and learn more about how banks actually work so as to figure out how to regulate them.

Of course, that is an idea and it is beyond the scope of most of us.  We are supposed to have regulators and elected officials to do it. How are we supposed to understand banking regulations? If you look at the mortgage servicing rules closely and intently you come to the conclusion that most are written by lobbyists for bankers. Dealing with the nitty gritty of how banks work from a policy perspective is not easy. We need to learn more so we can continue to require regulators and elected officials set policy well.

The second thing is the reform written into the Dodd-Frank Act, which I find most important. The SEC whistleblower program may not be perfect. In fact, it is a long way from solving everything. Its existence though, gives regulators a fighting chance of obtaining information about what the banks are doing behind closed doors before the problem mutates into a system wide disaster.

Yes, I know, some people want to simply break up the banks, others want to re-enact laws from the 1930s. We can look with envy across the border to Canada, which from all appearances, enjoys the benefits of a much more highly regulated, restricted and conservative financial sector that led its banks to remain stable when ours needed to be bailed out, but who knows what the reality is inside the banks themselves.

Only whistleblowers can provide us with that information. So, here’s hoping there are more of them, while the rest of us try to figure out what these big institutions are doing with our financial worlds.

Tony Munter Whistleblower Attorney

Tony Munter Attorney at Law
409 7th St NW,

Washington DC  20004