After the 2008 financial crisis wrecked much of the global economy, many people around the world asked how it was possible that no one in charge saw it coming and that no one responsible was held to account. Normal people had to bear the burden, both as taxpayers and as shareholders, but no major bank executives, that required a bailout to keep them from imploding, went to jail or paid a personal price.
Since than many articles, books and even movies were produced on the topic – all trying to answer why it happened. One possible explanation that is seeming increasingly likely is that the regulators who needed to oversee the financial markets were not blind or incompetent but rather harboring corrupt incentives.
Eric Ben-Artzi, a former VP of Risk Management at Deutsche Bank in New York, suggests that the reason the U.S. Securities and Exchange Commission (SEC) does not prosecute Wall Street executives and just settles for fines that fall on shareholders is a “revolving door” between the regulators and banks’ top management.
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Fox guarding the henhouse
Writing in the Financial Times, Mr Ben-Artzi pointed out: “Robert Rice, the chief lawyer in charge of the internal investigation at Deutsche in 2011, became the SEC’s chief counsel in 2013. Robert Khuzami, Deutsche’s top lawyer in North America, became head of the SEC’s enforcement division after the financial crisis. Their boss, Richard Walker, the bank’s longtime general counsel (he left the bank this year) was once head of enforcement at the SEC.”
The former VP of Risk Management sacrificed his career on Wall Street when he notified regulators that management at Deutsche Bank had been inflating the value of its credit derivatives. After he was informed that he is entitled to a 15% share of a $55 million settlement that was reached with the bank, Ben-Artzi refused to accept his part in the $16.5 million prize – the third largest in the SEC program’s history – the first known incident of anyone rejecting the award money.
In an interview published today in the Israeli newspaper TheMarker (link in Hebrew) he explains why he rejected the large sum. Ben-Artzi considers the American regulatory system to be broken – punishing duped shareholders instead of the actual perpetrators. He feels that the settlement is a robbery of Deutsche Bank shareholders and refuses to take part in it or accept stolen money. Furthermore, he called the whistleblower award hush-money and says that if he had accepted it he could not then criticize the SEC’s behaviour.
Ben-Artzi recounts how he needed to build the entire case for the SEC himself and push it on the Financial Times in order for Deutsche Bank to face any investigation. He believes that if it wasn’t for him the case would have been buried by the SEC. “The story ended in a fine because I fought valiantly and made it a crusade. In most cases the whistleblowers pay a heavy price – there are rules to protect them in the U.S but they are rarely enforced.”
Regarding the revolving door that allegedly helped Deutsche Bank management avoid prosecution, Ben-Artzi says that the fact that no one involved with inflating the value of the credit derivatives faced even a symbolic punishment proves how meaningful it is. “It’s hard to expect a different result when the heads of the SEC are themselves the same managers that operated the inflating and the cover up. The fox is guarding the henhouse.”