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February 24, 2012

Stopping Wall Street from Firing the People Who Stop Their Reckless Conduct

“You must understand, anyone who was worried [about risky trading and investments on Wall Street] was fired long ago and is not in this room,” confessed a bank manager privately in 2007 as the housing market started to crumble.  With risk managers gone, there were no brakes on Wall Street’s recklessness and greed.  The fuse was lit on the dynamite stick that exploded in September 2008.  (Quote from Raghuram Rajan’s award winning book “Fault Lines: How Hidden Fractures Still Threaten the World Economy.”)

That remarkable statement highlights one of the major flaws in corporate governance: in the past, chief compliance officers and chief risk officers reported to corporate executives whose job was to maximize profits and their own bonuses. The same people who were authorizing and benefiting from the risky bets the chief compliance officers were paid to worry about could also fire those very people if they worried too much.

The only way to solve this problem is to make sure that the people whose job it is to sound the alarm can’t be fired for doing so; and that means they need to have access to and protection from people in authority who are outside the chain of executive decision-making: the Board of Directors generally and the independent members in particular.

Better Markets, my organization that fights for the public interest in financial reform, has argued for the Commodity Futures Trading Commission to pass the strongest rules possible to empower chief compliance officers so they can do their jobs without fear of reprisal. Their jobs are extremely critical because the CFTC – which is the primary regulator for the $700-plus trillion derivatives market –will never have a budge big enough to put enough cops on the beat to patrol Wall Street, which is a high crime area.

Empowering and protecting chief risk officers are essential-front line defenses to protect taxpayers from ever having to bailout Wall Street again. As CFTC Chairman Gary Gensler stated  this week at the CFTC meeting adopting rules on Chief Compliance Officers, Wall Street’s risky trading and investments spilled over “into the real economy, affecting businesses and consumers across the country.” The ongoing cost of the last financial crisis is evident in virtually every neighborhood: millions of lost jobs. Thousands of businesses shuttered. Countless foreclosed homes. Numerous retirement dreams deferred. Trillions of dollars lost for the nation’s gross domestic product.

To help prevent that from happening again we specifically argued that the CFTC’s rules must empower and protect chief compliance officers so they can do their jobs.  For too many years, the biggest banks on Wall Street  have viewed regulation  as an obstacle to doing business. Compliance was viewed as a cost center and something to be overcome, either by persuasion, coercion or termination.  As Wall Street continues to fight every financial reform regulation, no matter how sensible, necessary or modest, it can’t be denied that little has changed and little will change without strong rules to force a new compliance culture.

But creating that kind of corporate culture requires attention from the highest levels of the organization, and that means the board of directors generally, and in particular those who are independent.  If there is any hope of effective chief risk officers, then the independent members of boards of directors will be crucial to addressing embedded anti-regulatory corporate cultures.   Chief compliance officers should no longer have to choose between doing their job and keeping their job.



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