Speech of Commissioner Bart Chilton before the National Association of Credit Management (Rolling Meadows, Illinois)
October 9, 2013
Rolling Meadows, hello! My heartfelt thanks go to Rick Hayes, my friend of over 30 years, for the invitation to spend some time with all of you. Rick has been a leader since the day we met; it’s in his DNA. He’s a real inspiration to me. It’s an honor to be your pal, Rick.
Thanks, also, to each of you—senior credit executives—for all that you do as part of our financial system. Some of the smartest people in the world work in the financial sector in credit. Some are with us today. I'm really pleased to be in your company.
How great it is to be out here in Rolling Meadows. Oh, so close to nature. The breeze kissing the tops of the declining grasses, and every so often a stray leaf has managed to ride the wind to incredible heights. Ah, Rolling Meadows.
It’s so nice to get out of the big cities, away from it all and, like Tom Petty sings, get "…Into the great wide open, Under them skies of blue…" Whew, Rolling Meadows.
Well, perhaps things aren’t as they seem. I guess with a population of roughly 25,000 and an industrial corridor—the Golden Corridor—maybe Rolling Meadows isn’t what one might think. It’s not like it was in the 1800’s when the rolling meadows were a thing to be treasured.
Banking, Finance and Credit
And like Rolling Meadows, many in the financial sector, banks and others in the financial world are no longer what some might imagine. Perhaps things aren’t as they seem.
They were, primarily, businesses that facilitated building communities, making loans, taking deposits, providing credit and helping to create jobs that fueled the economic engine of our democracy. Banks built our nation. They were a thing, like the rolling meadows northwest of Chicago, to be treasured.
Today, banks are different. I don’t think the word “treasured” would be a descriptor held by most Americans; maybe weathered. Things have changed. You credit managers pay attention to this; at least to the extent you can digest it all. Regulators have been catching some real bad actors, bankers and others, doing harm to markets and to individuals.
The week before last, we saw yet another Libor manipulation case—the London Inter-Bank Offered Rate. As you know, Libor rates impact prices people pay on interest for just about everything they buy on credit. For those of you jaded by all of the malfeasance, this is the fourth such case. We previously settled with Barclays, UBS and RBS.
In this newest matter, here we were again, sadly, with traders behaving badly. ICAP settled with us for $65 million. They also settled for a lessor amount ($22 million) with the U.K.’s Financial Conduct Authority. These traders were involved in audacious illegal acts, disregarding proper procedures and protocols. Champagne and curry dinners were exchanged for currying reporting favors. One person suggested a Ferrari the following year as a payment. The U.S. Department of Justice (DoJ) charged three people with violations of the law.
While ICAP was certainly the largest case, the CFTC had 10 cases in the news that week. That’s just us, only a single regulator.
That same week, JP Morgan paid $920 million connected to the 2012 London Whale trading calamity, and $389 million associated with the bank’s treatment of its own credit card customers. They duped their customer into purchasing stuff they didn't want. They enrolled people without permission, billed them, and then the services they didn't want but paid for weren't even performed. The Office of the Comptroller of the Currency ordered JP to conduct an exhaustive overhaul of its debt-collection operations—the first time ever that’s occurred.
This was all just two weeks ago. Some of you may recall last year, Capitol One and Discover paid $210 million and $214 million, respectively, for analogous activities.
And, does anyone recall the roughly dozen banks that rigged their computer programs to rip-off their own customers with ATM and debit transactions? What a barrel of monkeys. Many banks configured their programs to deduct the largest amount first, even if it was not chronologically the first transaction. That resulted in more and higher fees for their own customers. Many hundreds of millions in settlements with the government were paid by the banks for these deliberate and despicable activities.
Others in the financial sector have been involved in illegal activities as well. We’ve seen record numbers of Ponzi cases in recent years—so much so that I wrote a book about it to aid consumers and help them better discern these scams.
My point in all of this is that the financial sector doesn’t seem to resemble the financial sector we knew and…well, maybe not loved, but relied upon for most of our nation’s history.
There are at least three ways in which this unfortunate state of affairs can be addressed:
One: We have an antiquated penalty regime that allows us, by law, to only fine firms $140,000 per violation. And the case law suggests a fine is only once per day. That’s neither a deterrent nor a disincentive. It’s simply a potential cost of doing business for most financial firms, if, if they get caught. I’ve suggested that Congress increase those levels to $1 million for individuals and $10 million for firms, and that we be granted the specific authority to consider a violation as more than once per day, at our judicious discretion.
