Who, precisely, will pay the $1.9 billion fine that international mega-bank HSBC has agreed to pay in order to settle charges with the government that it illegally laundered money for Mexican drug lords and al Qaeda terrorists?
One fine payer is a plumber in Lowell, Massachusetts. Another is a school teacher in Boise, Idaho. A third is a nurse in La Jolla, California.
They’re paying the fine, but did these three really mastermind the HSBC scheme explored by the U.S. Senate Permanent Subcommittee on Investigations? Did one of them mask the name of Iran on 85 percent of $19 billion in transactions that HSBC completed with this country? Did another supply an al Qaeda-connected bank with $1 billion? Did one actually wave through money from the Mexican drug lords, as investigators discovered?
No, no, no and no. Not only are these fine payers innocent of HSBC’s infractions, they probably are unaware that they are paying the fine. They are HSBC shareholders. They may not even know that they are shareholders — they might own shares through one of the giant institutional investors such as Fidelity, Vanguard, or Dodge & Cox, all of which have substantial stakes in HSBC.
When the government fines a company, the money doesn’t come from executives or any individuals at the company. It comes from the owners of the company — meaning average Americans who own stock, largely through mutual funds. The plumber, teacher and nurse may be hypothetical, but their collective liability for the fines is real. In fact, the Idaho Public Employee Retirement System does hold HSBC stock, as does the California Public Employee Retirement System, and the Plumbers and Pipefitters National Pension Fund. You may well own HSBC stock.
Stock ownership means responsibility; it also should mean “control.” In practice, however, shareholders have little control. Shareholders can’t really nominate board directors. The Dodd-Frank Wall Street Reform Act provided that shareholders representing at least three percent of the stock could forward such a nomination, but the U.S. Chamber of Commerce successfully blocked this statute in the courts. Mutual funds serve as roadblocks to shareholder initiatives as well, as a series of reports from AFSCME demonstrates. That’s because mutual fund companies manage corporate pension funds, and are apparently loathe to contest management for fear of losing this consulting business.
A number of thoughtful bank policy leaders are pressing for greater stock investment in banks in order to help prevent future taxpayer bailouts. This includes Republican FDIC Vice Chairman Tom Hoenig, U.S. Senators Richard Shelby (R-Ala.), David Vitter (R-La.), Sherrod Brown, (D-Ohio), MIT Professor Simon Johnson, and Stanford Professor Anat Admati, among many others. Significant shareholder investment should absorb all the losses from bank failures, as even JPMorgan Chase CEO Jamie Dimon has told the House financial services committee. Creditors, including the bank’s depositors and those holding the banks’ bonds, should not face losses.
Linked to this policy is the theory that shareholders are owners, and as such, theoretically control the company. If a bank takes on risks, shareholders, as controlling owners, can bridle that risk. If a bank slides to the wrong side of the law, shareholders, as owners, can replace board directors who will replace managers. But shareholders cannot perform the role of self-interested owners protecting themselves (and the rest of us) from bank mischief while shareholder rights remain compromised.
The HSBC fine demonstrates many dysfunctions in current banking and corporate policy. The fine represents only 12 percent of the company’s 2011 earnings. No one is facing prison. The government apparently has decided the bank is “too big to jail,” as punitive actions against the bank could lead to its failure – an event that ultimately could destabilize the entire financial sector.
But on the narrow issue of who pays the fine, which unfortunately defines the current state of affairs, shareholder rights should be more than a theory. Without improved shareholder rights, any new investor capital may simply result in the injustice of fines for plumbers, teachers and nurses. The Securities and Exchange Commission can take a good first step in this direction by re-proposing its proxy access rule in a form that will empower shareholders while also satisfying the courts.
Bartlett Naylor is Public Citizen’s financial policy reform advocate. You can follow him at @BartNaylor