Global Business 4th Edition by Mike Peng

Exercise 32

Bank Scandals: Bad Apples versus Bad Barrels 1
Mike W. Peng (University of Texas at Dallas)
Banks have been fined left and rights for misconduct since the Great Recession of 2008-2009. Are they "bad barrels" or they just happen to have a few "bad apples"
It is tough to be a banker after the Great Recession of 2008-2009. It seems that not a day goes by without any new scandal being unearthed and punished. Since 2009, Barclays, ING, and Lloyds have all paid big settlements related to allegations that they moved money for people or companies that were on the US sanctions list. In 2012, HSBC paid a huge $1.9 billion fine to settle US government charges that it had facilitated money laundering for rogue states and groups such as Cuba, North Korea, Sudan, as well as Hamas, Mexican drug lords, Syrian terrorists, and the Taliban. Since 2010, six major Wall Street banks-Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo-agreed to pay a combined $80 billion in settlements and penalties related to the financial crisis. For example, in 2013, JPMorgan Chase agreed to pay another $13 billion fine in connection with mortgage-backed securities that it mis-sold as well as securities sold by Washington Mutual and Bear Stearns, two banks that JPMorgan Chase took over during the financial crisis. In 2014, Credit Suisse pleaded guilty to a criminal charge of helping its clients dodge American taxes. The upshot An enormous $2.8 billion fine.
What is the root cause of such large-scale unethical and often-illegal business behavior It is difficult to imagine such wrongdoing is due to just a few "bad apples." Yet, few people have lost their jobs, and none has been criminally charged. The top brass at Credit Suisse, for example, argued that it played no role in the actions for which the bank was prosecuted. Its board discussed firing some top executives, but concluded that the benefits would not outweigh the upheaval such firing would introduce. After coughing up the record $13 billion fine that would cripple the finances of many firms and a nontrivial number of countries, JPMorgan Chase chairman and CEO Jamie Dimon managed to keep his dual titles-never mind shareholder uproar. In short, the banks argue that a small number of "bad apples" have caused all the trouble.
By naming, shaming, and fining the banks (but not individuals), the government begs to differ. All are treated as "bad barrels" that need to be cleaned up. As part of the settlement, all the "bad barrels" named above promised to enhance compliance and behave better. How much credibility do such statements have One argument suggests that people may have ethical or unethical predispositions before joining firms. Another side of the debate argues that while there are indeed some opportunistic "bad apples," many times people commit unethical behavior not because they are "bad apples," but because they are spoiled by "bad barrels." Some firms not only condone, but may even expect unethical behavior.
The debate on "bad apples" versus "bad barrels" is an extension of the broader debate on "nature versus nurture." Are we who we are because of our genes (nature) or our environments (nurture) Most studies report that human behavior is the result of both nature and nurture. Although individuals and firms do have some ethical or unethical predispositions that influence their behavior, the institutional environment (such as organizational norms and cultures) can also have a profound impact. In a nutshell, even "good apples" may turn bad in "bad barrels." Therefore, despite the record number of fines and settlements, future bank scandals remain to be unearthed. Stay tuned for the raging debate on "bad apples" versus "bad barrels" in the banking industry and beyond.
1) This research was supported by the Jindal Chair at the Jindal School of Management, University of Texas at Dallas. All views and errors are those of the author. © Mike W. Peng. Reprinted with permission.
Sources: Based on (1) Bloomberg Businessweek, 2013, Hell to pay, November 4: 47-48; (2) Bloomberg Businessweek, 2013, Too big to cry, October 28: 14-15; (3) Bloomberg Businessweek, 2013, Wall Street's guilt moment, October 28: 33-34; (4) Economist, 2012, HSBC's grilling, July 21: 61-62; (5) Economist, 2014, Credit Suisse in court, May 24: 65-66; (6) Economist, 2014, The criminalization of American business, August 30: 9.
ON ETHICS: As a new CEO for one of these banks, how are you going to clean up the mess and restore reputation