Better Bankers, Better Banks

Taking financial risks is an essential part of what banks do, but there’s no clear sense of what constitutes responsible risk. Taking legal risks seems to have become part of what banks do as well. Since the financial crisis, Congress has passed copious amounts of legislation aimed at curbing banks’ risky behavior. Lawsuits against large banks have cost them billions. Yet bad behavior continues to plague the industry. Why isn’t there more change?
           
In Better Bankers, Better Banks, Claire A. Hill and Richard W. Painter look back at the history of banking and show how the current culture of bad behavior—dramatized by the corrupt, cocaine-snorting bankers of The Wolf of Wall Street—came to be. In the early 1980s, banks went from partnerships whose partners had personal liability to corporations whose managers had no such liability and could take risks with other people’s money. A major reason bankers remain resistant to change, Hill and Painter argue, is that while banks have been faced with large fines, penalties, and legal fees—which have exceeded one hundred billion dollars since the onset of the crisis—the banks (which really means the banks’shareholders) have paid them, not the bankers themselves. The problem also extends well beyond the pursuit of profit to the issue of how success is defined within the banking industry, where highly paid bankers clamor for status and clients may regard as inevitable bankers who prioritize their own self-interest. While many solutions have been proposed, Hill and Painter show that a successful transformation of banker behavior must begin with the bankers themselves. Bankers must be personally liable from their own assets for some portion of the bank’s losses from excessive risk-taking and illegal behavior. This would instill a culture that discourages such behavior and in turn influence the sorts of behavior society celebrates or condemns.

Despite many sensible proposals seeking to reign in excessive risk-taking, the continuing trajectory of scandals suggests that we’re far from ready to avert the next crisis. Better Bankers, Better Banks is a refreshing call for bankers to return to the idea that theirs is a noble profession.

"Exceptionally well‐written. . . . Hill and Painter do a great job of telling an impressively comprehensive story of how, in the course of the last few decades, investment bankers gradually abandoned their professional ethos in favor of purely self‐serving pursuit of personal profit that is at the core of today's culture of 'irresponsible banking.' . . . What makes the book an even more worthwhile read, however, is the authors' proposed solution. . . . I hope Wall Street CEOs read this book--and soon!"--Saule T. Omarova, Cornell Law School "Jotwell" (1/14/2016 12:00:00 AM)
"Crisis, regulation, and detection have not stopped banks behaving badly. This may well be because those ultimately responsible for business conduct have nothing to lose. . . . Hill and Painter have come up with a bold and practical solution--senior bankers should provide a personal guarantee against loss, enforceable under the law of contract. . . . The idea put forward in this book is too valuable to waste."
-- "Financial World" (11/24/2015 12:00:00 AM)
"The change in the financial community over the past few decades has been dramatic. The economic crisis brought the activities of investment bankers into the limelight, and suddenly it seemed the staid buttoned-up banker types of the popular imagination had been transformed into wild speculators risking billions on a single trade. What happened? According to Hill and Painter, the reason is that the billions they're risking on a single trade aren't their own but somebody else's. Hill and Painter want to do something about it by requiring that financial operators have their own assets at stake."--Glenn Reynolds "USA Today" (11/5/2015 12:00:00 AM)
"Better Bankers, Better Banks is a game-changer for the financial regulatory reform. Its proposal for 'covenant banking' is a serious formula for restoring trust in the financial services industry by requiring bankers to have skin in the game. Hill and Painter have figured out how to recreate the reputational benefits of general partnerships in an age of giant incorporated banks. This book should be required reading for anyone concerned with restoring a fair and stable banking system."--Adam J. Levitin, Georgetown University Law Center
"A thoughtful, modern exploration of a pernicious problem: excessive risk-taking in banking. Better Bankers, Better Banks offers an original and path-breaking perspective to the problem, including a brave remedy to reestablish professionalism and personal liability."--Steven Davidoff Solomon, University of California, Berkeley

Claire A. Hill is professor and the James L. Krusemark Chair in Law at the University of Minnesota Law School, where she is also director of the Institute for Law and Rationality and associate director of the Institute for Law and Economics. Richard W. Painter is the S. Walter Richey Professor of Corporate Law at the University of Minnesota Law School. He is the author of several books, including, most recently, Getting the Government America Deserves and has served as Associate Counsel to the President in the White House Counsel's office.

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