Although the big financial meltdown began around 2007, financial fraud lawsuits are still all the rage among trial lawyers these days. It usually takes a couple months for an investor to realize they’ve been swindled by a bank and a couple years for the lawsuits to be investigated, filed, litigated, and then sent to trial.
Yet, it happens, and happens a lot. Sometimes the banks just take the money, withdrawing it without consent. Other times the banks wait until the worst moment to make an unreasonable demand or give bad investment advice, compelling an investor into selling (or buying) an asset, and then profiting on the other side of the transaction, like Goldman Sachs allegedly did to Marvell Technology. (That lawsuit was just filed last month, though the actual breach of fiduciary duty was in 2008.)
It’s a persistent and somewhat baffling problem: why on earth do large international banks — which routinely earn billions in profit without effort due to their market position — keep stealing their clients’ money?
Greed is obviously one answer, but take a look back almost five hundred years for another, via an excerpt from 1493, the followup to the pre-Columbus history of America, 1491:
Incredibly, the Basque-Vicuña war had almost no effect on the flow of silver. Even as Basques and Vicuñas fought in the streets, they cooperated on mining and refining the silver, then shipping it from Potosi. The last was a huge task. One account describes how a single shipment of 7,771 bars left the city in 1549, four years after the lode’s discovery. Each bar was about 99 percent silver and weighed more than eighty pounds. All were stamped with serial numbers by the foundry and marked with the owner’s stamp, the foundry stamp, and the taxman’s stamp. By the time the assayer individually certified its purity with his stamp, the bar looked as if it had been graffiti-tagged by a demented numerologist. Each llama could carry only three or four bars. (Mules are bigger than llamas, but need more water and are less surefooted.) The shipment required more than two thousand of the beasts. They were watched by more than a thousand Indian guards who in turn were watched by squads of Spanish pistoleros.
(Via Marginal Revolution.)
There is a bogglingly complex and well-staffed system for dealing with errors and disputes on Wikipedia. There are special tools provided to volunteers for preventing vandalism, decreasing administrative workload and so on: rollbacker, autopatroller and the like. Then there are nearly two thousand administrators, who are empowered to "protect, delete and restore pages, move pages over redirects, hide and delete page revisions, and block other editors."
Higher up the tree, there is MedCom, a committee of mediators, and then there are the arbitrators (just 16 of them, at this time) who handle more serious beefs. The bar for arbitrators is high. Potential candidates are limited to those who have made their bones by contributing many hundreds of hours of work. A look at the Wikipedia page detailing current requests for arbitration gives an idea of the kinds of disputes resolved by arbitrators and the methods through which they’re settled.
The system is by any account “Byzantine,” just like the system for New World silver mining, but it works, certainly better than any sort of accountability on Wall Street works.
Money is usually kept safe by trust and ethics. Because there is no trust or ethics at the big banks (much like there likely was no trust in 16th Century New World silver mining), there instead needs to be a series of systems to perform checks and audits.
Considering that banks throw a fit a simple requirements like FINRA’s new Rule 2111, which introduces the everyone-thought-banks-already-had-that-duty duty to “have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer,” it’s unlikely we’ll see any sort of auditing reform in the near future unless the Consumer Financial Protection Bureau forces it on them. “Too expensive and inefficient” they’ll say, as if it’s cheaper for customers to be ripped off and then spend years in litigating paying a hefty contingent fee (if they’re lucky) to an investment fraud attorney.
But we can keep our fingers crossed. Thankfully, it seems like the CFPB is already hiring the right people.