I remain hopeful that the House and Senate Agriculture Committees will not only take this matter up, but include it in the CFTC’s reauthorization legislation this year, along with some other provisions I’ve suggested.
Two: Fines pale compared to jail. People need to go to jail. DoJ is getting tougher and tougher on financial crimes, and I commend them for doing so. If criminals do the crime, they shouldn’t just pay a fine, but do the time. That’s starting to occur more frequently and will have a definitive deterrent impact in my view; and
Three: This is the biggie. There’s only so much government can do. We can’t regulate business ethics. There needs to be a culture shift in the financial sector. It seems that some have been slow to get a grip on the seemingly pervasive attitude that existed prior to the 2008 economic collapse. The high-flying traders and others out for easy money were still around (uhm, sorry, frog in my throat, London Whale, uhm). They didn’t get the memo, if a memo even existed, that things needed to transform. This is about leadership from the top, from the CEOs, the presidents and from the boards of directors.
Frankly, all too often it seems these boards are very insular and could use a bit more independence. I spoke with one head of a large firm who says their board is very impressive. They are diverse, they are known, and they are supportive of what is proposed by the CEO. The problem is, however, they go along to get along. They don’t have, or at least express, independent views. The board as a sounding board is muted. This person acknowledged that needs to change. My guess is: that’s not the only firm in such a circumstance.
The independence on boards which promotes transparency, accountability and customer protection seems under-represented. In high-profile instances we’ve unfortunately witnessed firms that have been directly driven to death’s dark door due to a lack of appropriate board involvement. Firms need diverse insights; a view from the outside, and there needs to be a culture shift.
I’m not suggesting all firms have issues. That’s certainly not the case. There are many firms doing just fine, thank you. However, given the current ethos in the financial sector, where we have seen more malfeasance than ever before, it’s clear to me that there needs to be a culture shift. Perhaps the more advanced firms will be models for others. Let’s hope so.
Bottom line: Things aren’t what they seemed like back in the day. We need, and want, the banks and the financial sector to get back to the honorable and worthy role they played in helping to energize and invigorate our economy.
Terry Duffy, the Chairman at the CME Group wrote a super opinion editorial which appeared in the Wall Street Journal this week. He writes about the reduction of college students turning to the financial sector and how he’s concerned that trend will continue. Here’s a direct quote: “…Wall Street has suffered reputational damage, thanks to a few bad actors, that can't be undone simply by waiting for memories to fade and an economic boom to kick in. I'm concerned that those of us in financial services have forgotten who we serve—and that the public knows it. For instance, no matter how much you hear about ‘institutional money,’ there is no such thing. Those funds belong to individuals, and regardless of how many zeros are on the ledger, it is money that real people have entrusted to others for savings, retirement or education. That is a reality too often ignored, and when it is ignored, some Wall Streeters can too easily slip into regarding their work as a kind of money-making game divorced from the concerns of Main Street.”
It is so important for Mr. Duffy’s message to be heard and to be acted upon.
Finally, with regard to what else can be done at the firms, instead of rewarding the aggressive “Hey! Hey! Hey, hey hey! Macho, Macho” men traders (many of whom have perverse bonus incentives) how about incentivizing credit and risk managers? How about making those credit and risk professionals a top recruitment priority? How about rewarding people like you in this room, credit managers?
Shut Down Break Down
As we all know, the government shut down on October 1st. When most Americans think of government, perhaps they think of a horrid bureaucratic experience. I hate going to the DMV, don’t you? The government, all too often, seems unresponsive, bloated and uncaring. If they have to shut down for a bit, who cares?
Well, even if you don’t think government is important, it’s estimated that the shutdown is costing our nation $10 billion each week. There’s an economic ripple impact: contractors in the defense, technology and other sectors are all furloughing people. United Technologies will furlough 5,000 workers; Lockheed Martin 3,000 people.
However, like Rolling Meadows and our financial sector aren’t exactly what one might think, the citizens of our nation rely upon our government more than they realize. They might not know it so much, but they do. Perhaps things aren’t as they seem.
I was disappointed in the initial coverage of the government shut down. Do you recall the images of the Washington memorials being closed? It was silly and stupid. These memorials are open all the time. One simply needs to walk up to them. I’ve done it at 1 in the morning. (No crowds and the lighting is cool!) Yet, the National Park Service placed barricades in front of the memorials. When tourists, and in particular veterans, showed up on October 1st, it was an issue. The video of veterans moving the barricades might be symbolic of a government shutdown…sorta. But, it didn’t explain the very important government services that were curtailed and had an impact upon people in real ways.
