Let’s lessen bureaucracy, but acknowledge the need for regulations

When I hear we need fewer regulations, I usually have two thoughts running through my mind. First, I believe many confuse bureaucracy, which we need less of, with regulation, which are needed. Second, we do need to review our regulations to make sure that they are providing sufficient governance. Some may need to be loosened, some may need to be tightened and some could be eliminated. But, at all times we should look to make the regulations effective and not bureaucratic.

Erskine Bowles, of the Simpson-Bowles Deficit Reduction Committee, was asked to co-chair this committee after serving as President Clinton’s Chief of Staff. Bowles got this position after he had served as Clinton’s Director of Small Business Administration (SBA) once he left a very successful business career. One of his claims to fame as director was he reduced the SBA application for assistance from 42 pages to 2 pages. He noted the repetitive nature of the form and that it caused far too much work for the applicant and reviewer. This streamlining of bureaucracy is a model for others.

John Oliver on his most recent “Last Week Tonight” show highlighted another terrible bureaucracy which is offensive to those who serve. His show is a comedy, but within its format, he does some excellent news reporting on various subjects, better than many newscasts. Oliver noted that we have committed to help the many Afghani and Iraqi interpreters who helped our troops in these countries. These people saved the lives of our troops many times and are valued members of their squads. Yet, they are in danger once we departed and some members of their families have been killed.

We promised to make them citizens, but the forms and process are so unbelievably bureaucratic, only a handful of the interpreters have made it here. This is beyond shameful. Oliver notes after Vietnam, we patriated hundreds of South Vietnamese who helped us, through an organized process in Guam that took about eight months. Some of these Afghani and Iraqi interpreters have been waiting almost three years. This process has to be changed to make it work better for everyone, while still allowing risk management over people we need to closely at, but these interpreters saved US lives.

Yet, we need regulation as human nature demands it. One of our constants is the “haves” will take advantage of the “have-nots.” It has always been thus, and will forever be this way. The system will be gamed no matter what the government and economic construct. President Teddy Roosevelt took on the Robber Barons who ran the country going against his own party. He wanted a “square deal” for everyone. Today, in America, we are returning in some respects to the Robber Baron period, with the vast amounts of money to win elections and the undue influence that follows.

For those who disagree with my opinion, let me offer some true stories, some in the public domain, some I am aware of through my consulting work experience.

Greed is not often good – altruistic leaders are not common

  • I have known a CEO who had every perquisite and a multi-million dollar income, but he invited customers to his daughter’s wedding, so his company would pay for the cost.
  • I have known executives who tried to have animal hospital bills paid by their spending accounts, expense light bulbs, etc. purchased for their homes and got a second company chauffeur, as the CEO and COO’s wives fought over the use of the lone chauffeur.
  • A colleague worked with a minister of a large church who answered his question about the scope of a compensation consulting project with these immortal words – “Your job is to look after the shepherd; the Lord will look after the flock.”
  • We have more immortal words uttered by the former head of the PTL Club to Ted Koppel on ABC Nightline about the extravagance of a solid gold faucet in his house at the expense of innocent donors – “The Lord wanted me to have nice things.” This was before he went to jail for defrauding his flock..
  • We had a local CEO of the United Way who single-handedly decimated future funding levels of the United Way from $40 million to $15 million, with her trying to ram a Supplemental Executive Retirement Plan through for herself without the full Board’s knowledge, coupled with a PTL Club worthy expense account.
  • Then, there are the tales of the Rigas family who led Adelphia and Dennis Kozlowski who led Tyco International, who basically treated the corporate money as theirs which led to scandals over lavish spending.
  • Bank of America and former Wachovia (I am a shareholder of both), one of which is now owned by someone else, have had a series of aggressive marketing, fraud, malfeasance, insider trading, etc. settlements (of course, without admitting guilt) which have totaled in multiple tens of billions of dollars. They both have been part of three of the worst merger transactions in banking history – the names Moneystore, Golden West and Countrywide will live on as reminders of poor decision-making that harmed many customers and employees, in addition to shareholders.
  • The name Enron will live on as well as its executives had code names for various financial gimmicks that sheltered earnings or created fictitious gains for reporting purposes. And, when the company was about to get caught, its CEO was asking employees to buy more Enron stock in the 401(k) plan to prop up the price.
  • Beazer Homes is one of the poster children for the financial housing crisis as they inflated a buyer’s ability to buy a home, did not disclose they owned the mortgage lender, did not fully describe variable loans, and did not let people know the realtor and inspector were in on the game. So, people bought a house they could not afford under terms that were not suited for their income. The CEOs recent appeal in Court was denied and he is back to jail.
  • The other financial crisis culprits were rating agencies like S&P, Moody’s who stamped AAA ratings on more risky financial products which packaged all these bad loans together and sold them to investors. They sold their ratings by gaining more business from the people whose products they were rating. Goldman Sachs got chastised for selling these products to clients while betting against them with their own money. The above sleazy activities are why the Consumer Financial Protection Bureau exists and should remain.
  • A West Virginia coal mine owner paid for a judge’s campaign for office, so penalties for EPA violations would go away or be lessened. Later, this sloppy operator later had a coal mine collapse which killed many.
  • The petro-chemical and fossil fuel industries have made so much profit, they will effectively use those profits to get their way with regulators and sway public opinion. The movie” Erin Brockovich” is a great movie as it shows how one person can fight an industry that was harming people, but her heroic efforts should not be an anomaly. I would encourage you to watch “Toxic Hotseat,” “Living Downstream,” and either/ both “Gasland” movies to show how industry can steam roll people. If someone says we should do away with the EPA, ask them why on earth would anyone want to do that?

