In 1995, New York City Mayor Rudy Giuliani, launched a “zero tolerance” policy. NYC had long been out of control, rife with crime. Giuliani knew strong measures were a must if the city were to survive.
“Zero tolerance” was first talked about by James Q. Wilson and George Kelling in a 1982 Atlantic Monthly article. Their theory argued that by targeting minor crimes, “fixing broken windows,” police could reduce the sense of disorder that often led to more serious crimes.
Their theory proposed that left unchecked, disorderly behavior makes communities and cities more “vulnerable to criminal invasion.” They warned, “One unrepaired broken window is a signal that no one cares and so breaking more windows costs nothing.”
For the next 20 years, NYC’s adoption of “zero tolerance” would fundamentally change the behavior of both New Yorkers and the city’s culture. By arresting and jailing rule breakers, NYC became a safe city. Petty lawlessness virtually disappeared
At the same time as “zero tolerance” was adopted, Wall Street was being subjected to little to no scrutiny; the theory being that individual liberty benefits business. Be that as it may, the financial industry took this to mean they could run amok.
In a recent article in The Atlantic, former Wall Street trader Chris Arnade states “My banker friends and I benefited from both. We were ignored during the day by regulators and free at night from squeegee men and muggers.”
As a result of few restrictions, Wall Street business soared. Wall Street firms grew as never before. Small firms became colossal with few, if any, paying attention to employees or customers.
Accountability and employee engagement were gone. The huge mega banks no longer required employees to have a financial stake in their companies. The customer became a commodity and gambling was rife. Regulatory permissiveness encouraged the financial outrages we are all now familiar with. If the bank traders won, they won big; if they lost, little was actually lost.
No one had to pay it back, to the banks, or to their customers.
The result, as we all know, led to our 2008 financial debacle. Finally the public, government and the regulators were confronted with “the reality that Wall Street was out of control and had too many broken windows.”
As Arnade says, “Wall Street was a huge digital neighborhood, almost completely unpatrolled, steeped in a culture with a diminished sense of responsibility to the firm, the customer or really anyone.” The analogy the author draws to a “zero tolerance” is chilling. Put a car, with no identification, in a tough neighborhood and within minutes the car is stripped. A vacant house with one window broken becomes a target for stone throwers until all of its windows are broken.
“Wall Street had become a neighborhood that feasted on loose regulations and few rules.” Lack of policing encouraged rule bending, lobbying by politicians, nefarious relationships and increasingly complex rules. Dodd-Frank was one of them.
Cheating thrives in a neighborhood of broken windows and, as government regulators and the public are finally realizing, the only way to stop rampant rule breaking is to implement a “broken windows” policing to Wall Street that perhaps will hopefully succeed in changing its culture.
[tweetthis url=”http://bit.ly/1SpnLtE”]If a system is rotten, it requires serious fundamental change.~ @RichardMBowen #tbtf[/tweetthis]
If a system is rotten, it requires serious fundamental change. Arnade speculates that some of the recent investigations regarding LIBOR, FXfix, etc., might be the beginning of “no broken windows” policing.
Maybe, just maybe, he is right, and it might achieve serious fundamental change. As the 1982 Atlantic article says, it may be unjust to arrest one vagrant, but “failing to do anything about it, a hundred vagrants may destroy an entire community.”
This is what occurred on Wall Street!
“Zero tolerance?” Our neighborhoods can’t afford broken windows. And we absolutely can’t afford the chaos and bills that Wall Street’s “broken windows” has endowed us with.
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Richard Bowen is widely known as the Citigroup whistleblower. As Business Chief Underwriter for Citigroup during the housing bubble financial crisis meltdown, he repeatedly warned Citi executive management and the board about fraudulent behavior within the organization. The company certified poor mortgages as quality mortgages and sold them to Fannie Mae, Freddie Mac and other investors.
Thank you for this thoughtful analogy and compelling case you’ve made. I never thought of it this way and appreciate how you’ve framed this up.
Don’t know why this article escaped my attention for four months, but now having read it, I find myself wishing it could be published front page, center in the Wall Street Journal. It provides such an easily readable chronicle of the many “wrongs” that led to so much pain for so many, especially displaced home buyers and fixed income investors. How about it? Would it be possible to float the idea to the decision makers at WSJ? If published, perhaps it would also be picked up and made available by a number of smaller, regional papers as well.