For example, the National Institutes of Health had to furlough staff. Patients expecting to begin clinical trials—some hoping their lives would be saved—have had to wait. People can live and die based upon this shutdown.
Five of our soldiers died over the weekend in Afghanistan. When a tragic loss such as theses occurs, the military provides $100,000 to the survivor families. They call it a "gratuity gift." It fills a gap before survivor benefits kick in. These gratuity gifts can be used for burial arrangements, flying to Dover Air Force Base in Delaware to be there when the soldier's casket arrives, or for immediate bills. Well, those payments aren't being made due to the shutdown. That's simply obscene.
The Food and Drug Administration stopped all inspections, including inspections of imported foods. Hey fella, can you say “salmonella?” And by the way, there was just a huge salmonella outbreak reported. Over 300 people are sick in at least 18 states. You guys having lunch here? Bon appetit.
Early childhood education programs had to be shut down, in addition to workers being furloughed at various emergency management agencies and certain veterans’ offices. Workplace safety inspections have halted; seems like we have a bunch of screws loose.
Smokey Bear doesn’t care, he’s on a prolonged smoke break, and Woodsy Owl no longer can give a hoot if you pollute. The EPA is closed. Even plane safety inspections by the FAA have been grounded, yet we need to fly to conduct business.
With a killer kibosh put on all of these things people rely upon, perhaps we should get a stern talking to from Dirty Harry (Clint Eastwood as Harry Callahan), “...you’ve gotta ask yourself: ‘Do I feel lucky?’ Well, do ya, punk?”
The answer is: we shouldn’t have to rely upon luck to have a drink of water, eat a sandwich or get on an airplane. That’s why we have some of these key government programs. They protect us and assist with things we can't do ourselves as individuals. These are solemn government activities, and there are many, many more; they matter.
My point is this: The shutdown impacts a lot more than the Washington memorials. Things aren't always as they appear.
And for us at the CFTC, we are not doing the needed market surveillance or enforcement required for the derivatives markets. We usually have about 700 staff. Now, 28 are simply holding down the fort as best they can.
Enforcement: Perhaps you might wonder, like I have, if the tips we receive for potential violations of the law have increased since the shutdown. Well, we don’t know. The system we use is shuttered. Like Church Lady (Dana Carvey) used to say, "Isn’t that special?"
Reports: How about what happens when all of the government reports; crops and livestock reports from USDA, jobs-related reports from the Bureau of Labor Statistics, reports from the Energy Information Agency and from others stop being produced? I spoke with an official the other day who works at ADM here in Illinois. They rely, and markets rely, upon those reports. Traders won’t trade to the extent they normally do without them. We are already seeing that. If they are trading more infrequently, that means less volume and less liquidity. Less liquidity means smaller trades that can move markets more easily, thereby potentially creating more volatile markets. Volatile markets aren't good.
I asked what was done about the lack of reports during the last shutdown 17 years ago (1995-96). Nobody I’ve asked has given an answer. Should the exchanges create some synthetic report? Ya know what; we're closed at the CFTC. We can’t do much about it. Isn’t that special, too?
Coulda Shoulda Stayed Open: Here’s the utterly senseless thing; keeping market regulators on duty at the CFTC could have easily been accomplished. In fact, other financial regulators are open and operating. The Securities and Exchange Commission, the Federal Deposit Insurance Corporation, the Comptroller of the Currency and the Federal Reserve are all open and operating.
You see, all other federal financial regulators are, in part, self-funded through fees. That means they don’t rely completely upon government appropriations. I’ve called for Congress to allow us to be funded in this same way. Our annual budget last year was roughly $200 million. We could fund that with a very modest fraction of a cent fee, while exempting end-users. It could save that $200 million. While I’m pleased that the Obama Administration has now begun to actually work on specific language in this regard with Capitol Hill, it isn’t likely to be accomplished anytime soon.
Here’s another simple way we could have been funded that doesn’t get discussed; although, I’ve written to Congress seeking a change to allow this approach to take effect. Here it is: the day before we shut down, the CFTC returned one billion dollars. That’s a one with nine zeros behind it—a billion dollars we sent back. These are funds we had collected as a result of settlements from cases (like the large Libor settlements) during the last year. We returned a billion dollars a week ago Monday, and on Tuesday we had zero, zip, nada—no money to operate. How nutty is that? Chock-full o’nuts it is.
All it would have taken is a one line amendment to allow the use of these funds. In fact, there is still, right now, a fund containing $100 million of these same funds at the CFTC. They are sitting there, unused, in a Whistleblower and Education Fund created expressly to be used for those purposes. However, we can’t access the money without Congress approving a simple amendment.
