Wednesday, December 14, 2011

Customer Service Banking Style

Yves Smith of naked capitalism tells a story of her time working in Japan as a way to illustrate how it is that doing right by the system and doing right by customers is an idea whose time has come and gone. The more I read this stuff the more I realize the re-set button will be pressed only when absolutely no other course is open to our leaders. We must sink to absolute bottom before common sense returns. What drag.

When I worked for Sumitomo Bank, I needed to buy a pricey book that catalogued the equipment in cotton spinning mills for a client (we’d been engaged to help him acquire a manufacturer, and he was interested only in certain types of machinery).

I sent one of the guys in my department to get the expense approved by the General Affairs department (no approval, no reimbursement). For convenience, we’ll call the person I sent A and the General Affairs fellow Mr. Noh.

A: We need to purchase this book to complete this assignment for a client. You know he’s a really big and important customer. Here’s a copy of the engagement letter. You can see that they’ve agreed to reimburse all expenses. They keep nine figure balances in this branch, so there’s no risk.

Mr. Noh: There is no budget in your department for books.

A: I don’t understand why that matters since the client is going to pay the cost.

Mr. Noh: There is no budget in your department for books.

A: How could we know to budget for this? Are we to allow for every possible contingency? Then we’d have a budget way bigger than we needed and we would not be careful with our spending. You of all people know how expense conscious our bank is.

Mr. Noh: There is no budget in your department for books.

This went on, I kid you not, for 20 minutes, since A by this point was very well schooled in dealing with a Japanese bureaucracy. Finally Mr. Noh slammed his desk and exploded:

You do not understand. Organization is more important than customer.

The good thing about the Japanese is they are willing to tell you things like that straight up, at least is you persist in being a clueless gaijin long enough.

Most Westerners laugh when they hear that story, because it sounds patently ridiculous. After all, businesses depend on customers, and any business that acts like they have the whip hand will suffer a loss of business.

But we are now seeing that Sumitomo was simply ahead of its time. The bank had been the head of the Sumitomo zaibatsu, which after the war continued in a lite form known as keiretsu. The Sumitomo group was the most cohesive, and the bank really did tell certain group companies like Mazda what to do. Others operated more autonomously, which folks at the bank found annoying. So for it to assume it didn’t necessarily have to be all that attentive to “customer” needs was not quite as barmy as it sounds.

We see a variant of the Sumitomo “customer be damned” attitude becoming widespread in financial services. The latest example is CME, which is under the hot lights in the wake of the MF Global debacle. Legislators are trying to get in front of the unhappy mob of wronged customers and call it a parade. And an obvious focus of inquiry is the self regulated derivatives exchange, the CME Group, which also oversaw futures commission merchants like MF Global. Worse, MF Global had gotten a clean bill of health from the CME in its last audit.

Needless to say, this isn’t merely a “gee maybe we need to do something about bad practices” issue. As various market participants have fulminated, this strikes at the heart of the integrity of markets. If you can’t be sure a large and supposedly reputable broker won’t pilfer your accounts, it makes no sense to participate in those markets. Not surprisingly, CME trading activity has fallen sharply.

Now you would think a buyers’ strike would persuade the CME that it needs to restore credibility. But the 21st century version of that seems to be to engage in lobbying to preserve the status quo rather than do what it takes to win back customers’ trust. The Financial Times tells us the CME is girding up for a fight:

“CME has one of the most effective government affairs operations in the nation’s Capitol. I’ve rarely seen them on the losing end of an issue,” says Robert Holifield, a former staff director on the Senate agriculture committee.

CME has spent more than $8m on lobbyists since 2008, ranking each year within the top 20 biggest spenders in the securities industry, according to data compiled by the Centre for Responsive Politics, a non-partisan research group.

It has also been a big donor to political campaigns, laying out about $2m to candidates, party committees and leadership political action committees in the last two election cycles, according to the Centre for Responsive Politics.

This year, CME donated more than $75,000 to lawmakers who serve on the House agriculture committee and over $97,000 to members of the Senate agriculture committee. These committees oversee the Commodity Futures Trading Commission, the government futures regulator, which in turn supervises CME’s role as a self-regulatory organisation.

And you have to love the CME’s admission of failure couched as success:

“In the case of MF Global, we did everything we could within our regulatory power, but MF Global broke exchange rules and government regulations designed to protect customer funds. Because the firm failed to comply with regulations, that does not mean the system failed,” the group said.

Huh? First, we don’t know exactly what happened. Therefore the CME’s confident claim that it was blameless is premature. Second, it admits the process WAS defective. If the overseer did everything right and you have an MF Global level disaster, the system failed. I’m actually amused at this NewSpeakish formulation “We’ll admit to a damning fact set but maintain everything was fine.”

Now there is a possible out for the CME: that MF Global staff mislead auditors and/or filed inaccurate regulatory reports. Given that the firm unraveled quickly, it would not be fatal to the CME if it were hoodwinked for a while by doctored information. But that in turn would imply a real conspiracy by MF Global staff. So a scenario that is favorable to the CME argues for throwing the book at MF Global.

But back to the bigger picture. Here we have the CME taking a hit in trading volumes, and it acts as if it can just ride it out. I don’t see why customers would or should get over their shell shock quickly. We see the same behavior in the securitization market. Investors know damned well they were had. The FDIC put forward a proposal of reforms in a Advanced Notice of Proposed Rulemaking in early 2010 which looked to be a pretty good set of measures designed to get investors back in the pool. But the sell side refused to consider it, and so we remain with pretty much the entire mortgage market on government life support. And the worse is that the media continues to parrot the bank/originator line that it is “market conditions” that are keeping investors away from private label deals, when it is in fact the industry’s own intransigence.

Here the CME does not have (to my knowledge) the prospect of a government guarantee to boost business. And on top of that, futures traders and fund managers are far more aggressive and outspoken than their mortgage brethren, who have been remarkably slow to stand up to abuses. So it would seem to have far less reason than the mortgage industrial complex to be confident that it can stare its customers down.

But maybe I’m out of touch with the zeitgeist. Or perhaps the iron law of institutions is at work, and people at the CME are all working to preserve their posts, with little regard for what it does to the organization. Maybe in this brave new world of rule by banks, not ceding any ground is more important than profit. If you were really paranoid, you might wonder about whether any individuals here were confident a tough stand in this battle would lead to rewards elsewhere.

All I know is that self regulatory bodies can work in the wake of a 1929 level wipeout, when even more than forty years later, securities trading still had an unsavory air about it. That gave industry incumbents a big incentive to embrace tough standards. Now, with members operating almost entirely with other people’s money and looting a widespread phenomenon, the time for firm, outside oversight is long overdue. How we get that with DC largely captured by banks is an open question, but letting the industry mind itself is no longer a desirable option.

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