Regulations are needed to keep things fair. Regulations are needed to keep our children and parents safe. We should test our regulations to make sure they are effective, but we should be ever vigilant to minimize bureaucracy. Bureaucracy and regulations are not the same thing. If we are not careful, we may throw the baby out with the bath water.

Bankers used to be trustworthy, but threw their reputation out the window

Last week, Bank of America was the latest bank to be penalized for fraudulent or aggressive marketing practices. They have had so many fines for malfeasance or aggressive marketing practices that it is hard to keep track of their sins. The latest penalty fined Bank of America $783 million for selling credit card consumers products and services they did not request. The Consumer Financial Protection Bureau (CFPB), which was newly created a couple of years ago by the Dodd-Frank Act under the tutelage of now Senator Elizabeth Warren, said the $738 million of that fine is used to restore money to those customers who were fraudulently sold these products.

In its first two fiscal years of operations ending June 30, 2013, the CFPB has fined banks and financial entities $942 million of which the significant majority goes to the consumers who were harmed or defrauded. The banks and financial institutions that were penalized include, but are not limited to American Express, Capital One, Discover, and JP Morgan Chase. While the significant majority of the penalty goes to the consumers, the remainder, which is usually less than 10% of the overall fine, goes into a Civil Penalty Fund, which has the following purpose as stated in the CFPB 2013 Annual Report:

“Under the Act, funds in the Civil Penalty Fund may be used for payments to the victims of activities for which civil penalties have been imposed under the Federal consumer financial laws. To the extent that such victims cannot be located or such payments are otherwise not practicable, the Bureau may use funds in the Civil Penalty Fund for the purpose of consumer education and financial literacy programs.”

What is interesting to me is why certain politicians are against this agency? I want them to tell me why an agency designed to protect the average Joe’s and Josephine’s is a bad thing. To state the obvious, these politicians tend to be Republican and tend to be supported by bankers. Senator Richard Shelby, who Chaired the Senate Banking, Housing and Urban Affairs Committee from 2003 – 07 is one of the key critics of the CFPB.

This is one area where people who don’t want regulation need to explain how we would be better without it. Would it be OK for bankers to have full license to sell their customers services they do not need? Is it OK for banks to screw people over? I find most people confuse unwieldy bureaucracy with regulation. We need the latter, but need to guard against the former. I also find people who don’t want to be regulated tend to be those who need to be regulated more. The fossil fuel industry comes to mind, but that would be a large digression.

Having worked in Human Resources within a bank back in the 1990s, what I have witnessed is being a banker used to be one of the most trusted professions. Now, it ranks much lower in trust.  And, they only have themselves to blame. Truth be told, bankers used to be trustworthy, but threw their reputation out the window.

The slippery slope began in earnest with the repeal of the Glass-Steagall Act in the late 1990s. This act had been put in place at the time of the Great Depression and was designed to assure that banks would be banks and not investment banks, security traders or insurance companies. With the feeling everyone learned their lesson and cooler heads would prevail, the repeal of the Glass-Steagall Act reopened the can of worms. The real reason for the repeal was banks wanted the fee income that usually came with those products and services. Yet, to add another metaphor, the can of worms became a Pandora’s Box.

What transpired after that repeal is banks pushing the envelope more and cross selling products and services to unsuspecting customers. Two marketing trends emerged. “Bundling” and “Tying.” Bundling represents the concept if you do more business with us, we will give you better terms. By itself, that is not necessarily a bad practice. Yet, when married with tying, it becomes unethical and illegal. Banks started tying business marketing together, so that you had to business with them in one area to get a better deal on another service which was more vital to the buyer. Usually these offers were not made in writing, as some tying can be illegal.

But, the larger trend that occurred is a selling push to reward employees for selling you services you may or may not need. The unscrupulous ones would push the hardest and do things that now get the attention of the CFPB. One of the key reasons the mortgage crisis hit is the better mortgage market dried up and banks had all of these mortgage bankers with nothing to do.

With the push out of the second Bush White House that home ownership was good, the higher risk mortgage market became the target. It was at this time you saw mortgage-in-a-box retail stores competing against banks to sell mortgages to people who did not understand fully what was being sold to them. Variable mortgages and the dreaded Pic-a-payment mortgages that brought Wachovia down after their acquisition of Golden West, were being sold to people who were in over the heads, both economically and educationally. People should have been asking more questions, but trusted the men and women in nice suits that told them they could afford the American Dream. They failed to mention or fully explain terms like “negative amortization” and “variable mortgages” especially what transpires when the rate goes up by 200 basis points.

So, bankers used to be trustworthy, but they threw it out the window. They earned these new stripes. You have to be the navigator of your customer service experience, in general, but especially with a bank. You have to ask questions about why you are being asked to do something. You need to ask why you need another credit card. You need to ask why is the salesperson pushing so hard on this issue. If you don’t, you may need the help of the Consumer Financial Protection Bureau.

With that said, I know many fine people who work for banks. They do their best to serve their customers. Yet, the higher-ups are pushing for sales and align incentives with that push. As a result, even well-meaning people will push the envelope even more. I have been a business for over 34 years and a truism I have learned is you make more money serving the needs of your client long term. You may make more money on occasion by pushing that envelope, but you may do so at the expense of a long term relationship which might come to an end.

For full disclosure, I am a shareholder and customer of both Bank of America and Wells Fargo. These fines disappoint me. I want them to be accountable to their customers, employees and shareholders. But, they also need to be accountable to their regulators. They owe it to all of us.