Instead, boom boom, out went the lights. We aren’t doing the required futures and swaps oversight and enforcement. It is very disappointing, and is was, and is, preventable. Ugh.
We’ll Fine You: Oh, by the way, Congress may allow for back pay. So, we are paying folks and getting no work—work that is needed—out of them at all. That’s cracked, too.
In fact, people can’t even volunteer to work if they wanted to do so. On October 1st, our staff was allowed to work for three hours to engage only in shut down activities. After that, a memorandum was circulated which informed employees that a fine of up to $5,000 could be imposed by those logging onto their government website for work. Working while on furlough, it said, could be punishable by termination. The whole thing was, and is, this government shutdown, a manufactured monstrous mess of mammoth proportions.
Guy walks into a bar and orders a shot of Jack Daniels. He says, “before the trouble starts.” He tosses it back and says, “Gimme another shot, before the trouble starts.” After a few shots, the barkeep asks the patron, “What’s all this trouble you’re talking about?” The fellow says, “Well, the trouble starts when you realize I don’t have any money!”
Let’s talk about the debt ceiling. It seems that some believe this isn’t such a big deal. They are wrong. It’s a titanic issue.
And, I just gotta say it, even though you all probably know this, but if there is one person today that doesn’t know this (hear me now and listen to me later—we will pump you up) the debt ceiling is about paying existing obligations. It's not about what we will do in the future. This is about paying our bills as a country.
However, we can’t do that after October 17th. That’s the date on which the federal government exhausts its ability to borrow money, unless Congress raises the debt limit. After October 17th, the U.S. Treasury would have about $30 billion on hand, enough to cover only a few days. Predictions for ferocious market fallout will continue and we may even see market-related impacts before October 17th because many may believe the government will default.
As you know, in 2011, the U.S. Government’s credit rating was actually downgraded, from AAA to AA+, by Standard and Poor’s. Consumer confidence dropped 22 percent. The stock market lost roughly 2000 points—16 or 17 percent. And the American people lost $18 billion—just due to the potential of not addressing the debt ceiling.
A default now, putting in jeopardy the full faith and credit of our nation, could mark down U.S. treasuries; company balance sheets could become unsteady, and as you all know very well, credit could seize up, interest rates could rise, and it could even throw us into another recession.
By the way, the impact could be felt, according to the Department of Treasury, for a generation. Talkin' bout my generation? Nope. Who; I mean The Who? I’m talking about your kids' generation. That would be fun…not! If that occurs, it won't be a debt ceiling issue; it will be a debt squealing scream!
Here’s the galling part of all: there are likely the votes in the U.S. House of Representatives and the Senate to solve this dilemma. The Senate has actually never been in question. It’s the House where the issue remains unresolved. It is now being reported (I believe Chuck Todd told this to Brian Williams last evening) that all 200 Democrats and at least 20 Republicans would vote to resolve the matter—more than the 217 needed.
Will it all be resolved? Well, I’ve never been more pessimistic about how Congress operates than this very day. I’ve watched it closely since 1985. This is the worst getting-along ever. It's hyper-partisan. That said I believe it will be resolved, probably a day or two, maybe three, before October 17th if I had to pick a date. When I say resolved, it might be pushed off for a few weeks, but the calamity won’t occur, at least in my estimation.
Here’s why. Like Rolling Meadows, Speaker Boehner isn’t what he may appear to some. Perhaps things aren’t as they seem. He’s a smart man who is dedicated to public service. He’s certainly not a nut. He just has a truly unprecedented set of circumstances. He has a small, but influential and energetic, element in his party that is unreasonable. The Speaker needs to pay attention to this group and to the more moderate members of the Republican Party. His question is balance. He’s got to figure that one out, and it continues to become more evasive as time passes. However, in the end, he won’t let a default occur, and he can stop that from taking place.
Well, that’s a wrap. Wait, here’s a RAP:
When government shuts down, ain’t no fooling ‘round, it’s a mammoth monster.
No affection for inspections, no correction to direction, no protection from infections, we need one more election.
Debt ceiling goes to debt squealing soon.
Don’t be a buffoon and wait till high noon.
Act now or ow! It’s gonna hurt.
We’ll pay dearly, severely, ya hear me?
There, that’s a RAP. Not what you expected, eh? I’m crafty that way.
It has been a pleasure to be with you. The work you do is important and it may be getting even more important in…ten, nine, eight, seven… Well, very soon. Or perhaps…things aren’t…as they seem.
Enjoy the lovely rolling meadows.
Last Updated: October 21, 2013