The Wall Street Journal reported this morning that the Federal Deposit Insurance Corp. (“FDIC”) is trying to purge Citigroup’s Chief Executive, Vikram Pandit and other senor managers. The article by Damian Paletta and David Enrich also reported that FDIC Chairperson Sheila Blair has been pressuring her fellow regulators to cut their rating of Citigroup’s financial health, which would allow regulators to keep the bank on a tighter leash. Taxpayers own or will own 34% of Citigroup. Federal officials would like former U.S. Bancorp CEO Jerry Grundhofer to replace Mr. Pandit, according to the article. Mr. Grundhofer is reportedly well-regarded for avoiding the risky lending that hurt Citigroup and other banks.
This is a particularly significant development since the FDIC is one of the candidates being considered by the Obama Administration and Congress to act as an overarching overseer of the entire financial system, according to a May 28th article in the Wall Journal by David Wessell called “Reshaping Financial Oversight.” Other candidates are the Federal Reserve and a “council of regulators,” according to the article.
There appears to be a consensus in Washington that such an overseer is necessary to prevent another financial contagion from rapidly engulfing the entire financial system. There is much discussion and debate in Washington about process-oriented issues, such as the precise role and powers of the overseer, and how it will go about the task of preventing irresponsible firms and individuals from bringing down the entire system by buying and selling non-conventional structured financial products that imprudently rely on housing prices expanding at a rapid rate forever. Prior to the bursting of the housing bubble and systemic financial collapse, the working theory seemed to be that firms and the individuals running them could be counted on to act rationally and refrain from taking risks that would put their own firms in jeopardy. Instead, they took insane risks and drove their firms into the ground. (We call upon Malcolm Gladwell, author of Outliers, to explain the demographic and cultural underpinnings of that behavior.)
All of this discussion – about reigning in the financial institutions’ high-risk behavior with respect to its own money and its own accounts – is important. We suggest, however, that equal time and consideration should be given to Wall Street’s duties to investors. For starters, Congress should clarify that brokers and brokerage firms are held to the standard of fiduciaries with respect to their customers. The firms’ advertising certainly tries to convey the impression that they will provide sound financial advice and monitoring of customers’ accounts, and will always act in their clients’ best interests rather than their own. They should not be allowed to disclaim such duties when customers file arbitration claims against them. In addition, Congress should make the arbitration system (which after all is mandatory in most cases) fairer by mandating that all arbitrators shall be neutral and not have ties ? past or present ? with the securities industry.
Page Perry and its attorneys has experience representing investors in arbitrations and in court in cases dealing with securities and investment management firms. The firm has over 125 years of collective experience representing investors in investment-related litigation and arbitration. For further information, please contact us.