Complicit or incompetent. Those are the accusations typically made against the CEOs of banks that have behaved badly. Sir, either you were aware of the crime, or breach of regulations or ethical standards, and did nothing about them, which makes you complicit. Or you were unaware of them, which makes you incompetent. Either way, you have no business running a bank.
But there may be a third category in which bank CEOs could be thrust – that of the simply overwhelmed. It is in this category that HSBC boss Stuart Gulliver fits.
Mr. Gulliver is not a crook, in spite of the revelation this week that he stashed his bonuses in a secret Swiss account controlled by a secret Panamanian company – a Guardian investigation this week made them unsecret, much to his embarrassment. He is certainly not incompetent. He has spent 35 years at the bank, rising through the ranks to the top job at one of the world's top banks (and the biggest bank in Europe), like a sailor on his way to an admiralship. No scandals or employee revolts marred that progress. While not considered visionary, he is regarded as an able technocrat.
By his own admission, however, he couldn't keep track of all his managers in all his departments in all those countries. HSBC is the most international of the international banks. It now has 257,000 employees in 73 countries and, until recently, had a lot more. "Can I know what every one of 257,000 people is doing – clearly I can't," he said during questioning early this week before the British Parliament's Treasury select committee.
In other words, epic misbehaviour such as the scandal at HSBC's Swiss private bank, now under investigation for aiding and abetting tax avoidance, tax evasion and "aggravated" money laundering, could happen again.
All of which raises the question: If some banks are too big to fail, are they also too big to manage? And if they are too big to manage, shouldn't they be forced to shrink? A smaller bank would be easier to manage and regulate, therefore less able to hide rogue or criminal operations, and would pose less risk to the taxpayer were it to implode, as Lehman Brothers did in 2008, almost bringing down the global financial system with it.
HSBC was, and still is, a monster by any measure – assets, employees, countries, businesses, influence, lobbying power. The bank that began life in 1865 as the Hongkong and Shanghai Banking Corp. used to be a highly disciplined operation that focused on trade finance. The model more or less remained intact until the 1990s, when the concept of bigness for the sake of bigness penetrated the psyche of HSBC's bosses no doubt, in good part, because big banks paid bigger salaries and bonuses.
HSBC and many of its rivals, among them Royal Bank of Scotland (briefly the world's biggest bank) and JPMorgan, became massive wholesale and retail supermarkets, enamoured with cross-marketing and economies of scale, providing all services to all people. And that meant massive acquisitions, almost all of them slavishly endorsed by shareholders and boards of directors.
HSBC became a mergers and acquisitions machine. Under Sir John Bond, who was chairman from 1998 to 2006 (during which time he put a lot of effort into making HSBC Canada a credible player), HSBC's global employment well more than doubled to 330,000 as bank after bank was hauled into the fold. One of the biggies was Household Finance, the consumer finance bank in the United States that would play a starring role in the 2008 financial crisis.
HSBC's sheer size obviously made it impossible to manage effectively. The bank in recent years has been hit by scandal after scandal. There was the London interbank offered rate – Libor – scandal, the mortgage misspelling and foreign exchange scandals, plus the money-laundering debacle that, in 2013, saw the bank pay $1.9-billion (U.S.) to settle American charges that its shameful practices allowed Latin American drug cartels to launder billions of dollars through HSBC. "It's a terrible list," HSBC chairman Douglas Flint admitted in Treasury select committee questioning.
And now comes the news of the Swiss tax scandal and Mr. Gulliver's use of the Swiss and Panamanian accounts. The accounts were legal – the CEO said he set them up to keep his bonuses secret from the prying eyes of HSBC's Hong Kong and Swiss staff, not to avoid or evade taxes. That may be perfectly fine, but what an odd admission. In effect, he was saying he could not even trust his own employees, another indication that he was running a bank that was really too big to run.
To his credit, Mr. Gulliver is shrinking the bank. Since 2011, when he became CEO, he has unloaded 77 businesses. He is trying to kill off the federal structure that gave far-flung divisions too much autonomy – HSBC will become more centralized.
But HSBC is still an oversized octopus and it's not alone in the banking world. If bank bosses want to build global empires, they and the regulators that allow them to get so big have a duty to ensure that they can be properly managed. Big is not best in banking. In HSBC's case, it was a liability.